Making sense of 401(k) after-tax Roth conversion options

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Making sense of 401(k) after-tax Roth conversion options

Postby BigOilTexan » Tue Jul 02, 2013 11:11 am

I'm not quite sure I understand this part of my 401(k) plan. I'm currently contributing $17,5k/year pre-tax. I can contribute an additional amount after-tax, which now just goes into my taxable savings account and $5k backdoor Roth IRA.

1) Can I contribute up to my employee maximum to 401(k) and then convert the after-tax portion to an outside Roth-IRA?
2) If so, does this affect my ability to make a $5,000 backdoor Roth-IRA contribution?

Rollovers

You may defer taxation on the taxable portion of certain withdrawals/distributions from the non-Roth accounts by making a rollover to an eligible plan or an IRA. You may also defer taxation on the taxable portion of certain withdrawals/distributions from the Roth accounts by making a rollover to an eligible plan or a Roth IRA.

Generally, all withdrawals/distributions (taxable and non-taxable) may be rolled over into an eligible plan except:
  • Hardship withdrawals.
  • MegaCorp stock direct dividend payments.
  • Distributions to retirees required after attaining age 70-1/2 (minimum distributions).
  • Loans declared in default and treated as taxable distributions.
Any eligible rollover amount paid to you (i.e., not made as a direct rollover) will be subject to 20% income tax withholding on the taxable amount to the extent of the cash received. No withholding is required on withdrawals/distributions consisting solely of MegaCorp stock.

The total amount of the withdrawal/distribution (including the amount withheld) is still eligible to be rolled over to an eligible plan or IRA within 60 days from the date received. Any taxable amount that is not rolled over within the 60-day period must be included in taxable income and also may be subject to an additional 10% tax (explained above).

You may elect to have no income tax withheld on the taxable portion of an amount that is not eligible to be rolled over. If no election is made, withholding will be at 10%.


and

In-Plan Roth Conversions

Once a year, you may also convert amounts in your non-Roth accounts into the Roth Conversion Account. Generally, you can only convert amounts in existing non-Roth accounts in which you are fully vested and amounts which, if distributed, can be rolled over to an IRA.
  • Employees younger than 59½ can convert a portion or all of the balance in their After-Tax, General, and Stock Match Accounts to the Roth Conversion Account. However, funds in the Before-Tax Account cannot be converted.
  • Employees 59½ or older can convert a portion or all of the balance in their Savings Plan Account to the Roth Conversion Account.
  • Retirees and terminees can convert a portion or all of the balance in their Savings Plan Account to the Roth Conversion Account.

At the time of conversion, you will incur tax liability as if the converted assets were distributed to you. However, any MegaCorp stock converted is taxed at fair market value and the additional 10% early withdrawal tax does not apply.

If the amount converted is withdrawn/distributed within 5 calendar years from January 1 of the year of conversion, the additional 10% tax may apply. See section titled "Additional 10% Tax if You Are Under Age 59-1/2" above.

There is no income tax withholding on the amount converted so you are responsible for estimating and paying the amount of tax owed.
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Re: Making sense of 401(k) after-tax Roth conversion options

Postby Alan S. » Tue Jul 02, 2013 1:19 pm

1) Can I contribute up to my employee maximum to 401(k) and then convert the after-tax portion to an outside Roth-IRA?
2) If so, does this affect my ability to make a $5,000 backdoor Roth-IRA contribution?


1) Your posted plan provisions do not clearly state that your after tax contributions are eligible for distribution, or how often you can roll them out. You will have to check with the plan regarding these distributions. However, if allowed you can roll them directly to a Roth IRA, and any earnings that accrue on these contributions will be taxable. Therefore, reducing the time large amounts of after tax contributions sit in the plan will reduce taxable earnings as part of the rollovers.
2) This will not affect your back door Roth contributions in any way. This would be a separate conversion from the 401k plan Roth rollovers and would be reported on Form 8606 and line 15b of Form 1040. The 401k Roth rollovers will NOT involve Form 8606 and will be reported on line 16 of Form 1040.

Your total 401k deferrals plus after tax contributions, co match and forfeitures cannot exceed the annual additions limit of 51,000 for 2013.
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Re: Making sense of 401(k) after-tax Roth conversion options

Postby Bacchus01 » Tue Jul 02, 2013 1:52 pm

If you have a loss when you transfer, can you take that as a loss on your taxes?

If you have a loss on one withdrawl, but a gain on another, do they offset for tax purposes?
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Re: Making sense of 401(k) after-tax Roth conversion options

Postby BigOilTexan » Tue Jul 02, 2013 3:10 pm

Alan S. wrote:1) Your posted plan provisions do not clearly state that your after tax contributions are eligible for distribution, or how often you can roll them out. You will have to check with the plan regarding these distributions. However, if allowed you can roll them directly to a Roth IRA, and any earnings that accrue on these contributions will be taxable. Therefore, reducing the time large amounts of after tax contributions sit in the plan will reduce taxable earnings as part of the rollovers.
2) This will not affect your back door Roth contributions in any way. This would be a separate conversion from the 401k plan Roth rollovers and would be reported on Form 8606 and line 15b of Form 1040. The 401k Roth rollovers will NOT involve Form 8606 and will be reported on line 16 of Form 1040.

Your total 401k deferrals plus after tax contributions, co match and forfeitures cannot exceed the annual additions limit of 51,000 for 2013.


On #2, I didn't think so, but thanks for the detailed explanation.

On #1, I've sent my plan an email asking for clarification.

In the meantime, does this help?

Distributions from non-Roth accounts

  • A diversification distribution from your Stock Match Account is tax-free up to the amount of your tax-paid balance in your General Account. The remainder is taxable as ordinary income.
  • A total distributionof your non-Roth Accounts is tax-free up to the amount of your tax-paid balances in your General and After-Tax Accounts. The remainder is taxable as ordinary income.
  • The tax treatment of a partial distribution from your non-Roth accounts depends on the account from which it is paid:
    • A partial distribution from accounts other than your After-Tax Account is treated first as a distribution from your General Account tax-paid balance, and to that extent, is tax-free to you.
    • Any remaining portion of a partial distribution from accounts other than your After-Tax Account is taxable as ordinary income.
    • A partial distribution from your After-Tax Account is prorated between tax-paid and tax-deferred balances in that account.
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Re: Making sense of 401(k) after-tax Roth conversion options

Postby Alan S. » Tue Jul 02, 2013 4:23 pm

In most plans you can distribute your non Roth after tax balance along with the earnings on that balance (kept in a separate sub account) while still in service, but your posted info just indicates how such distributions will be treated, not that you can take them while still working, or how often you can take such distributions. I think you probably can take those distributions, but you may need to call the plan administrator to make sure.
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