In Service Withdrawal of After tax 401k
Client, age 57 has $140,000 of after tax monies in 401k worth total of $2,000,000.
Plan allows for in service withdrawals
Client wants to take in service withdrawal of after tax monies.
Is that possible (plan allows) and would the tax on that be zero since it is after tax contributions?
Is there an early withdrawal penalty since she is under 59 1/2?
Thanks
Howard
Permalink Submitted by Alan - IRA critic on Tue, 2021-03-16 19:45
The after tax sub account in the plan holds the140,000 and also the earnings that this amount has generated. Any distribution she takes will include a pro rated amount of earnings in that account. The earnings would be taxable and subject to penalty, but the after tax contribution amount would not. If the earnings are significant, she might be able to request a direct rollover of the earnings to a TIRA and have the after tax amount paid to her. That would avoid any tax or penalty. I assume client understands that this sub account could otherwise be rolled to a Roth IRA, and just withdrawing it eliminates that attractive option.