Roth Conversion from After-Tax 401(k)

Submitted by Jay P. on Wed, 2018-01-31 16:52

I am re-posting this question from December b/c perhaps I did not ask it correctly. If you read the post from Dec 13th (below), what I am trying to clarify is….

Is rolling after-tax 401(k) money to a Roth IRA the same as a “Back Door Roth”? If so, does this client have any issues with the pro-rata rule? Previous to this after-tax rollover to his Roth, he did not have any money in a Traditional IRA, BUT he did directly roll $1,375,000 from the same 401(k) into a Traditional IRA at the same time as the $25,000 after-tax rollover to a Roth. Does this $1,375,000 count as having an IRA as it relates to the pro-rata rule for the after-tax Roth rollover? Or….does the Pro-Rata rule not apply b/c this was not technically a Back Door Roth?

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In Oct 2016, client (age 67) retired and had $1,400,000 in his former employer’s 401(k). $25,000 of that was after-tax contributions which he rolled to a Roth IRA and the remaining $1,375,000 rolled to a Traditional IRA. At the time time of the rollover, he also had $200,000 in another Roth IRA, but no other Traditional IRA’s. Of the $25,000 after tax money, I do not know what portion is earnings and what portion is contributions.

One year later, the after-tax money that was rolled to the Roth IRA is now worth $30,000. Is there any issue with him rolling the $25,000 to a Roth IRA as it relates to the pro-rata rule or any other tax issues he should be aware of? If so, how does he unwind it?

Thank you.

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Sounds like there was two
Submitted by Alan-iracritic@… on Wed, 2017-12-13 17:12

Sounds like there was two direct rollovers done from the 401k with the 25,000 in after tax contributions going to a Roth IRA. When that rollover was done, the earnings on the after tax contributions were rolled to the traditional IRA. Once the 25,000 is in the Roth IRA it is treated as a non taxable conversion. However, since the client had 200,000 in another Roth IRA, I will assume that his first Roth IRA contribution was prior to 2013. If so, his Roth IRA is fully qualified (5 years and age 59.5) and all distributions are tax and penalty free. Therefore, there is no need for any further accounting or for tracking the amount of gains on the Roth contributions. No need to unwind any of this. Remember that for tax purposes, all of his Roth IRAs are treated as a single combined Roth. Once the first one is qualified, they are all qualified and fully tax free.



Submitted by Alan - IRA critic on Wed, 2018-01-31 23:40

  • The term “Back door Roth” is an unofficial description of the process of contributing to a Roth IRA by making a non deductible TIRA contribution and then converting it, ending with a very similar result as a regular Roth contribution. An analagous process with a 401k is making a much larger after tax contribution to a separate sub account and then rolling it along with its earnings to a Roth IRA or Roth 401k in the plan. 
  • The conversions in both cases involve pro rating the basis with pre tax values in either the TIRAs or in the case of the separate after tax account in the 401k to the pre tax amounts in the sub account only, since it is generally treated as a separate account per Sec 72(d)(2). Amounts moved from the after tax sub account DIRECTLY to a Roth IRA are not affected by TIRA pre tax balances because they were never deposited in a TIRA.
  • Therefore, while client’s 25,000 Roth rollover functions as a back door Roth, the taxable amount is not affected by any value in his pre tax 401k as long as the plan still treats the sub account as a separate account OR if the direct rollovers were requested per Notice 2014-54 (a split rollover of pre tax and after tax amounts requested at the same time) it would not matter as the IRS explained in the Notice. Were these direct rollovers requested at the same time?  Since this occurred in 2016, was the 2016 1099R reported correctly on line 16 of Form 1040 showing no taxable amount on line 16b?
  • Therefore, the shorter answer to your question is that if this direct rollover was requested as a split rollover of pre tax to TIRA and after tax to Roth IRA per Notice 2014-54, there is no pro rating of basis with pre tax. Even the gains in the after tax sub account would have gone to the TIRA. 

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