After tax 401(k) in plan conversion
Is it allowable to have after tax contributions converted to Roth 401(k) via an in-plan conversion? Seems like it makes sense to do for plans that allow so you get tax-free growth on Roth 401(k) as opposed to keeping it in the after tax position.
Permalink Submitted by Alan - IRA critic on Sat, 2019-02-02 00:39
Yes, the funds should be rolled to either a Roth IRA or the Roth 401k account (IRR) frequently enough so that earnings to do not build up, since any earnings must be distributed along with the contributions. Plans differ with the frequency of these rollovers allowed. Usually, the amount of gain in the after tax account is so small that it is best to roll both the gain and the contributions to the Roth account, paying tax on the gains. However, if someone has left the gains to build up in the after tax account, and if the plan allows a Rollover to a Roth IRA, that distribution can be split so that only the contribution go to the Roth IRA and the gains to a TIRA to avoid any current tax. Some plans allow rollovers to either Roth IRA or Roth 401k, but more of them are now allowing only one or the other. If someone has a choice, the Roth IRA usually has a slight edge over the Roth 401k as a destination for the rollover.