Pre-87 – how does the taxation work of after-tax Pre-87 contributions?

Submitted by Laura Seymour on Wed, 2015-02-25 15:42

Hello!
I have a situation with a 66 year old female who has been an active participant in her 401k plan for 30 yrs. She has the following in AFTER-TAX contributions within her 401k plan (Park Nicollet 401k):

$10,060 contributions of after-tax contributions only
value of the “Pre-87” after tax contributions today (as of 12/31/14) is $110,722.62 balance

Questions:
1. Can the client take a tax-free distribution of the $110,722.62 and owe NO taxes?
2. If she can’t take the full $100,722.62 as a tax-free distribution, how do the taxes work for the difference between the original $10,060 contribution and value of $110,722 if she took the entire $110,722 out?
3. Can she roll 100% of the $110,722 into a **ROTH** IRA?

Is there any specific IRS sections that actually dictate these rules? It was super hard to figure these out and the plan administrator had changed 3 times so they weren’t even sure.

Any light you can shed to clarify this would be MOST appreciated. Thank you so much!!
Feel free to email me directly at torchlightadvisors at gmail.com or post here.

This is in the state of Minensota if this has any pertinence to the situation.

Thanks!



Submitted by Alan - IRA critic on Thu, 2015-02-26 01:58

  • The earnings on the pre 87 after tax contributions are always taxable, however the client can ask that only the actual after tax contribution amount of 10,060 be distributed by itself without any of the earnings. It would be distributed without any withholding because it is non taxable. Client could then roll this over to a Roth IRA within 60 days, or client could just request a direct rollover to a Roth IRA as a tax free rollover.
  • Under Notice 2014-54, client could also request two direct rollovers as a single transaction under which the 10,060 goes to the Roth IRA and the earnings to a TIRA. No taxes would be due. This can also be done after retirement where the entire pre tax balance of the plan goes to a TIRA and the entire after tax contributions amount (pre 87 or later) go to a Roth IRA.
  • The subject of after tax sub accounts is complex. Here is a summary of this topic:  http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/basis-recovery-from-employer-plans/

Submitted by Laura Seymour on Sat, 2015-02-28 23:31

Thank you so much, Alan! 

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