After-Tax Funds in a 401k rolled over to a Roth IRA

Submitted by Robert Gibb on Mon, 2022-08-15 18:08

A 71 year old retiree has after-tax funds in his 401k that he would like to rollover into a Roth IRA.

The after-tax funds are not Roth contributions, rather contributions that were made after-tax.

He has no existing Roth IRA account.

Once he rolls over the after tax funds into the Roth IRA, will he need to wait 5 years until the earnings are also tax free?

Permalink Submitted by Alan - IRA critic on Mon, 2022-08-15 18:18

Yes, earnings generated in the Roth IRA are not tax free until the Roth IRA has been held 5 years.
Retiree should request a split direct rollover in a single request. The pre tax balance including any gains on the after tax contributions can be rolled to a TIRA, and only the after tax balance to a Roth IRA. There would be no current taxes on these transactions.
If retiree will reach 72 before year end, the RMD for the 401k will have to be distributed prior to any rollovers. That RMD cannot be rolled over. If not 72 by year end, this is a good year to complete the rollover as it will avoid any RMD distribution from the 401k.