Rollover from 401(k) plan with both pre-tax and after-tax contributions

Submitted by Chung-Chu Hsieh on Wed, 2023-09-20 16:36

Have a 401(k) plan which allows a direct rollover of pro-rata pre-tax portion to a government 457b plan. However, it only allows indirect rollover of after-tax portion with a check to me. I like to roll it over to an existing individual Roth IRA account within 60 days of receiving the check. I understand that I don’t have to pay taxes on this indirect rollover and the future earnings in the Roth IRA account. Does the 365-day restriction applies on this “indirect” 401(k) to Roth IRA rollover, i.e., I can only do it once within any 365-day time period as required by IRS? The 401(k) plan does not have any restriction on the frequency of partial distributions, and I do have a large balance so I like to do the partial rollovers over a period of time.



Submitted by David Mertz on Wed, 2023-09-20 17:27

The one-rollover-per-12-months limitation does not apply to rollovers to or from a 401(k).



Submitted by Chung-Chu Hsieh on Wed, 2023-09-20 19:10

Thank you! 



Submitted by Chung-Chu Hsieh on Wed, 2023-09-20 19:57

Please confirm that this indirect rollover of nontable funds from 401k to individual Roth IRA is not a taxable event, and the future earnings from the rolled in funds in the Roth IRA will be tax-free upon withdrawals. Thank you.



Submitted by Alan - IRA critic on Wed, 2023-09-20 21:45

Yes, this rollover is non taxable, although it still must be reported on lines 5a and 5b of Form 1040. Roth earnings that are distributed will be taxable until the Roth IRA is qualified (5 years and age 59.5), but the earnings come out after the non taxable contributions.



Submitted by Chung-Chu Hsieh on Wed, 2023-09-20 20:49

For partial 401k distributions, are contributions distributed before the earnings? With both pre-tax and after-tax contributions, how the pro-rata calculation works? Thank you.



Submitted by Alan - IRA critic on Wed, 2023-09-20 21:57

  • Contributions and earnings are distributed together unless the plan limits the portions that you can distribute if you are still employed.You have a pre tax 401k account with an after tax sub account that contains the after tax contributions and the earnings on those contributions. But with the split rollover you are ordering as a single request, the pre tax amounts are directly rolled to your 457b (non taxable) and the after tax amounts distributed to you personally (also non taxable). There is no pro rating involved as the source funds are being sent to different destinations. 
  • Note that if you are not 59.5, rolling the 401k into the 457b will not provide the penalty free distributions that the 457b has, and the 457b will have to hold those 401k funds in a rollover sub account. If you withdraw them prior to 59.5 the penalty will apply, but not on the distribution of 457b non rollover money.


Submitted by Chung-Chu Hsieh on Thu, 2023-09-21 13:36

Thank you. I am 70+ years old. As I understand from your explanation above, rolling the 401k into the 457b now will provide the penalty free distributions. 



Submitted by Alan - IRA critic on Thu, 2023-09-21 14:47

Correct. There is never an early distribution penalty after 59.5.



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