After tax 401K contributions

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After tax 401K contributions

Postby boglesmymind » Fri Jan 15, 2010 6:46 pm

I am leaving my job and will be rolling my 401K into a new IRA with Vanguard. My 401K is with Fidelity and since I have been contributing to my employers savings plan for more than 30 yrs, there is a large amount of after tax "source contributions" in it. When 401K's came about I began contributing pre tax money. Fidelity has always kept track of where the contributions were coming from. For instance, after tax, pre tax, company match, dividends,etc.

A Vanguard spokeperson told me that these contributions would just all be lumped together, and they don't keep track of what came from where. Another firm sugested that I pull out the after tax contributions and put them in a taxable acount. I don't need this money for another 10 yrs, and don't want to deal with a large taxable account at this time. I'd like it to grow in a tax sheltered IRA.

I don't want to pay taxes on the after tax contributions twice, when I start drawing from the IRA in the future, so what should I do?
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Postby dbr » Fri Jan 15, 2010 6:49 pm

I believe this is a point in time when you can file an IRS Form 8606 which declares the tax status of your IRA components. That would mean you, in effect, declaring everything as it was in the records of the 401K custodian at time of transfer. The IRA custodian will no longer track all that.

Others more exactly knowledgeable of the drill might help me out here.
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Postby livesoft » Fri Jan 15, 2010 6:50 pm

Are not after-tax contributions documented by your filing of Form 8606 each year. Or by the form 5498 each year? Do you actually need the vendor to keep track of these for you or are your records sufficient for the IRS when you begin withdrawals?
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Postby Sidney » Fri Jan 15, 2010 6:55 pm

You aren't required to file an 8606 for 401K plans. You may want to consider trying to roll the after-tax piece to a ROTH. It is a bit complicated but apparently can be done. Search this site for a couple threads on the subject.
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Postby dbr » Fri Jan 15, 2010 7:00 pm

livesoft wrote:Are not after-tax contributions documented by your filing of Form 8606 each year. Are by the form 5498 each year? Do you actually need the vendor to keep track of these for you or are your records sufficient for the IRS when you begin withdrawals?


I think the 8606 the year of the rollover is the key. The OP, like myself, has a 401K plan at an employer that contains a grab bag of accounts which can include items such as before tax 401K, after tax 401k savings post 1986, IRA pre 1987, ESOP plan, Company Contributions plan, Performance Sharing Plan, etc., etc. There is no 8606 involved in any of those accounts as long as they were with the employer. The problem is who keeps that all straightened out if you roll over to an IRA. No doubt much of that CC and PS stuff is just pre-tax 401K except that originally those funds were all in company stock, and for those who did not diversify out would be the holdings subject to NUA.

PS I have little clue what the reference to a pre 1987 IRA in a 401K plan is, but it is there and mine has funds in it.
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Postby boglesmymind » Fri Jan 15, 2010 7:02 pm

I cant roll it into my ROTH. I'm still limited to $6000/yr contributions in the ROTH. The firm that reccomended I roll out the after tax portion said I could then dribble $6k/yr into my ROTH provided I had $6k of earned income each of those years.
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Postby Sidney » Fri Jan 15, 2010 7:07 pm

boglesmymind wrote:I cant roll it into my ROTH. I'm still limited to $6000/yr contributions in the ROTH. The firm that reccomended I roll out the after tax portion said I could then dribble $6k/yr into my ROTH provided I had $6k of earned income each of those years.


Talk to someone else. Rollovers are completely different from contributions. They are not limited in amounts.
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Postby crow » Fri Jan 15, 2010 7:48 pm

