Non Roth After Tax Contributions and In Plan Roth Conversions

Submitted by Brian Devers on Mon, 2017-02-27 15:03

Fidelity Investments just offered our company plan —
– Non Roth After Tax Contributions
– In Plan Roth Conversions

and stated the After Tax Contributions (and only the After Tax Contributions) can be converted with either a phone call or electing to do so on the participant online account portal. Fidelity went on to explain all contributions are ‘sourced’ (being kept up with/recorded/accounted for separately) within the overall account.

CPA raised the question of ‘pro rata’ conversion issue; i.e. – whenever a ‘conversion’ is triggered, it should include a pro rata share of both the pre-tax AND after-tax amounts.
Fidelity stated this was not an issue. Is it an issue ??????



Submitted by Alan - IRA critic on Mon, 2017-02-27 16:09

  • Not an issue. After tax contributions are maintained in a separate sub account per Sec 72(d)(2). The earnings on the after tax contributions also remain in the sub account. When amounts from this sub account are converted to a Roth IRA or within the plan as an IRR (in plan Roth rollover), there is no pro rating with other portions of the plan, but there IS pro rating between the contributions and their earnings. If contributions are allowed to be rolled into the Roth portion of the account fairly often, there is limited chance of earnings accumulated in the sub account, therefore these rollovers should only include a very small amount of earnings.
  • While you would always roll the after tax sub account dollars into the Roth first, you can probably roll amounts from the pre tax account into the Roth as well, although you would be taxed on those amounts. The plan is allowed to limit Roth rollovers to “otherwise distributable amounts” such as the after tax sub account or perhaps company matching contributions, or may also include “otherwise non distributable amounts” such as your elective deferrals prior to age 59.5. If you want to roll pre tax amounts into the Roth, remember that IRRs cannot be recharacterized, so if serious investment losses occur, you are stuck with the tax bill. But if you limit your IRRs to the after tax sub account, there will only be a negligible tax bill.


Submitted by William Tuttle on Mon, 2017-02-27 16:38

While you didn’t mentioned it in your bulleted list. If your plan allows in-service withdrawals/rollovers, you can roll the after-tax contributions to a Roth IRA and the earnings to a traditional IRA tax-free. The IRS allows, but does not require a plan to allow in-service withdrawals/rollovers of after-tax contributions and earnings prior to 59 1/2. This may be a better option if available. 



Submitted by Brian Devers on Mon, 2017-02-27 21:14

Thanks much.



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