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My employer recently began offering Roth 401k contributions. I decided to switch my contributions to the Roth 401k, figuring that it is impossible to guess what my tax situation will be in 25 years (and likely tax rates are going up, rather than down), so it will be good to have both pre-tax and post-tax dollars with different tax treatment at withdraw when I need it.

Much to my surprise, my benefits plan contributed the Roth contribution to the same 401k account. On the statement it now tracks how much is contributed to the account pre and post tax. I had assumed incorrectly (because none of the information I could find about our new plan mentioned this at all) that I would have 2 separate accounts, and that I would be able to choose which account to draw from at retirement, similar to my IRA accounts.

So now my question is, how are withdrawals taxed? Do you get to choose pre and post tax treatment at withdrawal time? What about minimum required withdrawals? How is growth tracked? Are they going to track the amount of growth attributed to pre and post tax dollars? This seems way overly complicated having all the money co-mingled in the same account...

Update: Have confirmed that account statement does account for pre-tax, match and post-tax contributions and earnings separately, but I have to dig for it buried in generated statements in the on-line system.

Just looking at the current holdings, investment elections, re-balancing and transfers apply to the entire value of all the investments regardless of the cash source, which is somewhat annoying, but I can live with it.

Assuming that littleav's answer is correct and hoping that a rollover to separate IRA accounts at retirement is an option for better control :)

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On the statement it now tracks how much is contributed to the account pre and post tax.

This is the key. Your withdrawals will be proportional. Assuming you have contributed 90% in regular contributions (pre-tax) and 10% in Roth (post tax), when you withdraw $1000, it will be $900 from the regular (taxed fully) and $100 from the Roth (not taxed, assuming its a qualified distribution). Earnings attributed proportionally to the contributions.

I agree with you that it is not the best option, and would also prefer separate accounts, but with 401k - the account is per employee. Instead of doing 401k Roth/Non-Roth consider switching to Regular 401k and Roth IRA - then you can separate the funds easily as you wish.

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    @Dilip, RMD rules for 401k are regardless of whether its Roth or not. See the FAQ on irs.gov: irs.gov/Retirement-Plans/…
    – littleadv
    Commented Jan 16, 2013 at 22:54
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    @littleadv Thanks for the link where I learned something I didn't know before. So unless the employment is continuing past age 70.5 or something else prevents it, it seems that it would be best to roll over the Traditional and Roth portions of the 401k into Traditional and Roth IRAs respectively and thus gain more flexibility.
    – Dilip Sarwate
    Commented Jan 16, 2013 at 22:59
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    @Dilip yes, that is my conclusion. 401k has some benefits (for example, better protected against creditors), but when you reach the age you have to consider the rollover (if you have a Roth portion).
    – littleadv
    Commented Jan 16, 2013 at 23:04
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    @littleadv So I guess the next question should be if a rollover of only the Roth portion can be done (leaving the traditional 401k safer from creditors if that is an issue) or is all money leaving the 401k apportioned amongst the Traditional and Roth portions regardless of whether it is a distribution or a rollover? At least one plan that I know of allowed separate rollovers of the different parts.
    – Dilip Sarwate
    Commented Jan 16, 2013 at 23:11
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    Nope, the match goes into the traditional side regardless of which account employee was depositing to. Now, the latest rules springing from the cliff, included the ability to convert from Trad 401(k) to Roth, so if you wish to convert on a regular basis, that's fine, just brace for the tax bill or account for it in regular withholdings.
    – JTP - Apologise to Monica ♦
    Commented Jan 17, 2013 at 3:47
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It's not possible for them to be comingled.

From the IRS FAQ:

Does my employer need to establish a new account under its 401(k), 403(b) or governmental 457(b) plan to receive my designated Roth contributions?

Yes, your employer must establish a new separate account for each participant making designated Roth contributions and must keep the designated Roth contributions completely separate from your previous and current traditional, pre-tax elective contributions.

It doesn't have to be a separate "account" necessarily, but the amounts must be tracked separately as if they were in separate accounts:

Does separate account refer to the actual funding vehicle or does it refer to separate accounting within the plan's trust?

Under IRC Section 402A, the separate account requirement can be satisfied by any means by which an employer can separately and accurately track a participant’s designated Roth contributions, along with corresponding gains and losses.

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  • +1 thanks for the citation. I thought this question was strange 2-1/2 years ago, and it still seems the employer may be doing something wrong.
    – JTP - Apologise to Monica ♦
    Commented Aug 12, 2015 at 22:09
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Your assumption, the need for two distinct accounts is correct.

Are you sure that the deposit was made to the same account? Since a 401(k) doesn't really have an account number, just your social security number, it may be they report it to you as though it were aggregated, but it's improper for it to be so. With respect (I mean this literally, I have the utmost respect) to littleadv's answer - the aggregation of the two accounts cannot be legitimate. If I wish to invest my Roth side into investments that grow far greater than the Traditional side, the mixing of accounts destroys this possibility. Something is either wrong, or misunderstood.

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    My 401k is set up similarly to the OP's - it all pours down to the same investments.
    – littleadv
    Commented Jan 16, 2013 at 18:43
  • @littleadv - by choice or lack of options otherwise? i.e. Can you request different investments for each side?
    – JTP - Apologise to Monica ♦
    Commented Jan 16, 2013 at 18:44
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    There is only one choice for contributions, rebalance/transfer... it applies to the whole balance/contribution, can't choose pre or post tax contributions
    – Jay
    Commented Jan 16, 2013 at 18:49
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    There may be tracking in separate accounts underneath, because they do show "balance" broken out by pre-tax, match and post-tax on a statement (when I generate a statement). Looking at current value/investments, it's all lumped together... (which i mentioned in littleadv answer comment.)
    – Jay
    Commented Jan 16, 2013 at 18:53
  • I agree that this is screwy, but the inability to have separate allocation decisions between the regular and Roth accounts describes precisely how the TSP is currently set up (and also the proportional withdrawal from both the regular and Roth TSP when you go to take a distribution). This is their first iteration at the Roth, so hopefully that will change.
    – Tim Whitcomb
    Commented Jan 17, 2013 at 23:26
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It is not necessarily proportional. 401k are all unique per the plan and how they are set up. It is impossible to find any two exactly alike. You should have separate buckets of the money types. Pre tax, after tax, roth, employer contribution,etc...

If the plan is good you may have a Source Specific Withdraw option which allows you to take only roth or pretax at your choosing.

They should track the growth of each bucket separately. It does indeed appear complicated but just think of it as different buckets of cash store in the same vault.

Most people end up rolling over the 401k into an ira when they retire for flexibility to get out from under the plan rules. When you do this you will create a roth ira and a traditional ira. Then you can pick and choose when you want to take what type of money.

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