I had almost the same problem. I had after tax contributions to a 401K with Fidelity, who was the 401k administrator. Once the 401k was rolled over to a IRA, the after tax portion was not eligible to be put in the IRA so went into a money market. I don't like Fidelity as I've had MANY problems with them over the years, so I moved everything over to Vanguard asap. Unfortunately Fidelity, who was the only company who ever had the money as the plan administrators, didn't report the cost basis on the amonut that was after tax contributions. The IRS tried to hit me with a zero cost basis on these after tax funds. I called and made several visits to the local Fidelity office explaining the situation. I finally found one person (on loan from another location) that understood and said she'd get the problem corrected and that I'd have a corrected form for that year within a week. Two weeks later, still no form and another trip to the office. The next guy tells me the forms aren't available yet. I finally made him understand I was talking about a corrected form from 4 years earlier. I finally got a new form in the mail.....and it was an exact copy of the original showing zero cost basis. I finally dug out payroll stubs and calculated the after tax contrubiutions that way and the IRS accepted those figures. I know I overpaid on the taxes because I was missing some of the data, but it was better than paying tax on the entire amount as profit. I hate Fidelity and would never allow them to have control of any of my accounts....well except for that 64 cents I left in that IRA just to cause them headaches. I still get quarterly and annual statements for that 64 cents and have been doing so for 9 years now. Last laugh:)
In summary, your after tax contributions cannot go into your IRA or Roth, they'll be rolled into a separate account. Make sure you have good records showing your contributions so you only have to pay tax on the earnings and appreciation. Otherwise you'll be taxed on the contributions a second time.
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Postby pshonore » Fri Jan 15, 2010 8:30 pm

I had a 401K at Fidelity a few years back. It contained both pre-tax, after tax and Company stock. I think Fido was the 5th or 6th custodian of the plan, but they still had the NUA basis for the stock. I rolled the after tax and some of the stock (with NUA treatment) to a taxable account. Tax was due on the cost basis of the NUA stock. The pre-tax money and remaining went to a Traditional IRA. NUA treatment requires a total distribution of the account. Got 1099s reflecting all that. As I recall, one 1099 covered the after tax and specified $0 taxable, another showed the NUA basis and was all taxable. The third showed a rollover and therefore none was taxable. It all went to accounts at Fido so it all went very smoothly.
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Postby Ron » Fri Jan 15, 2010 8:53 pm

I retired just under three years ago, and my then 401k was with Fidelity (one of many, through my working years).

They kept the record during the years of pre/post 401k contributions, did a roll-over to the same Fidelity accounts and took the post-tax contributions and put them in a taxable MM account for my further decision process. All tax documents reflected the breakout/move with no problems at all.

BTW, my (and my wife's) 401k plans were through Fidelity for many years (my wife - still working, still is). The entire process was done without a problem, and I've been quite satisified with their management of my funds over the years.

BTW, my wife/my TIRA/Roth accounts are with VG (no problem there, either). I don't have a problem with either company, especially since each have their strengths (and weaknesses).

- Ron
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Postby Shawn » Fri Jan 15, 2010 10:36 pm

Up until 10 days ago, I had both pre-tax and after-tax contributions in a 401a at a former employer and a 401k at my current employer, with both plans being administered by Fidelity.

With the January 1, 2010 elimination of the $100K income limit for TIRA/401 to Roth IRA conversions, I was able to take my after-tax contributions and the earnings on the after-tax contributions from both 401 plans and roll them into a Roth IRA at Fidelity. The pre-tax contributions remain in the 401 plans. I believe I could have rolled the earnings on the after-tax contributions into a TIRA, but my earnings were essentially zero so this was a non-issue.

This happened without a hitch, perhaps helped by the fact I did a Fidelity to Fidelity transfer. Fidelity sent me documentation clearly stating what was rolled into the Roth IRA (i.e., after-tax contributions and their earnings) and the taxable amount, which was essentially zero.

Unlike a TIRA to Roth IRA conversion, the pro-rata rule doesn't appear to apply with 401 to Roth rollovers. Some people seem to disagree with this. I can only state how my situation was handled.
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Postby EmergDoc » Fri Jan 15, 2010 11:14 pm

Sidney wrote:You aren't required to file an 8606 for 401K plans. You may want to consider trying to roll the after-tax piece to a ROTH. It is a bit complicated but apparently can be done. Search this site for a couple threads on the subject.


I'm playing with this now. One great solution if you change jobs is to roll the entire 401K out to an IRA, then roll it back into a 401K. Since most 401Ks don't accept rollovers involving after-tax money, that money can't go in. So you basically contribute all the tax-deferred money back into the 401K, leaving you an IRA that costs you nothing to convert. I'll let you know how mine works out this fall.
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Postby Default User BR » Sat Jan 16, 2010 4:42 am

EmergDoc wrote:I'm playing with this now. One great solution if you change jobs is to roll the entire 401K out to an IRA, then roll it back into a 401K. Since most 401Ks don't accept rollovers involving after-tax money, that money can't go in. So you basically contribute all the tax-deferred money back into the 401K, leaving you an IRA that costs you nothing to convert. I'll let you know how mine works out this fall.

