401(k) – After Tax Earnings
Client has three buckets of funds in their 401(k): pre-tax, Roth, and after-tax. Pretax will go into Traditional IRA, Roth will go into Roth. After-tax contributions will go into Roth. Custodian is asking where to send the earnings of the after tax as if it were a question. I was under the belief that we can only move these funds into the Traditional IRA. Is there really an option to direct these earnings to a Roth?
Permalink Submitted by Alan - IRA critic on Wed, 2024-05-22 15:50
Yes, but those earnings would be taxable. Therefore, in most cases these earnings should be added to the other pre tax balance and rolled to the TIRA. No taxes due currently. But if client does not mind incurring current taxes on those gains, they could be rolled to the Roth IRA.
If client was still employed and only able to roll out the after tax sub account, and that account only included a small amount of earnings, in many cases the entire after tax account balance including the gains would be rolled to the Roth IRA for simplicity, with the gains being taxable.
For either choice, client needs to be very clear in requesting the direct rollovers. Client should get an H coded 1099R for the Roth 401k rollover and a G coded 1099R for the non Roth rollovers. If client sends the gains in the after tax account to the Roth IRA, the G coded 1099R will show those gains as taxable in Box 2a.