after-tax 401(k) contributions to Roth 401(k)

Submitted by Mary K. Dean on Fri, 2019-10-04 23:56

My client sent me a 401(k) Vanguard memo that his employer plan now allows his after-tax contribution automatically converted to a Roth 401(k) the same day as the contribution was made. Is there a reg or significant private letter ruling supporting this? Since my client is over 59 1/2, can he periodically roll this into his personal Roth IRA?

Thanks as always … Mary Dean



Submitted by Alan - IRA critic on Sat, 2019-10-05 01:08

  • The plan provisions determine how often an after tax contribution can be rolled to the designated Roth, and whether a rollover to a Roth IRA is also an option or not, as well as the frequency of rollovers out of the plan to a Roth IRA. 
  • The after tax contributions are made to an after tax sub account per Sec 72(d)(2). These amounts are generally distributable at any time along with their earnings, but a plan can adopt restrictions. Therefore, it is up to the plan how flexible transactions will be involving the after tax sub account, not the IRS.
  • However, the IRS does require ACP discrimination testing for the after tax contributions. Therefore, there is always a risk of excess contributions that might need to be corrected after the in plan Roth rollover has been completed.
  • Most plans that allow in plan Roth rollovers (IRRs) offer them for distributable amounts (includes the after tax sub account), non distributable amounts, or both. After an IRR, the distributable amounts usually remain distributable, so could be rolled out of the Roth 401k to a Roth IRA unless the plan restricts such rollovers. 
  • Note that amounts rolled instantly to the Designated Roth will have no earnings and therefore the 1099R will show no taxes due. That also means that the 5 year holding period for such rollovers is meaningless since the 10% penalty only applies to the taxable portion of an IRR, which in this case will be 0.

Submitted by [email protected] on Sat, 2019-10-05 20:25

Thanks Alan as always!  I believe that any partial rollover from a 401(k) where there is a Roth 401(k) and after-tax monies must be prorated?  At least that is my reading of the IRS publication on 401(k)s Rollovers of After-Tax Contributions in Retirement Plans.  In short we can not just roll the Roth 401(k) to the Roth IRA nor the after-tax to the Roth IRA?

Submitted by Alan - IRA critic on Sun, 2019-10-06 00:54

If the amount rolled to the Roth 401k is from the after tax account, it was distributable while in service and remains so after rolling to the Roth 401k. Conversely, if an IRR is done from pre tax elective deferrals, such elective deferrals cannot be distributed in service before age 59.5 per IRS rules. Therefore, if the plan allows IRRs from both distributable and non distributable sources, they must maintain dual accounting of these funds. However, while plan generally could allow IRRs from the after tax account in this case, they have the authority to restrict rollovers outside the plan even though the IRS would allow them. Many plans that offer these types of IRRs take on the extra accounting to preserve plan assets, and not lose them to Roth IRAs. Therefore, the client needs to ask the plan administrator if they are allowed to roll these IRRs out of the Roth 401k to their Roth IRA. Good chance the answer will be no, but it will not hurt to ask. 

Submitted by [email protected] on Tue, 2019-10-08 16:31

Hi Alan,I am still confused.  Per the above my client can transfer just his after tax or Roth 401(k) to a Roth IRA as long as the plan allows.  Correct?  Why does the IRS publication contradict this?   Note:  my client is working and over 59 1/2.Per the IRS Publication:Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?”No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:• pretax amounts to a traditional IRA or another eligible retirement plan, and• after-tax amounts to a Roth IRA.” 

Submitted by William Tuttle on Tue, 2019-10-08 19:17

  • The IRS used incomplete/imprecise terminology in the first two sentences of their answer. They clarified this (although not completely) in the third sentence and as shown by examples.
  • Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account.
  • The account they are referring to is the employee after-tax account which only includes employee after-tax contributions and earnings. The pro-rata only applies to those tow amounts.
  • NOTE: This does not have to be an actual account you can see. All that the IRS requires is that the record keeper can separately account for the employee after-tax contributions and earnings.
  • Pre-tax contributions and earnings are NOT included in any pro-rata consideration.

Alan, I really wish the IRS would fix this extremely confusing web page. I can’t begin to tell you how many times people bring up this page as a reason why you can’t just rollover the employee after-tax “sub account”. 

Submitted by Alan - IRA critic on Wed, 2019-10-09 02:15

  • Yes, I agree. The Q&A also ignores that the accounted for grandfathered (pre 87) after tax contributions can be distributed alone without any earnings. Of course, that option is only helpful if all the after tax contributions were pre 87 since those made later would result in earnings being distributed and would likely trigger Notice 2014-54 if multiple destinations were desired.
  • As for the problematic wording, the IRS sometimes attempts to over generalize. I even recall an article by Michael Kitces that overlooks after tax sub accounts. These are not all that rare anymore.

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