Transfering after tax contributions in a 401k to a Roth IRA

Submitted by john schneider on Wed, 2014-11-05 21:33

I retired from my current company 8 years ago.

I left my 401K money with that company. The 401K has after tax money in it.

I have never taken any funds from the account.

If I take out 10000 from this 401K it will be a return of my non-taxable monies because it is pre-1986 money.

Can I roll this money into a Roth Ira and let it continue to accumulate tax free in a Roth IRA instead of in the taxable 401K?



Submitted by Alan - IRA critic on Thu, 2014-11-06 00:45

Yes, if the plan specifically accounts for pre 1987 after tax contributions, you can request a distribution of only that amount, and have it directly rolled into a Roth IRA (unless the plan requires you to take a total lump sum distribution). However, recent IRS Notice 2014-54 makes this somewhat obsolete because that Notice will allow you to separate ALL your after tax contributions, pre 87 or post 87 and roll them to a Roth IRA, while the pre tax amounts are rolled to a traditional IRA. There would be no tax due for either of these rollovers. Is there a reason you want to leave the rest of the balance in the 401k instead of doing the total rollovers?  You have not reached 70.5 yet have you?  Is there any highly appreciated employer stock shares in the 401k? 

Submitted by john schneider on Thu, 2014-11-06 16:22

I don’t recieve creditor protection of monies over $1,245 in an IRA. Iam not 70.5. No employer stock.

Submitted by Alan - IRA critic on Thu, 2014-11-06 16:39

  • OK. Then specifically request a distribution of only the pre 87 after tax contributions. The earnings on those contributions should remain in the 401k, so either a direct rollover or indirect rollover to your Roth IRA will be tax free. Since plans do not receive these requests too often, be sure they understand your request.
  • Re creditor protection – most states fully protect IRAs from attachment, and there would be no need to tap the federal BK Act. A few states such as CA provide little protection. If you are in a state that would require tapping the BK Act, if you have a rollover IRA that holds no regular contributions, there is no dollar limit. The 1.245 limit only applies to IRA accounts that hold regular contributions or rollovers from other IRA accounts that held them.

Submitted by john schneider on Thu, 2014-11-06 17:19

A further qusetion.I also have post-86 after tax contributions in the account. If I take out say 10,000 of after tax monies and the earnings are 100,000 is it my understanding that I would have to take at 10% of the 100,000. (10,000)  or a proportional amount from the account. I could then put 10,000 into the roth IRA and 10,000 in a regular IRA? 

Submitted by Alan - IRA critic on Thu, 2014-11-06 17:51

Other than the pre 87 after tax contributions, the rest of an after tax sub account must be distributed proportionately with earnings from those contributions. If you wanted to access the entire 10,000 you would also have to distribute the 100,000 in earnings. You could then do a direct rollover of 10,000 to your Roth IRA and as part of the same request 100,000 to your TIRA. Some plans may not allow retirees to make separate distributions of different portions of the plan like they would for active employees. But if allowed, you should be able to do the two rollovers. It is also possible that your plan may not allow this until 2015. The IRS allows it now, but plans may be more restrictive. Obviously, if you can get the after tax amounts into your Roth IRA, future earnings will all be tax free after you have had a Roth IRA for 5 years. Left in the plan, the earnings would eventually be taxable. Further, in the Roth IRA you will not have RMDs.

Add new comment

Log in or register to post comments