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Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
RMD tax calculation on 401k after-tax contributions
Posted by: luke_airig, August 15, 2017 09:53PM
From [fairmark.com]:

Regarding 'After-tax contributions to employer plans made after 1986':

After-tax contributions to employer plans made after 1986 are recovered pro rata with taxable amounts.

Example: Your 401k account has a value of \$100,000. Of this amount, \$15,000 is from after-tax contributions and \$5,000
is from earnings on those contributions. The remaining \$80,000 is from pre-tax contributions, employer matching dollars,
and earnings on those amounts. If the plan has maintained your after-tax contributions in a separate subaccount and
you're able to withdraw from this subaccount, 75% of that withdrawal will be tax-free, even though basis represents only
15% of your overall account value of \$100,000.

Would RMD's be treated the same way?

Using the numbers from the example above, if I have an RMD of \$1,000 I calculate that \$150 would be the portion of the RMD from the
'after tax CONTRIBUTION':

(\$15,000/\$100,000) * \$1,000 = \$150

So, in this example, is 75% of the 'after tax CONTRIBUTION' portion of the RMD tax-free?

If not 75%, what would it be and how would it be calculated?

TIA

Luke

Re: RMD tax calculation on 401k after-tax contributions
Posted by: Alan S., August 15, 2017 11:43PM
Unless the plan includes a specific provision to the contrary, you can still specify that an RMD be distributed from the after tax sub account. In your example only 25% of that RMD would be taxable.

If you do not specify which portion of the plan the RMD will be distributed from, the plan will either pro rate over the entire plan balance eligible for distribution or some plans might have a provision that the after tax sub account is applied first to post separation distributions.

If you are retired and subject to 401k RMDs and have after tax contributions still in the plan, you would ordinarily complete your RMD for the year per above and then request a split direct rollover of the balance in the after tax sub account, with the earnings going to your TIRA and the after tax contributions to your Roth IRA (per Notice 2014-54). In your example, that would eliminate subsequent RMDs on 15,000 and in addition later growth on that 15,000 would be Roth growth. This is more tax efficient than having the 15k trickle out tax free over many years of plan RMDs. Of course, you might also do a split lump sun direct rollover of the entire 401k plan balance to your TIRA and Roth IRA after completing the last 401k RMD for that year.

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