401k After Tax accumulations to Roth IRA

If your plan allows rolling over after-tax contributions, and it allows rolling directly to a Roth, then maybe. If your contributions were made prior to 1987, you are good to go and can ignore the rest of this message.

The thing you have to be aware of is that any after-tax contributions that were made post-1986 will bring a share of taxable earnings with them. So you can't designate only after-tax contributions in that case, and if you go directly to a Roth you'd have to pay the taxes (but not penalty) on the earnings portion. Your plan should be able to give you a breakdown of how much taxable money will get dragged along. If you can handle paying the tax on the earning, you can stop once again. Don't pay it out of the IRA itself though.

There is a way to extract only the non-taxable portion, but it's more roundabout. You can also roll money from a traditional IRA to a qualified plan. However, the law states that only taxable funds can go. This is an explicit exception to the pro-rata distribution rule for traditional IRAs.

Here's an example. Suppose you have $5000 in after-tax contributions, which have $3000 in associated earnings.

1. Roll over all after-tax contributions to a TIRA. You end up with 00 in it. You must must must file IRS Form 8606 to establish the non-taxable cost basis.
2. Roll 00 back to your 401(k). Now you have 00 taxable back there, and 00 non-taxable (the basis) left in the TIRA. Now you can transfer this to a Roth or convert the TIRA to a Roth, whichever works best with your situation.
3. If your plan allows rolling over roll-over contributions (mine does) you can further roll that 00 taxable back out into a TIRA. Then you could convert parts each year if you wanted or leave it as as tax-deferred. This is useful if your plan isn't that great or if there are things like TIPS that you can't get in it.

Brian

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They didn't tell me that part!

The "broker" is Fidelity, and since they administer the 401k (via Netbenefits), I figured they know how this works. I guess I need to get finer granularity from them. Most of my after-tax contributions are pre-1986, but not all. The online statement breaks the assets down by "source," including "after-tax," but not further into pre and post 1986.

So far IRS pub 575, p. 29 is as close as I've found to the official pronouncement. I also finally located (online) some detail of my 401k plan that corroborates the distribution requirement for post-1986 after tax contributions.

Thank you for the detailed and clear response!

Ron

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It makes things trickier, but can be beneficial as the total amount you can roll over (at any age) is larger.

See if the online statement has a withdrawal guide that shows a breakdown of available pots of money. If so, the after-tax one should reflect the amount of contributions plus earnings. That's the way mine did it.

Also look at Pub 590. That's the IRA guide, and has some of the roll-over rules.

Brian

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Unless the "after-tax contributions" in question were Roth 401(k) contributions. If so, those can be rolled straight into a Roth IRA and don't carry any taxable earnings with them (in fact, the earnings they carry with them also have the Roth nature).

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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Correct. In the absence of qualifiers, I always assume 401(k) to mean "tax-deferred", but this is a valid point.

How very Zen.

Brian

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