Rolling after-tax 401k contributions into new 401k plan

Submitted by Christopher Combs on Wed, 2022-08-24 19:45

Dear Alan et al,

I have a client with some after-tax contributions in an old 401(k) plan and have two questions:

1. Can these after-tax contributions be rolled into his new Roth 401(k) plan?

2. If not, could the after-tax contributions be rolled into the new 401(k) plan where it’s made clear that these are after-tax contributions?

Thanks,

Chris



Submitted by Alan - IRA critic on Wed, 2022-08-24 21:05

  • Chris, the after tax contributions cannot be rolled into another plan’s Roth 401k account. While it is allowed to have after tax non Roth contributions rolled to an accepting employer plan by direct trustee transfer, I would not be comfortable with the smooth transfer such that the new plan would properly add these contributions to their after tax sub account. It would be better if the client instead did a direct rollover of these after tax amounts to a Roth IRA as a non taxable rollover, and roll the pre tax 401k into the new plan if client prefers that to a rollover IRA. To be clear, if the after tax is directly transferred to the new plan as non Roth after tax contributions, the client would be able to then do an in plan Roth rollover if the plan offers them. But his Roth IRA provides better distribution options without concern for plan accounting for an unusual form of direct rollover.
  • Q 2 – so yes, if the tax status of the after tax contributions correctly transfers from the old plan to the new plan, the after tax amount should show in the new plan as a rollover balance. If the plan provides IRRs it could then be rolled into the Roth 401k as an IRR. Earnings on those after tax contributions would have to accompany the transfer, and the earnings portion would be taxable in an IRR. The earnings portion cannot be rolled into the pre tax 401k plan, but it could be rolled into a TIRA account. All in all, a direct rollover to a Roth IRA or a split rollover to Roth IRA and rollover IRA would be a better destination for these amounts than the new 401k.

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