After-tax dollar Rollover from 401(k)

Submitted by Uli Bittenbinder on Thu, 2023-08-03 19:23

When doing a backdoor Roth all IRA’s are considered so often it doesn’t make sense if you have other IRA’s with large balances due to the Pro rata rule.

I was told that this rule dose not apply to voluntary after tax 401(k) contribution (Money that is added after-tax above the limit of 30k) if they are rolled annually into a Roth IRA. Wouldn’t the pro rata rule not apply if those $ get rolled into a Roth IRA if we have other IRA (SEP, Traditional etc.). Also should there be a 12 month wait between rollovers?

Would those be affected by a direct distribution if in the same tax year there was a Rollover from an old 401k into a Rollover IRA?



Submitted by Alan - IRA critic on Thu, 2023-08-03 20:12

  • You are correct. Pro rata calculations apply if you take a distribution or convert from an IRA account. However, any pre tax IRA balances are not included when calculating the taxable amount of a distribution from a non IRA plan such as a 401k. A distribution of after tax amounts from a 401k after tax sub account must include any gains on those after tax contributions. If those gains are also rolled to the Roth IRA, they are taxable, but you also have the option of splitting the direct rollover, sending the contributions to your Roth IRA tax free and the gains to your rollover IRA tax deferred. 
  • The one rollover per 12 month limit does not apply to distributions from non IRA plans, so there is no waiting period. In fact, some 401k plans will automatically roll your after tax contributions immediately  into the Roth 401k account, or allow you to roll them out to your Roth IRA several times a year. The funds do not sit in the after tax account generating taxable gains since they are moved to a Roth account shortly after contribution.
  • Direct rollovers of pre tax 401k amounts to a rollover IRA do not affect the rollover of after tax amounts to your Roth IRA. 

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