Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
After tax 401k rollover questions
Posted by: pmdonca, October 24, 2017 07:40PM
Is the after tax 401k subjected to prorata basis upon rollover to Roth IRA? I've read conflicting articles and forum posts.

Please note that my employers after tax 401k is in a separate account from my 401k/Roth 401k account.

Option 1:
Take the contributions and gains in the after tax 401k and roll to Roth IRA and only the gains will be taxable. Note that I do have 401k/roth401k money through same employer but it is separate from the after tax 401k account.

Option 2:
Take contributions from the After tax 401k and roll directly into Roth IRA and roll the gains to IRA. This would not create a tax event. Note that I do have 401k/ Roth 401& money through same employer but it is separate from the after tax 401k account.

Are these two options viable? And is there any concerns for pro rate roll over? Thanks.

-Phil

Re: After tax 401k rollover questions
Posted by: Alan S., October 24, 2017 08:24PM
Both options should be available, although these plans vary with respect to how often you can do these distributions. Also, some plans require the after tax rollover to be done into the Roth 401k instead of out of the plan into your Roth IRA.

The choice between these two options would be driven by the amount of gain you have on the AT contributions. The initial distribution may include more gains than you would have if your plan allows you to do frequent distributions (direct rollovers) so that gains do not accumulate in the plan. The choice would also be driven by your current year marginal rate that would apply to the gains vs. your expected rate in retirement since rolling the gains to a Roth is tantamount to a taxable conversion. Finally, simplicity would call for the entire sub account to be rolled to your Roth rather than doing a split rollover per Notice 2014-54 and Option 2 above.

If you are also doing a regular back door Roth IRA, sending the gains in the AT sub account to your TIRA will cause your regular back door Roth conversions to be partly taxable. Some people resolve that problem by rolling the pre tax TIRA amounts back into the 401k plan if the plan accepts IRA rollovers.

Finally, whatever portions are rolled to your Roth IRA, you have some accounting to take care of with respect to the composition of your Roth IRA. Your Roth IRA balance of conversions will increase, and you might have taxable and non taxable portions in each rollover you do. You need to keep track of this in the event you ever take a non qualified distribution from your Roth IRA.

The actual direct rollovers from the AT sub account will be reported directly on lines 16a and 16b of Form 1040. You do not report this on Form 8606.

Re: After tax 401k rollover questions
Posted by: pmdonca, October 24, 2017 08:51PM
Thank you. Yes, my employer allows for 2 in service rollovers/distributions per year. To limit the paper work, I was planning to just roll the amount in after tax 401k out either by doing option 1 or 2 above just once a year. Yes my employer also allows rollovers from rollover IRA (from the taxable gains in after tax 401k) to traditional 401k. This would not be a problem to do the back door Roth IRA.

So you saying that the rollover from after tax 401k to Roth IRA would not be subjected to pro rata taxation if the after tax 401k is in a separate sub account?

To what detail do I need to keep track of in order to take a non qualified distribution from Roth IRA before age 59.5? I understand I can only take out the contributions and rollover amounts not the growth within that account. Doesn't Vanguard (where my 401k/roth 401k, after tax 401k, and Roth IRA is at) and our tax records have kept this information? If not please specify what I would need to keep track of and I will be sure to keep a spreadsheet and update it yearly. Thanks.

Re: After tax 401k rollover questions
Posted by: Alan S., October 25, 2017 02:07AM
The after tax sub account is subject to pro rating, but only for amounts that are actually in that sub account. Amounts in the rest of the pre tax 401k and Roth 401k are not considered.

But almost all direct rollovers from the after tax sub account are total distributions of the entire balance in that account. Therefore, the contributions and the earnings must both be distributed, and your choice is to send the earnings to the Roth and pay taxes on them or split the rollover with the earnings going to your TIRA account to avoid any tax due.

With respect to your Roth IRA, all non qualified distributions follow specific ordering rules. First out are your regular contributions and they are tax and penalty free. But you need to know your total balance of such contributions. Next out are your conversions including rollovers such as this one. These come out with the oldest first and conversions over 5 years old are tax and penalty free. If you distribute conversions under 5 years, the taxable portion of each conversion is subject to the 10% penalty (up to age 59.5), and the taxable portion comes out first once you get to a specific year. So if you rolled over 9k of contributions and 1k of gains, the taxable portion is only 1k. If you took out 2k from that conversion, it would include the taxable 1k subject to penalty and another 1k without tax or penalty. Earnings come out last only after all regular contributions and conversions have been withdrawn. You can keep track of the status of your Roth using a spreadsheet or a simple manual tally sheet which takes about 5 minutes a year to update.

Re: After tax 401k rollover questions
Posted by: pmdonca, October 25, 2017 01:57PM
This makes perfect sense, Thanks Alan!

Re: After tax 401k rollover questions
Posted by: pmdonca, October 25, 2017 08:53PM
Perfect thank you!!



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