Confusion Reigns After IRS Notice 2014-54: Can You Roll Only After-Tax 401(k) Funds to a Roth IRA?

Monday, September 29, 2014

By Bevery DeVeny, IRA Technical Expert
Follow on Twitter: @BevIRAEdSlott

In the wake of IRS Notice 2014-54, this question is coming up a lot. Can you roll only after-tax 401(k) funds to a Roth IRA? The answer is that you are NOT limited to moving only after-tax employer plan funds to a Roth IRA.

As of 2008, all rollover eligible funds distributed from an employer plan are eligible to be converted to a Roth IRA; this includes both pre-tax and after tax funds.  Pre-tax amounts that are converted are included in the participant’s income for the year of conversion; after-tax amounts are converted income tax free.

Funds moved from an employer plan to a Roth IRA are a Roth conversion – even if the funds are after-tax funds in the plan (we are not talking about Roth 401(k) or other employer Roth funds here). You are converting plan funds to a Roth IRA. After-tax funds in an employer plan are not Roth funds, they are regular plan funds and are subject to the plan rules.

What plan participants are generally trying to do is to convert the after-tax funds only into the Roth IRA so they do not have to pay any income tax on the conversion. This IRS notice gives participants the ability to do just that – convert the after-tax funds only. Participants can still convert the after-tax account in the plan to a Roth IRA, even if it includes earnings. They will just have to include the earnings in their income for the year and pay the income tax due.

 

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