In Plan Conversion – 401(k) – Contribution Selection?
Custodian is asking if the client would like to use employer or employee contributions when processing an in plan Roth conversion. I’ve never heard of this and wonder if it is a part of a separate distribution election but is on the same form. Any ideas?
Permalink Submitted by Alan - IRA critic on Tue, 2025-01-07 16:30
There would be a huge difference in taxation.
Employee contributions are after tax and go into a separate sub account with any gains on those contributions. An IRR from that account should be mostly non taxable unless that account was left untouched for years and generated substantial gains.
Conversely, an IRR from the pre tax 401k balance would be mostly taxable up to 100%.
The after tax amounts should be rolled first to the Roth 401k. Some plans even offer automatic IRRs immediately after receiving the employee contribution, which would be entirely tax free.
Permalink Submitted by brcwm on Tue, 2025-01-07 17:34
Should have clarified, selection is pre-tax employee or pre-tax employer. Not after-tax.
Permalink Submitted by Alan - IRA critic on Tue, 2025-01-07 18:15
Sounds like the choice is then between pre tax deferrals and pre tax gains and employer matching contributions. In that situation it does not make any difference which source is chosen for tax purposes, but probably best to leave the employee deferrals to last just in case there is an excess deferral situation.