After tax 401k contributions vs. Roth contributions
We have a client who is inheriting $ 80,000 of a nontaxable Thrift savings plan balance along with the regular contributions (we’re all set on that, we can roll that over with no taxes). We aren’t clear yet whether it’s after-tax 401k contributions vs Roth contributions. My research tells me if they are Roth contributions, we can roll them over into a Roth IRA and no taxes are owed. I’ve also read that if they are after-tax TSP contributions, a rollover to Roth will be nontaxable for the contributions, but taxes will be owed on the earnings. The client is under 59.5 also.
- Is my assessment of Roth and after-tax contributions correct?
- If so, can my client roll over the contributions of the after-tax money and then roll the earnings over to a TIRA?
I greatly appreciate your input.
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-21 12:09
You are basically correct. The after tax TSP balance is likely Roth, unless perhaps if the decedent was in the military.
The pre tax deferrals and the gains on any after tax non Roth contributions can be directly rolled into an inherited TIRA, and the after tax non Roth contributions (if any) and the Roth TSP balance can be directly rolled into the Roth IRA tax free. This split rollover must be requested at the same time.
I assume that the client is a non spouse beneficiary. Either way, the exact composition of the inherited balance must be determined before requesting the direct rollovers. Note that a non spouse beneficiary must request the rollovers within 90 days of the time they have submitted the death cert and their info to the TSP or the TSP will issue a taxable distribution to the beneficiary. The TSP will not maintain an inherited account for a non spouse over 90 days.
Permalink Submitted by Robert Roselli on Fri, 2025-03-21 13:24
Excellent advice. We found out the nontaxable contributions were Roth contributions. Our custodian mandates that if the decedent held an IRA, you set up an Inherited IRA. If the decedent was in a qualified plan, they require us to set up an Inherited IRA QP. The same goes for Roth’s. Schwab’s retirement group said something to the effect of it’s an IRS requirement to separate the funds depending on whether the decedent held an IRA or 401k. They want to track the source. Do you have anything to add to that?
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-21 14:51
Have never heard of that.
An inherited IRA or inherited Roth IRA has the same tax status whether the decedent owned an IRA or a qualified plan. These inherited IRAs have never been titled any differently based on the source account, but perhaps this is something new possibly related to better beneficiary IRA RMD compliance or in some states creditor protection. An inherited IRA is never technically a qualified plan.
What’s critical is that the direct rollovers be done correctly, as the Roth TSP cannot be directly rolled into any account other than a Roth IRA. Pre tax dollars could go to either a TIRA or a Roth IRA but would be taxable if rolled into a Roth IRA. Any errors made in the direct rollover process are very difficult to correct, if not impossible.
Would be interesting to have Schwab explain the purpose of this.