After-tax 401k to Roth IRA - Tax Implications

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
MorningstarFan
Posts: 24
Joined: Tue Dec 06, 2016 2:53 am

After-tax 401k to Roth IRA - Tax Implications

Postby MorningstarFan » Wed Jan 11, 2017 12:47 am

Hi all,

I would like to double check my understanding on tax implications when I request direct rollovers from my after-tax 401K to Roth IRA.

Does the Pro Rata rule care about how much I have in my Pre-tax 401k? Or does the pro rata rule strictly applies to what is in my after-tax bucket?

For example, I have $10,000 invested in Pre-tax 401k and $5,000 invested in After-tax 401k. If there is no earnings in the after-tax 401k bucket, will the Roth IRA contribution be tax free? Or will there be a tax implication since I have $10,000 in Pre-tax 401k?

Thank you for clarification!

ryman554
Posts: 645
Joined: Sun Jan 12, 2014 9:44 pm

Re: After-tax 401k to Roth IRA - Tax Implications

Postby ryman554 » Wed Jan 11, 2017 9:18 am

No pro-rata rule for the after-tax 401(k) roll-over. After tax is its own separate account and accounting. There is pro-rata rule for an incomplete after-tax conversion. IRS is very clear about this. In fact, you are even able to separate your earnings in the after-tax 401(k) to make a completely tax-free roll-over: post-tax basis to roth, and earnings to tIRA.

Spirit Rider
Posts: 5509
Joined: Fri Mar 02, 2007 2:39 pm

Re: After-tax 401k to Roth IRA - Tax Implications

Postby Spirit Rider » Wed Jan 11, 2017 9:52 am

As long as the 401k plan has separate accounting (almost all do now) for the after-tax contributions and after-tax earning there is no interaction with the pre-tax contributions and pre-tax earnings.

There is also no interaction with post-tax (Roth) contributions and post-tax (Roth) earnings unless you can and intentionally do an In-plan Roth Rollover.

Alan S.
Posts: 6700
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: After-tax 401k to Roth IRA - Tax Implications

Postby Alan S. » Wed Jan 11, 2017 3:54 pm

Kaye Thomas (Fairmark Press) has reported that there are some plans out there that have the impression that the separate sub account treatment ends upon employee separation. While this impression is ill founded, a former employee could still run into issues with pro rating in certain plans. A more detailed explanation is available at Fairmark.

However, Notice 2014-54 provides an easy solution after separation. Just request that all pre tax dollars in the entire plan be directly rolled to a TIRA and all after tax amounts be rolled to a Roth IRA. This avoids the unpleasant surprise where you think that only a small amount of pre tax dollars are going to the Roth and the 1099R indicates that a large portion went there. Therefore, use 2014-54 if there is any doubt about plan accounting either recognizing the continued sub account treatment or accepting a request regarding the sub account only.


Return to “Investing - Help with Personal Investments”