After Tax Contributions to 401k

Submitted by James Arnold on Thu, 2020-02-20 13:27

I have a client who has about 50k in the after tax portion of his 401k. Can he roll that into his Roth 401k or to an individual Roth at retirement?

Thank You



Submitted by Alan - IRA critic on Thu, 2020-02-20 14:51

  • After tax contributions are maintained in a separate sub account in the 401k. In many cases the after tax sub account and the earnings on these contributions can be distributed while still working. Client should inquire if this can be done now in the form of a direct rollover of the after tax sub account to his Roth IRA. If the earnings in that account are significant, client can also request a split rollover where the 50k goes to his Roth IRA and the earnings to his TIRA account. However, if client is already doing back door Roth IRA conversions, adding to the TIRA will make those conversions  partially taxable. If the earnings on the 50k are small, is it best to just rollover the entire after tax sub account to the Roth IRA.
  • Some plans now require that these rollovers be made to the Roth 401k by an IRR (in plan Roth rollover) instead of to a Roth IRA. In that case, the earnings in the sub account will be taxed in the IRR year since a split rollover cannot be done. Basically, this still results in future gains occurring in a Roth account instead of being pre tax earnings, so sooner the better.
  • If he is about to leave the company or retire soon, he can wait and do a split rollover after separation. The main thing to avoid is the error of having the 50k of after tax money rolled into a TIRA instead of a Roth. That would subject him to the pro rate IRA rules since he cannot separate the after tax IRA money from the pre tax funds unless he rolls his pre tax IRA money back into a future employer’s plan.

Submitted by James Arnold on Thu, 2020-02-20 18:39

Thank you Alan!

Add new comment

Log in or register to post comments