After tax 401k rollover

Submitted by Steve Kochis on Fri, 2015-12-04 22:42

Client has a 401k with both pre-tax and after-tax dollars. Their intent is to roll over the after-tax amount into a Roth IRA and leave any pre-tax contributions in the 401k. By leaving any pre-tax contributions in the 401k, does that mean the taxation of the after-tax roll over to the Roth IRA is now based on a pro-rata calculation?

My understanding is that the 401k has to be fully distributed to take advantage of 2014-54 and that any that partial distribution must include a proportional share of the pretax and after-tax amounts in the account.

I’ve found sources which state a partial rollover conversion of after tax assets is permitted when separate contracts are used with the 401k.

Any thoughts?



Submitted by William Tuttle on Fri, 2015-12-04 23:28

You have to be careful when you are using the terms pre-tax and after-tax dollars with regards to 401k accounts. There are actually three potential 401k sub account types; traditional pre-tax deferrals, Roth after-tax deferrals, and after-tax contrbiutions. Traditiional pre-tax deferrals where the participant does not pay income tax on the deferred amounts, but where both principal and earnings are taxable.. Roth after-tax deferrals where the participant does pay taxes on the deferred amounts, but where both principal and earnings are tax free. After-tax contributions where the participant does pay taxes on the contributed amounts, but where the principal is tax-free and the earnings are taxable. After-tax rollovers only refer to this last account type. Salary deferrals are not eligible for rollover before 59.5 by IRS regulations. 

Submitted by Alan - IRA critic on Sat, 2015-12-05 00:20

  • In addition to spiritrider’s post, the after tax sub account can typically be distributed by itself. This account contains the after tax contributions and probably some earnings. Pro rating is done between the after tax contributions and the earnings within just the sub account, not the rest of the 401k. Notice 2014-54 allows the taxpayer to direct the non taxable contributions to a Roth IRA and the earnings to a TIRA such that no current taxes are due.
  • The remainder of the pre tax portion of the 401k may or may not be distributable depending on several variables such as plan provisions, age of participant, and portions of the account derived from different sources such as elective deferrals, company matching, and earnings on both. For the particular distribution any pro rating is done ONLY with respect to the balance which is distributable. For example, if the elective deferrals are not yet distributable, they are not involved in pro rating of the other portions that are distributable. Once the breakdown between taxable and non taxable amounts is determined, Notice 2014-54 can also be applied to these distributions.
  • The designated Roth (if any) is a separate account in the plan. Any prorating between non qualified earnings in the Roth and the contributions is limited to the designated Roth only. IRA Roth ordering rules do NOT apply here. If there have been IRRs (in plan Roth rollovers), further accounting breakdowns apply since some of the IRR money may not be distributable, and other IRR money may be distributable.
  • To summarize regarding pro rating, it does occur but you need to know what amounts are included in the math and which amounts are not.
  • Distributions of the after tax sub account are usually total distributions since taxes can be avoided by using Notice 2014-54 when rolling the money out, and you would want to get this money into a Roth IRA ASAP.

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