Compare moving after-tax 401k contribs into Roth IRA directly, vs splitting then converting

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
ljwobker
Posts: 53
Joined: Sat Dec 06, 2008 5:30 pm

Compare moving after-tax 401k contribs into Roth IRA directly, vs splitting then converting

Post by ljwobker »

So I'm trying to understand the mechanics of these two possibilities and whether there's any difference in how they're ultimately treated/taxed:

Initial case: I have after-tax contributions and some associated earnings on these contributions in a 401k. I eventually want to get these into a Roth IRA.

Scenario 1) convert the whole thing in one go into a Roth IRA. I think the 1099-R here will show the whole distribution amount, with the contribution/earnings amounts broken out.

Scenario 2) convert the contributions into a Roth IRA, and separately roll the earnings into a traditional IRA. Then, convert that T-IRA into a Roth. Here I think we end up at least one additional 1099 for the TIRA->Roth IRA conversion.

Is there anything else I'm missing here?
User avatar
gilgamesh
Posts: 1607
Joined: Sun Jan 10, 2016 9:29 am

Re: Compare moving after-tax 401k contribs into Roth IRA directly, vs splitting then converting

Post by gilgamesh »

I could be wrong, but my understanding is...

The associated earnings are taxable, no different than the rest of the amounts in your 401k....only the non-deductible basis is tax free if converted to Roth. So, I don't see a need to separate the earnings.

Or are you saying your entire 401k only consists of non-deductible and its earnings only.
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Compare moving after-tax 401k contribs into Roth IRA directly, vs splitting then converting

Post by PFInterest »

no you just roll over all of the after tax amount. since you would pay tax on converting a separate IRA rollover anyways....why try to separate two steps?
User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Compare moving after-tax 401k contribs into Roth IRA directly, vs splitting then converting

Post by Earl Lemongrab »

Yeah, option 2 doesn't make any sense. The reason people split the rollover is when the earnings amount is large and they don't want to pay tax on converting. Some 401(k)s allow you to roll IRAs back in, so they do that or just keep a TIRA around. If you want the whole thing in the Roth, do it directly. My company splits the rollover anyway, but I just send both checks to the Roth.
User avatar
celia
Posts: 11875
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Compare moving after-tax 401k contribs into Roth IRA directly, vs splitting then converting

Post by celia »

Scenario 3) rollover the whole amount you want to put into the Roth into a rollover traditional IRA. Then convert into a new (empty) Roth. This is useful should you need to recharacterize, which you would likely do if the markets dropped significantly and the taxable growth amount was large. You might also want to do a partial recharacterization if you found the taxes were more than you were expecting.

If you don't convert everything at once, the funds will be considered co-mingled as far as post-tax and growth. The pro rata rule will apply.

If you also own any non-Roth IRA, there are further complications due to pro rata rules. I'm not sure if they apply if you rollover the post-tax funds only directly into the Roth. Further research would be needed.
retiredjg
Posts: 42800
Joined: Thu Jan 10, 2008 12:56 pm

Re: Compare moving after-tax 401k contribs into Roth IRA directly, vs splitting then converting

Post by retiredjg »

ljwobker wrote:Scenario 1) convert the whole thing in one go into a Roth IRA. I think the 1099-R here will show the whole distribution amount, with the contribution/earnings amounts broken out.
If you intend to convert the whole amount anyway, this is the only route that makes sense. Fewer moving parts. No possibility of accidental pro-rating.
Scenario 2) convert the contributions into a Roth IRA, and separately roll the earnings into a traditional IRA. Then, convert that T-IRA into a Roth. Here I think we end up at least one additional 1099 for the TIRA->Roth IRA conversion.
This makes no sense. More moving parts. More to do. More things that can go wrong. And if you have any other IRA, rollover, SEP or SIMPLE, this route would cause them to be pro-rated with your conversion. You don't want that.
Post Reply