rolling over after-tax monies from 401(k)

Submitted by Michael Porfido on Tue, 2018-02-27 18:59

Have a client that has been making after-tax contributions to his 401(k) for a long time and has about $640,000 built up in it. My question is, when he leaves the company can he roll over his contributions as well as the earnings into a Roth IRA or just the contributions.?

Thank you.



Submitted by Alan - IRA critic on Tue, 2018-02-27 19:06

  • Usually, after tax contributions are made to a separate sub account within the 401k plan, and most plans consider this account balance (both contributions and their gains) to be distributable while still working. Therefore, client may be able to do a direct rollover now to a Roth IRA and pay taxes on the gains OR request a split rollover (per Notice 2014-54) in which the after tax amount is directly rolled to a Roth IRA and the gains to a traditional IRA. There would be no taxes due, however the new traditional IRA balance will cause any back door Roth conversions to be mostly taxable if client is doing that. 
  • Many higher paid employees make large after tax contributions and then roll them soon thereafter to a Roth IRA before earnings accumulate. Better to have the gains occur in the Roth IRA, rather than becoming taxable gains in the 401k plan.

Submitted by [email protected] on Fri, 2018-03-02 21:21

If he were to roll money out now from the after-tax sub-account and do a split rollover, would that prevent him from utilizing the NUA strategy in a couple of years when he retires from the company?

Submitted by Alan - IRA critic on Fri, 2018-03-02 21:55

No, because separation from service (retirement) is a triggering event for NUA. What must be avoided is taking distributions after a triggering event and before the year you do the LSD.

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