By Kaye A. Thomas
Current as of March 24, 2013
Simply paying out the after-tax dollars works only for pre-1987 contributions.
The simplest approach to converting after-tax dollars is to take a distribution that’s limited to these dollars. This approach is available, however, only for after-tax contributions made before 1987 to a plan that permitted in-service distributions as of May 5, 1986. Provisions in the Tax Reform Act of 1986 were specifically designed to prevent withdrawal of after-tax dollars without investment earnings.
For a while, some people argued that this approach should be permitted if the employer’s plan specifies that in-service distributions are restricted to the dollar amount of your after-tax contributions. Yet that’s precisely what the 1986 change in the law was designed to prevent. There is now a consensus among those with knowledge of this area that post-1986 after-tax contributions cannot be distributed without an allocation of earnings — unless, of course, there are no earnings to allocate.
But here’s what you can do
As noted earlier, this simple method is available for pre-1987 after-tax contributions, if the plan permitted in-service distributions as of May 5, 1986.
In addition, as explained in Basis Recovery from Employer Plans, it’s generally possible to take a distribution that consists of after-tax contributions and the investment earnings generated by those dollars, without including any other amounts (pre-tax contributions, matching contributions, and earnings generated by these amounts). The problem comes when you try to take your post-1986 after-tax contributions without the investment earnings they generated.
- Isolating Basis for a Roth Conversion
- Isolating IRA Basis
- Basis Recovery from Employer Plans
- Separate Subaccount Treatment
- Simple Payout
- Using an IRA to Isolate 401k Basis
- Split Rollover Methods