Individual has 401k at current employer that includes pre-tax contribution and after-tax contributions. He is 60 and considering an in-service distribution/rollover. Is there an order of distribution for the account (example; after tax contributions come out first, or a pro-rata distribution calculation)?
if he only wants to roll the pretax contributions into IRA, can he do that while leaving the after tax contributions in the plan?
Any distribution (rollover or not) from the after tax account must include a pro rata share of earnings in that account and vice versa. The plan provisions will determine if he can do a rollover from the pre tax portion of the account and leave the after tax sub account untouched or not. The plan may not allow an inservice distribution other than from the after tax sub account.
In other words, it will probably be easier to withdraw from the after tax sub account (pro rata with earnings in that account) than a withdrawal from the rest of the account. This depends on the plan rules.
Most people in this situation want to get the after tax amount out of the plan and into their Roth IRA, so that future earnings will be Roth earnings. Presently, earnings on the after tax amount in the 401k are pre tax.
Permalink Submitted by Alan - IRA critic on Wed, 2024-10-30 10:33
The after tax (non Roth) contributions and their earnings are generally maintained in a separate sub account within the plan, and the individual should be able to request the in service distribution from that account only.
If the amount of the distribution does not exceed the balance in that sub account, the distribution will include pro rata gains only from that account. If the distribution exceeds the balance in this after tax sub account, additional amounts will have to come from pre tax dollars in the rest of the plan.
Therefore, the after tax sub account should be distributed first, in order to reduce taxation of the distribution.
However, if the distribution is to be rolled over, a split distribution from the after tax account should be requested in a single request, sending the after tax balance to a Roth IRA and any earnings to a TIRA. This will avoid current taxes. The after tax portion should NOT be rolled into a traditional IRA.