401(k) after tax conversion to Roth IRA
Good afternoon,
I am finding conflicting guidance on this matter and would appreciate your help.
Are “mega backdoor” roth conversions from after tax allocations in a 401(k) plan subject to pro rata rules where all of the client’s existing traditional IRAs are considered?
Thanks you!
Permalink Submitted by Alan - IRA critic on Wed, 2025-03-19 18:29
No, because no distribution is being made from any TIRA.
A direct rollover can be done from the after tax subaccount in the 401k to the Roth IRA. The only pro rating in the 401k is limited to the after tax contributions and their earnings in the sub account. The rest of the 401k is not involved in pro rating. Most of these direct rollovers are for the entire balance of the sub account, and in that case only the gains held in that subaccount are subject to taxes.
Some plans permit these rollovers of the sub account to be done while still working, others will not until after separation from service. Some plans that do not allow in service rollovers offer in plan Roth rollovers from the after tax sub account to the Roth 401k. These are taxed in the same manner as if the rollover was done to a Roth IRA.