In-Service Distribution (allocating pretax & after-tax dollars)
I am hoping that someone can help with the following scenario
Let’s say for example a 401(k) participant is eligible for an in-service distribution. Per plan rules, only after-tax dollars are available for an in-service distribution. After-tax dollars are valued at $100,000 – $70,000 basis + $30,000 gains. The total 401(k) value is $500,000.
I understand based on IRS notice 2014-54 the withdrawal is required to be processed pro-rata. Is the pro-rata based on the full value of $500,000? or do I use only the after-tax dollars of $100,00 (which are the only dollars eligible for rollover). In short, can I request a distribution for $100,000 – $70,000 to a Roth (tax free) and the $30,000 rolled to a traditional IRA?
Thank you!
Permalink Submitted by Alan - IRA critic on Thu, 2015-05-07 16:59
Yes, just the 100k is pro rated because it is held in a separate account which receives separate account treatment per Sec 72(d)(2). The Notice can be used to send the 70k to a Roth IRA and the 30k to a TIRA if requested as part of a single distribution.
Permalink Submitted by ShipsnGiggles on Thu, 2015-05-07 17:24
Let’s change the facts – would anything change assuming the entire 401(k) account ($500,000) was avaiable for an in-service distribution? In other words would the pro-rated amount remain $100K or would you now use the full $500k since those dollars can now be rolled over. Thank you
Permalink Submitted by Alan - IRA critic on Thu, 2015-05-07 18:50
It depends. If the plan provides the separate accounting for the after tax sub account, it should accept a specific request that the distribution only include the sub account amounts. That is also true after separation when the entire plan balance is distributable. But if the taxpayer does not clearly specify the source of the funds, then the plan will usually pro rate using the entire distributable plan balance (the 500k).