If you are doing a rollover from an IRA to a qualified plan, after-tax money cannot be part of it. The tax laws require that only taxable money can roll over. If going from one qualified plan to another, then after-tax money can be part of it.

This is actually good, as that provision provides a way to isolate basis money because the pro-rata rule on distributiions is not applied.




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Postby boglesmymind » Sat Jan 16, 2010 10:29 am

It looks like my best bet is to convert my fidelity managed 401K to a Fidelity IRA, since Vanguard doesn't have a clue how to handle the after tax contributions. I have an existing Vanguard ROTH IRA which has been open 4yrs with max yearly contributions. Does anyone know if this type of account is eligble to receive after tax 401k rollovers?

If I can't get Vanguard to do this, I might have to let FIDO put it into a Roth and then later transfer it to Vanguard. Arrrrgh!
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Postby Mitchell777 » Sat Jan 16, 2010 12:56 pm

Shawn wrote:Up until 10 days ago, I had both pre-tax and after-tax contributions in a 401a at a former employer and a 401k at my current employer, with both plans being administered by Fidelity.

With the January 1, 2010 elimination of the $100K income limit for TIRA/401 to Roth IRA conversions, I was able to take my after-tax contributions and the earnings on the after-tax contributions from both 401 plans and roll them into a Roth IRA at Fidelity. The pre-tax contributions remain in the 401 plans. I believe I could have rolled the earnings on the after-tax contributions into a TIRA, but my earnings were essentially zero so this was a non-issue.

This happened without a hitch, perhaps helped by the fact I did a Fidelity to Fidelity transfer. Fidelity sent me documentation clearly stating what was rolled into the Roth IRA (i.e., after-tax contributions and their earnings) and the taxable amount, which was essentially zero.

Unlike a TIRA to Roth IRA conversion, the pro-rata rule doesn't appear to apply with 401 to Roth rollovers. Some people seem to disagree with this. I can only state how my situation was handled.

I need to investigate this possibilty also. Did Fidelity say that both the after tax contributions AND the earnings on those after tax contributions had to be withdrawn from the 401K and rolled into the Roth? Thanks
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Postby Default User BR » Sat Jan 16, 2010 2:45 pm

Mitchell777 wrote:I need to investigate this possibilty also. Did Fidelity say that both the after tax contributions AND the earnings on those after tax contributions had to be withdrawn from the 401K and rolled into the Roth?

Well, the tax laws say that post-1986 after-tax contributions must bring their share of earnings during a rollover. There are methods to split the taxable portion off into a TIRA, one outlined in a Fairmark article.

http://www.fairmark.com/rothira/09030801-401k-basis.htm



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Postby joruva » Sat Jan 16, 2010 5:24 pm

Default User BR wrote:
Mitchell777 wrote:I need to investigate this possibilty also. Did Fidelity say that both the after tax contributions AND the earnings on those after tax contributions had to be withdrawn from the 401K and rolled into the Roth?

Well, the tax laws say that post-1986 after-tax contributions must bring their share of earnings during a rollover. There are methods to split the taxable portion off into a TIRA, one outlined in a Fairmark article.

http://www.fairmark.com/rothira/09030801-401k-basis.htm



Brian


This is the part I find confusing. If I contribute to a 401k while living overseas, is the amount considered after-tax if it's under the foreign earned income exclusion? Do I have to do anything this tax year to "prove" it's after-tax?

Therefore, when I changed jobs, would I be able to roll-over the "after-tax" money to a Roth IRA without paying additional taxes?

It seems a little sketchy that I would have to receive the distributions myself, since a direct roll-over from 401k to Roth IRA results in IRS tax withholding.
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Postby GG » Sat Jan 16, 2010 9:16 pm

NO big deal. You can roll to an IRA if you want. You can roll to a 401 if there new admin agrees to track the after tax money (if not, they'll send it to you.) But the best deal in the world is that you can convert ONLY your after tax funds to a Roth right away and roll over the rest to an IRA. Best of both worlds, and no more tax on gais of your basis. Easy and no lose.
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Postby Shawn » Sun Jan 17, 2010 4:34 pm

Mitchell777 wrote:I need to investigate this possibilty also. Did Fidelity say that both the after tax contributions AND the earnings on those after tax contributions had to be withdrawn from the 401K and rolled into the Roth? Thanks

I don't know about Fidelity, but my plan(s) documentation says this. That is, if I take a distribution of after-tax contributions, I need to include the earnings on the after-tax contributions that are distributed (in the same ratio). I believe, but cannot guarantee, that I could have rolled the earnings into a TIRA and the after-tax contributions into a Roth IRA. If I had elected this route, it's unclear to me whether I would have needed to follow the 3-step Fairmark approach referenced by "Default User BR". There seems to be differing opinions on this. However, this was a non-issue for me since the earnings on my after-tax contributions were essentially zero. I just put everything in the Roth IRA.

