Conversion of after-tax 401(k) funds to Roth IRA
Hi,
My 401(k) balance consists pre-tax contributions, after-tax contributions, and growth. I’d like to do an in-service distribution and do a direct rollover of all of my after-tax 401(k) contributions to my Roth IRA, but my understanding is I can only do this if:
1) the 401(k) plan “separately accounts for” the after-tax contributions AND
2) I also distribute (which I’d roll into a traditional IRA) the associated growth of the after-tax contributions.
How can I determine whether my 401(k) plan separately accounts for the after-tax contributions? If I call the plan administrator and if they say that the growth on the after-tax contributions was some dollar amount, then I assume the after-tax contributions would’ve been separately accounted for?
More important and to the point, if they can tell me the amount of the after-tax contributions, but can’t tell me the amount of the associated growth of the after-tax contributions, is it safe to assume that the after-tax contributions are not “separately accounted for”?
I’d hate for the pro-rata distribution rule to apply to my entire 401(k) and not just the after-tax part.
Thanks in advance for your assistance.
Permalink Submitted by Alan - IRA critic on Mon, 2016-04-18 22:19
Just ask the plan administrator if the after tax contributions are held in a separate sub account per Sec 72(d)(2). The vast majority of plans are structured this way. That allows you to request a distribution from the sub account only and includes a pro rated amount of earnings on those after tax contributions. Generally, if the earnings on the sub account are more than you want to pay taxes on in a direct rollover to your Roth IRA, you would request a split rollover per Notice 2014-54. You would request that the after tax contributions in the separate sub account be directly rolled into your Roth IRA and the earnings to your TIRA. But if the earnings are small, for simplification you might have the entire sub account sent to your Roth IRA and just pay taxes on the earnings.
Permalink Submitted by chris erickson on Tue, 2016-04-19 13:17
Thank you for your clarification. I was told that I could roll over “just the after-tax contributions” but you have explained to me that the the way most plans work is the subaccount that contains the after-tax contributions ALSO contains growth on those contributions, and a full distribution from that subaccount would include both the after-tax contributions AND any growth of them. Correct?
Permalink Submitted by Alan - IRA critic on Tue, 2016-04-19 17:15
Yes, that is correct subject to one exception. Any after tax contributions prior to 1987 can be distributed without earnings on them. But after Notice 2014-54 all the after tax money can be rolled to the Roth IRA while the pre tax earnings go to a TIRA, so there is less need to isolate the pre 1987 money.
Permalink Submitted by chris erickson on Tue, 2016-04-19 19:07
Thank you!!