401k after tax contributions transfer to a Roth IRA

Submitted by William Bailey on Tue, 2014-12-16 23:49

I have a 63 year old client who is a active participant of his company 401k plan. He has $100,000 after tax contributions in his 401k plan. Can he transfer these funds to a Roth IRA and does he have to transfer the earnings from these after taxed contributions to a traditional IRA . Since he is over 59 and one half does the five year rule apply on the transfers? Could he take out his contributions first before earnings? He still wants to maintain his 401k pre taxed contributions and continue to contribute the next three years. Is this possible?



Submitted by Alan - IRA critic on Wed, 2014-12-17 02:53

  • If the plan includes an after tax contribution sub account, generally the sub account contributions and their earnings can be rolled out of the plan at certain intervals. A direct transfer to a Roth IRA would then be possible. If the earnings on these contributions are more than client wants to pay taxes on, per recent Notice 2014-54, client could request a single distribution consisting of two transfers. The taxable amount (earnings) could be directly rolled to a TIRA and the after tax contributions to a Roth IRA. Accordingly, there would be no current taxes due.
  • For the balance transferred to a Roth IRA if this is his first Roth contribution of any kind, he could remove the entire rollover tax and penalty free without any holding period. But any earnings generated in the Roth IRA would not be tax free until the 5 year holding period was completed. In the meantime, the rollover dollars come out first and the earnings last.
  • Rolling out the after tax sub account will have no effect on continued 401k contributions to any portion of the 401k.

Submitted by William Bailey on Wed, 2014-12-17 19:01

If there is no after tax sub account the participant cannot just transfer his after tax contributions?  Would he also have to transfer earnings on the contributions to a Traditional IRA.  How would the earnings amount be calculated? 

Submitted by Alan - IRA critic on Wed, 2014-12-17 20:47

  • Participant can still transfer after tax amounts if the plan will allow it, but much of the pre tax amounts will also have to be transferred out if there is no sub account maintained. An after tax sub account can typically be distributed separately from the rest of the plan, and therefore the pre tax portions of the plan could stay intact.
  • With an after tax sub account, the only pre tax dollars that must be transferred are the earnings on the after tax contributions.
  • But without an after tax sub account, pre tax dollars in the entire plan that are eligible for distribution must come out along with the after tax money.

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