My pre-tax contributions and their earnings didn't come into play. They remain in my 401a and 401k plans. (Of course, pre-tax contributions do come into play for TIRA to Roth IRA rollovers.) Fidelity tracks the "sources" of contributions (pre-tax, after-tax, catchup, etc). This makes it easy to do a direct Fidelity to Fidelity rollover. I assumed other firms such as Vanguard did this too, but apparently this assumption is incorrect.

By the end of 2010, I will have rolled over about $165K into my Roth IRA with essentially no tax consequences. That is, the after-tax funds being rolled into the Roth IRA would have gone into regular taxable investment vehicles if I did not make after-tax contributions to my 401's and TIRA (TIRA has no pre-tax contributions). In subsequent years, I will be able to effectively contribute about $40K/yr to my Roth IRA by immediately rolling over after-tax contributions made to my 401k and TIRA. This is truly a free lunch.
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Postby retcaveman » Mon Jan 18, 2010 12:36 am

You have to pay attention to the dates (years) of the contributions. If I recall, pre 1987 after-tax contributions must be withdrawn first and are not taxable. Post 1986 after-tax contributions are taxable on a pro-rated basis.

When my spouse rolled her pension to Schwab, she was told she had to take the after-tax money out ie she couldn't roll it. While no taxes were due, we lost the tax deferral (so we bought savings bonds when the annual max was $30k). Not sure if that was just her company, Schwab or IRS requirement.

What the Vanguard rep told you about lumping the various funds doesn't make sense to me and I wouldn't do it. There may be some way around it, but I would want to nail it down before I made a move with potentially serious implications. Perhaps checking with your employer HR/Benefits would be a good first step.

Good luck.
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Postby Default User BR » Mon Jan 18, 2010 4:16 am

retcaveman wrote:When my spouse rolled her pension to Schwab, she was told she had to take the after-tax money out ie she couldn't roll it. While no taxes were due, we lost the tax deferral (so we bought savings bonds when the annual max was $30k). Not sure if that was just her company, Schwab or IRS requirement.

Either they mislead you, or you misunderstood. At any rate, even if they wouldn't do a direct rollover, you could have rolled the after-tax money over yourself. It doesn't have to be in the form of a check to the receiving institution, it's just cleaner that way.


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Postby retcaveman » Mon Jan 18, 2010 10:10 am

I checked Jane Bryant Quinn's book, Making the Most of Your Money which is a reference I use for a lot of my finance questions. On Page 757, she says "Rollovers are only for pretax money. If you made any after-tax contributions to your pension plan, those have to be removed."

However, she goes on to say, "If you want to keep this extra money in a tax-deferred investment, consider a nondeductible IRA." I didn't know about this second part. I assume you have to do this within 60 days.

Still learning.
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Postby Default User BR » Mon Jan 18, 2010 1:05 pm

retcaveman wrote:I checked Jane Bryant Quinn's book, Making the Most of Your Money which is a reference I use for a lot of my finance questions. On Page 757, she says "Rollovers are only for pretax money. If you made any after-tax contributions to your pension plan, those have to be removed."

However, she goes on to say, "If you want to keep this extra money in a tax-deferred investment, consider a nondeductible IRA." I didn't know about this second part. I assume you have to do this within 60 days.

As I have mentioned elsewhere, there's no such thing as a non-deductible IRA. There are traditional IRAs with taxable or non-taxable money, or a combination.

Here is the information on rollovers from the source:

http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230605

Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. See Form 8606 under Distributions Fully or Partly Taxable later.




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Postby retcaveman » Mon Jan 18, 2010 1:40 pm

Thanks. I had just checked and found the same reference. IRS Publication 575, Rollovers Section. You can view it at:

http://www.irs.gov/publications/p575/ar ... 1000226891
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