Partial direct rollover to IRA

Submitted by Peter Thomann on Tue, 2015-10-06 07:32

Individual has a 401(k) account balance of $200,000 which includes $50,000 of after-tax funds. Individual instructs custodian to directly rollover $50,000 of the after-tax funds and $50,000 of the pre-tax funds to an IRA. $100,000 of pre-tax funds would remain in the 401(k). The individual is not separating; plan document permits withdrawal/rollover while active participant. Is this permitted? Also, would it be permitted to just directly rollover the after-tax funds ($50,000) to an IRA?
Thank you



Submitted by Alan - IRA critic on Tue, 2015-10-06 17:49

  • If the plan includes the usual type of after tax sub account, the individual should be able to request a separate distribution of that sub account balance which must also include the earnings in the sub account. Due to Notice 2014-54 individual has the opportunity to direct the earnings to a TIRA and the after tax contributions to a Roth IRA, and this will result in no current taxes due.
  • As a separate transaction perhaps a week later, individual can request a direct rollover of the eligible pre tax amount remaining in the plan to a TIRA. Doing this separately will reduce the chance of confusion. Note that unless the individual has reached 59.5 the pre tax elective deferrals cannot be distributed, but the plan document may allow other portions of the plan to be distributed. 

Submitted by Peter Thomann on Tue, 2015-10-06 19:37

What would happen if it is not a sub account?  Would the pro-rata apply when the money is rolled over?  In other words, the individual would only get a portion of the after-tax money?

Submitted by Alan - IRA critic on Tue, 2015-10-06 20:35

That would be very rare. But if a plan for some reason did not treat the after tax contributions as a sub account, then pro rating of any distributions would include the entire distributable balance of the plan. The employee would have to distribute everything eligible to distribute in order to get the entire after tax balance out of the plan. But they would still be able to use Notice 2014-54 to avoid current taxes.

Add new comment

Log in or register to post comments