Keeping after tax 401k contributions and rolling balance to IRA

Submitted by Terri Crinnion on Tue, 2017-11-28 22:32

Client received two distribution checks from his 401k consisting of pre and post tax contributions and earnings:

Pre tax and earnings: $514,000

Post tax and earnings $88,000 ($68,000 are the post tax contributions, $20,000 are the earnings, they also withheld $5,000 in federal tax, so net check was $83,000)

I know he can (within 60 days) roll the $514,000 to an IRA but can he also roll the earnings only ($20,000) on the post tax distribution to this same IRA. He wants to keep the post tax contributions (he needs the cash) and therefore he would pay -0- tax. Will this work?



Submitted by Alan - IRA critic on Tue, 2017-11-28 23:37

  • Yes, he could roll 534,000 to his traditional IRA within 60 days and there would be no tax due for the 401k distributions. 
  • It’s not clear why the amount withheld was only 5,000. 20% of the pre tax distribution is minimum mandatory withholding for the amounts that are eligible for rollover. Any RMD amount is not eligible for rollover, so there is no required withholding on that amount. Are you sure that the 514,000 check is NOT a direct rollover check, made out to client’s IRA custodian? I would check if any of the 88,000 is an RMD.

Submitted by Terri Crinnion on Wed, 2017-11-29 00:03

Client took his RMD earlier in the year.  These two checks are just to close out the remaining 401k.  And I will look to see who the checks are made out to, the $514,000 may in fact be made out to IRA custodian.   I am thinking the withholding of $5,000 on check #2 is 25% of the earnings on the post tax $20,000, as the check was made out to my client (I am guessing.)  Thanks Alan, much appreciate your input. 

Add new comment

Log in or register to post comments