I also posted to the
thread tioga did, and wanted to follow his lead and cross-post here.
DISCLAIMER: I am not a lawyer, tax person, or otherwise qualified to give any sort of tax advice. I was directed to this thread because I was asking about in-plan Roth conversion tax consequences (for converting after-tax contributions to Roth). I did some digging after reading this thread.
From that above mentioned IRS notice (IRS Notice 2010-84), page 5.
If the distributee rolls over the payment to a designated Roth account in
the plan, the amount of the payment rolled over (reduced by any after-tax
amounts directly rolled over) will be taxed.
From IRS Pub 575, emphasis mine.
In-plan Roth rollovers. If you are a participant in a
401(k), 403(b), or 457(b) plan, your plan may permit you
to roll over any vested amounts from those plans to a designated
Roth account within the same plan. The in-plan
Roth rollover must be an eligible rollover distribution (defined
earlier under Eligible rollover distribution). Any untaxed
amounts included in the in-plan Roth rollover must
be included in income in the year you receive the distribution.
You can make the in-plan Roth rollover by direct transfer
of the amount from the non-Roth account to your designated
Roth account within the same plan. The 20%
mandatory withholding does not apply to in-plan Roth rollovers
made by direct rollover. You can also effect the
in-plan Roth rollover by receiving an eligible rollover distribution
from your 401(k), 403(b), or 457(b) plan and within
60 days deposit it into a designated Roth account in the
same plan.
Your plan must provide a written explanation of the
consequences of making an in-plan Roth rollover. In-plan
Roth rollovers cannot be undone. Unlike rollovers to Roth
IRAs, you cannot later recharacterize an in-plan Roth rollover.
If you received employer securities as a part of
your in-plan Roth rollover distribution the rollover
is treated as a distribution for the purpose of net
unrealized appreciation (NUA). See Distributions of employer
securities, earlier.
20% Mandatory withholding. A payor must normally
withhold 20% when a rollover distribution is paid to you.
However, some part of your distribution may not be subject
to the mandatory 20% withholding. Otherwise nondistributable
amounts are not subject to the mandatory 20%
withholding. An example of otherwise nondistributable
amounts are employer matching contributions in a 401(k)
plan. See Payment to you option, earlier.
You cannot roll over amounts from your Traditional
TSP to your Roth TSP. See Publication 721
for more details.
How to report. Enter the total amount of the distribution
before income tax or deductions were withheld on
Form 1040, line 16a; Form 1040A, line 12a; or Form
1040NR, line 17a. This amount should be shown in box 1
of Form 1099-R. From this amount, subtract any contributions
(usually shown in box 5 of Form 1099-R) that were
taxable to you when made. Enter the remaining amount,
even if zero, on Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR, line 17b.
In other words, you DO NOT have to account for traditional 401k balances in a pro-rata fashion when determining taxes owed on an in-plan Roth conversion (called an in-plan roth rollover in this publication). You only have to account for any earnings/value increase.
My plan allows unlimited in-plan conversions per year, and tracks each years conversions separately.
It also tracks after-tax contributions (and their earnings) separately.
So if I make 26 in-plan conversions in 2014 (one per paycheck, to minimize earnings on the after-tax amount I'm converting), all of them show up aggregated as one source: "2014 Roth In-Plan Conversion" in Vanguard.
Personally, I prefer to move this money to my Roth 401k instead of a Roth IRA. This is because I have access to Institutional Plus shares in my 401k plan, of the exact same indices I use in my Roth IRA. The fees are around 2/3rd to 1/2 what the admiral share class charges (I essentially implement the 3-fund portfolio).
I have no intention (at all) of withdrawing this money before it becomes penalty free. I do plan to roll this over to a Roth IRA before retirement so I don't have RMDs, but in the meantime I'll take the lower expense ratios.