Is it a bad idea to have both pre-tax and Roth money in a 401k?

Question

From reading this article, it seems extremely hard to "separate" the pre-tax and the Roth parts of 401(k)s -- you must always move them together. But moving them together is often not efficient; e.g. rolling them both over to a Traditional IRA will give you basis for the basis from the Roth, but basis in a Traditional IRA is not very efficient since its earnings are taxable; rolling them both over to a Roth IRA will cause conversion tax on the pre-tax part, which you may not want.

On the other hand, if you just had one or the other, it would be easy to deal with -- a completely pre-tax 401(k) can be rolled over to a Traditional IRA without any loss of efficiency; a completely Roth 401(k) can be rolled over to a Roth IRA without any tax.

Given this, is it a bad idea to have both pre-tax and Roth contributions in a 401(k)?

Answer 1

There's a bit of confusion here.

Michael's article you linked is focused on the issue of post-tax 401(k) deposits. For those new to this, it sounds like we are talking about Roth 401(k) money. Not so. The Roth IRA was introduced in 1998, and the Roth 401(k) in 2006. Before '06, people had the ability to deposit more to their 401(k) than the pretax limit of $15,000 into the account as "after tax" deposits. My understanding is that these funds were analogous to the non-deducted IRA deposits for those outside the income limits.

Michael goes on the point out that now, with the addition of Roth 401(k) and Roth IRAs, there are folk with pre and post Tax 401(k) funds and trying to crack them for transfer to Traditional IRA and Roth IRA may be problematic.

Aside from a recent thread here, there are separate accounts for the Roth 401(k) and Traditional 401(k), and it's possible for the traditional to contain post tax money, which, given the recent introduction of the Roth 401(k) conversion, should be easily addressable.