4

I have a 401(k) that only has "post-86 after-tax" contributions and earnings.

I left the company and was thinking about rolling over the whole balance to a personal Roth IRA. This would be a direct rollover from one provider to the other.

I believe that there should not be any tax implications at all. Is it correct? Is there anything else that I should be aware of?

  • Does it have any earnings? – mhoran_psprep Sep 22 '14 at 18:01
  • if you are asking if the current value is higher than my total contributions then yes. – Marsellus Wallace Sep 22 '14 at 18:09
  • 1
    Wait, do you have "after-tax" contributions to your (Traditional) 401k? Or do you have a Roth 401k ("designated Roth account", which only existed since 2006)? The two are very different. – user102008 Sep 22 '14 at 19:44
  • 2
    @Gevorg: I think that's after-tax 401k, and not Roth 401k. If it was Roth then it should say Roth. – user102008 Sep 22 '14 at 21:40
  • 2
    @Gevorg: Yes, if it were just after-tax contributions to a Traditional 401k, then when you rollover money from your Traditional 401k, you roll over before-tax and after-tax money pro rata (in the same proportion as the ratio in your entire account). There is no easy way to separate them. The before-tax money, when converted to Roth IRA, will be taxed. Roth 401k is a separate account and can be rolled over separately. – user102008 Sep 22 '14 at 23:23
2

Post-86 After tax contributions to a 401k are after tax. The earnings on that money is taxable, but not the contributions.

This means:

  • If you invest $0 in pre-tax money in your 401k
  • If you invest $10,000 in after-tax money in your 401k
  • If your investment grows by $5,000

You'll have $15,000 in the 401k and $10,000 is considered after-tax and $5,000 is considered pre-tax.

The after-tax portion can be converted to a Roth IRA without paying taxes or penalties.

New in September 2014 The IRS has made substantial changes that now enable this to happen. You can request a distribution from your 401k provider where they divide the money into pre-tax and after-tax funds. In my example, you'd get a check for $10,000 that you could send to a Roth IRA and a check for $5,000 you could add to a traditional Roll-over IRA.

Neither of those would be taxable events and you'd end with a Roth IRA with $10K and a Traditional, Rollover IRA with $5K in it.

Notes:

  • Until September 2014, the 401k after-tax methods were all based pro-rata making it either impossible or difficult depending on which tax advisor you asked to separate out after-tax and pre-tax money.
  • See this article that reasonable sums up the change: http://www.thinkadvisor.com/2014/09/29/irs-blesses-401k-rollovers-with-pre--after-tax-con?t=philanthropy
  • See this table describing tax effects of various 401ks: http://www.money-zine.com/financial-planning/retirement/comparing-401k-contributions/
  • If your after-tax contributions are greater than your balance, you can convert all of your funds to a Roth IRA because they are 100% after-tax.
  • Your 401k company should be able to tell you what % of your funds are pre-tax and what are post-tax.
  • There are specific steps to take to make sure that the funds are correctly accounted for with your 401k company. This just changed which means that 401k administrators may not yet know how to do this.
  • The IRS allows 401k companies to do this, but it does not require them to support non-pro-rata withdrawals so as to optimize for taxes.
  • The conversion taxes are based on the ratio of pre tax to post tax contributions. If 100% is post tax, that simplifies the calculations. – Alex B Sep 29 '14 at 22:42
  • 1
    @CraigW I rewrote my answer and clarified on the earnings. The IRS just issued a statement that clarifies this in the last few days making most of what's written about conversions of after-tax contributions wrong right now. – Alex B Sep 30 '14 at 7:07

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.