After-tax contributions in a 401k. Pro-rata rules apply?
A client has a 401k balance of $1 million. Included in this $1 million balance is an after-tax contribution balance of $350,000 (itemized as follows: $100,000 represents after tax contributions or basis and the balance $250,000 represents earnings). From a previous post in this forum, I understand my client can rollover the $100,000 in contributions to a Roth IRA and the $250,000 in earnings to a traditional IRA. Do the pro-rata rules not apply since this is a 401k and not an IRA? Thanks.
Permalink Submitted by Alan - IRA critic on Thu, 2025-03-20 19:26
The distribution will require a pro rated portion of the after tax sub account balance only, but it’s allowed to split the rollover between a TIRA and a Roth IRA, which would be a non taxable split rollover per Notice 2014-54.
What would not be allowed is a rollover of the after tax contribution to the Roth IRA while leaving the earnings in the plan.
Permalink Submitted by Alan Fishman on Sat, 2025-03-22 11:18
Thanks Alan.
Permalink Submitted by Alan Fishman on Mon, 2025-03-24 09:52
Alan, to be clear, then, though the pro-rata rules apply, by completely withdrawing the after-tax “bucket” (i.e., contributions and earnings, or $350,000), my client can rollover the contribution portion to a Roth IRA ($100,000) and the earnings to a traditional IRA ($250,000), with no tax impact on the two rollovers. Is that right? Thanks.