After-Tax 401k Rollover to Roth – Subsequent Distribution

Submitted by Neil Crowell on Fri, 2016-09-30 17:33

A client, age 50, rolls over his after-tax 401k contributions to a Roth IRA. When can he withdraw his contributions (not the earnings) from the Roth IRA without incurring tax penalties? Immediately, after 5 years, or at age 59 1/2?



Submitted by Alan - IRA critic on Fri, 2016-09-30 22:21

The rollover was probably mostly non taxable and the non taxable portion of the rollover can be withdrawn without tax or penalty anytime. If the rollover included 500 in earnings, then the first 500 withdrawn will incur a 10% penalty because the taxable portion of a rollover comes out first. The non taxable portion comes out last. All this assumes that this rollover was the first Roth IRA client has. If client already had a Roth IRA, his regular contributions come out before any of this rollover, and any older Roth conversions come out before the current Roth rollover. In other words, the usual Roth ordering rules apply to all non qualified Roth IRA distributions.



Submitted by MIKE KRUCHTEN on Fri, 2016-09-30 23:17

Alan,I thought contributions(AFTER TAX ROTH 401K CONTRIBUTIONS) come out first when redemption is taken from the Roth IRA(assuming client rolled Roth 401k to Roth IRA). On Tue, 2016-08-30 18:31 you replied to a post and stated Roth basis from Roth IRA would come out first??  



Submitted by Alan - IRA critic on Fri, 2016-09-30 23:53

  • The OP was not referring to Roth 401k money, but rather to after tax contributions (aka employee contributions) made to the pre tax portion of the contract. Plans that offer this after tax sub account usually allow distributions from the sub account only. Employees make the contributions and then frequently roll the sub account balance over to their Roth IRA or sometimes to the Roth 401k as an in plan Roth rollover. This is another form of a back door Roth contribution, only with much higher limits.
  • When either Roth 401k money or after tax sub account money is rolled to a Roth IRA, it is absorbed under the Roth IRA ordering rules. Roth 401k money rolled in is treated as partially regular Roth IRA contributions up to the amount of employee deferral contributions or as earnings if there are earnings in the Roth 401k. However, when an after tax sub account balance is rolled to a Roth IRA, it is treated as Roth conversion money with respect to the ordering rules. This affects what dollars are actually distributed from the Roth IRA, and Form 8606 must be completed correctly to show the balance in terms of either regular Roth IRA contributions or conversion contributions. Once the Roth IRA is qualified, then these balances no longer matter. Until that time Roth IRA basis does come out of the Roth IRA before earnings under the ordering rules.


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