Trustee-to-trustee transfer from 401k to IRA/Roth IRA and After Tax 401k contribution/transfer

Submitted by B Lee on Mon, 2015-05-25 18:56

My young friend asked me the following questions and I thought they should be answer by you experts. Many thanks!

Can employee under 55 and still working for the company request a trustee-to-trustee transfer from 401k to IRA or Roth IRA? Is there a 10% early withdraw penalty?

If employee is older than 55 and still working for the company do the above and not having a 10% early withdraw penalty?

If employee is older than 59 1/2 and still working for the company do the above and not having a 10% early withdraw penalty?

If employee has contributed the max allowed by the plan annually, is he allow to make additional contribution to 401k under the non tax defer (after tax contribution)? What is the annual limit for this after tax contribution? Can he then do trustee-to-trustee the after tax portion to Roth IRA shortly after the contribution (say deducted on Friday, request transfer the following Monday)? What about the earning attributed to the after tax contribution, would it commingle with the regular 401k contribution/earning? Must he wait till after he max out annually before request after tax contribution or can he have regular contribution (leading to max out annually) + after tax contribution be deducted in each payroll deduction? Can he simplify the process by writing an annual check to 401k for the desired after tax contribution before requesting transfer?

Are these IRS rule or a Company Plan Description rule?



Submitted by Alan - IRA critic on Mon, 2015-05-25 23:30

  1. There is never a 10% penalty for a direct rollover. Prior to 59.5 under IRS rules you cannot roll out your elective deferrals, but the plan may allow you to roll out matching contributions and earnings. More likely, if the plan includes a non Roth after tax sub account, you would be allowed to roll out those after tax contributions and their earnings.
  2. For your first 2 questions, age 55 is not a factor. 59.5 may result in more portions of the plan being eligible for in service rollovers.
  3. See above.
  4. If the plan includes an after tax sub account, such contributions are in addition to the elective deferral limit (24k if age 50 plus). Total annual additions are 59k including the age 50 catchup, but a plan may reduce the after tax contribution limit to be sure that company matching and forfeitures do not result in creating an excess annual addition. Therefore, each plan may have a different limit for after tax contributions, and also the frequency of which the sub account may be rolled out to an IRA, typically a Roth IRA. Earnings in the after tax sub account are locked to that account and not combined with earnings on other parts of the plan. Most plans do not require that elective deferrals be maxed out before allowing after tax contributions. Whether after tax contributions must be made by payroll deduction or if a separate check will be accepted is a plan specific provision.  Most of the options here are plan specific.

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