After Tax Withdrawal to a ROTH or NQ Funds- In Service Distribution?

Submitted by karin Tyson on Fri, 2024-09-20 13:40

My client is 64 and wants to work at her company for a couple of more year but her 401K does not have the appropriate investments for her risk profile since she is so close to retirement. She can now do an in-Service distribution and would like to roll her After Tax contribution and Pre tax contributions. My question is on the after tax contributions- my understanding is that her after-tax contributions  (not earnings) is $66,000 can be rolled over to  a ROTH without taxation. Is that correct? Once she Rolls them to a newly opened  Roth at say Schwab – will she have to wait for 5 years to access any profit earned to avoid tax on the profit? Next Question: Can she choose instead of rolling it to a ROTH, take the$66,000 and put it in an after tax in a brokerage account without tax implications?    99% of her investments are in IRA’s and having this one  taxable account could provide some flexibility with taxes. In this way, this taxable brokerage account invested in stocks can be used for tax loss harvesting?



Submitted by Alan - IRA critic on Fri, 2024-09-20 17:08

The after tax (non Roth) contributions must be distributed along with the gains on those contributions, therefore the usual solution is a split direct rollover with the after tax contributions going to a Roth IRA and the gains to a traditional IRA. There is no tax due for this or withholding.

If client already has a Roth IRA, there is no need to open a new one to receive the after tax rollover. But if this is the first Roth IRA contribution of any type, 5 years must pass before gains generated in the Roth IRA will be qualified and tax free. Seems like putting the after tax amount in a Roth IRA is the obvious choice unless she plans to spend the entire amount very soon. But if she wants to have it distributed to her it would be tax free, but the pre tax gains must still be rolled to a TIRA to avoid taxes.

No reason that tax loss harvesting cannot be done if the 66,000 went to her Roth IRA.

Submitted by karin Tyson on Wed, 2024-10-02 12:32

Very helpful… I learned an important lesson here-the after tax contributions (NON ROTH) can either be sent directly to a client with no tax implications allowing the client to  spend it or in this instance roll that portion ($21,000) to a Roth- with no income tax implications. Since this is the first time my client (over age 60) has had a Roth-it starts the 5 year clock for tax free treatment of the profit.  But the other 60,000 of profit earned on those after tax contributions is treated like other PRE-Tax Money. Therefore that money needs to be rolled into a traditional IRA like her other pre-tax rollover money.  Thank you!

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