Aftertax 401K rollover to Roth IRA

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Zonian59
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Aftertax 401K rollover to Roth IRA

Post by Zonian59 » Thu Apr 26, 2018 2:43 am

I am currently separated from Megacorp, but still have 401K plan with Megacorp.
401K is aprox $456,500 comprising of pretax $450,000 and aftertax $6500.
Have been contributing to the 401K since 1999 until separation.
The $6500 aftertax portion has approx $4600 aftertax contributions with approx $1900 earnings.

I also have funded a Schwab Roth IRA since 2010.

Forthcoming 4th quarter 2018 I will turn 59.5.
I'd like to rollover the entire $6500 401k aftertax to the Schwab Roth IRA via trustee-to-trustee rollover.
Will also rollover the Pretax 401k to a Trad IRA via a trustee-to-trustee rollover.

I understand there are three ways to do an aftertax rollover to a Roth IRA:
1) Rollover the aftertax portion ($6500) to a Roth IRA and pay taxes on the aftertax earnings at time of rollover.
Taxes would be paid from account outside IRA.

2) Rollover the aftertax contribution ($4600) to a Roth IRA and the earnings ($1900) to a Trad IRA and pay no taxes at time of rollover.
Is this correct?

If I elect to rollover the entire $6500 to a Roth IRA, would it be better to A) do an In-Plan 401K conversion to Roth 401K, then rollover to Roth IRA, or B) directly rollover the $6500 (w/o In Plan conversion) to the Roth IRA?

When doing an In-Plan 401K Roth conversion, the aftertax contribution and earnings are transparent.
But when opting to directly rolling over the entire aftertax portion (w/o In-Plan Conversion) to the Roth IRA, how would the contribution and earnings be identified? Or would I have to request two aftertax rollover checks: aftertax contribution ($4600) and aftertax earnings ($1900), both which can then be rolled over into the Roth IRA?

I am also confused about the 5-year holding period rule:
If I do the In-Plan Roth conversion in 2018, would I have to hold the 401K Roth in the 401K Plan for 5 years before I can roll over to Schwab Roth IRA?
If this is true, then it would be better if I rollover the $6500 aftertax portion without In-Plan conversion directly to the Roth IRA?

Thanks for all clarifications and suggestions.

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RetiredMule
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Re: Aftertax 401K rollover to Roth IRA

Post by RetiredMule » Thu Apr 26, 2018 10:09 am

Why would you have to pay taxes on the rollover to a Roth IRA of the aftertax portion of $6500 (incl. the $1900 earnings) in your 401K, *if* this after-tax contribution and its earnings are separately shown, I'd assume, as a Roth 401K?

Or, is it not designated/shown as a Roth 401K?

Gryphon
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Re: Aftertax 401K rollover to Roth IRA

Post by Gryphon » Thu Apr 26, 2018 12:50 pm

After-tax contributions to a 401K don't necessarily mean a Roth 401K. For many years I set my 401K contribution percentage so that I would hit the annual maximum near the end of the year. The excess was categorized as an after-tax contribution (and this was long before that company started offering a Roth 401K option). At first, I withdrew those after-tax contributions early the following year, but at some point I started letting them accumulate. When I retired, I rolled those accumulated contributions over to my Roth IRA, while the earnings went to my traditional IRA, along with all the pre-tax contributions & earnings (Zonian59's option 2).

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Earl Lemongrab
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Re: Aftertax 401K rollover to Roth IRA

Post by Earl Lemongrab » Thu Apr 26, 2018 1:08 pm

RetiredMule wrote:
Thu Apr 26, 2018 10:09 am
Why would you have to pay taxes on the rollover to a Roth IRA of the aftertax portion of $6500 (incl. the $1900 earnings) in your 401K, *if* this after-tax contribution and its earnings are separately shown, I'd assume, as a Roth 401K?

Or, is it not designated/shown as a Roth 401K?
The OP meant rolling the after-tax (not Roth) contributions plus earnings to a Roth IRA and paying taxes on the pretax part.

If the goal is to have the after-tax in a Roth IRA, then I don't see any purpose in going to Roth 401(k) first. Extra steps for no advantage.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

RetiredAL
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Re: Aftertax 401K rollover to Roth IRA

Post by RetiredAL » Thu Apr 26, 2018 8:51 pm

Zonian,

When I retired two years ago, I had about $10,000 of After-Tax in my 401K. Fidelity was the custodian of the 401K and the IRA's. Many bucket types were in the 401K account identifying the source type. They were readily accessible via their website.

Upon retirement, they first rolled the After-Tax bucket ( contributions, mine and old ESOP ) to my existing Roth. Then they rolled the Pre-Tax bucket to a Roll-Over IRA created for this transfer. All earnings, either from After to Pre contributions, which had accumulated over the years, were accumulated in various sub-buckets of Pre-Tax bucket. I understood that the After-Tax had to be rolled first to ensure that the Roll-Over IRA would not be polluted. This pollution, if it had occurred, complicates the withdrawal taxation computation, forcing you make and keep pro rata data each year forward.

Although there had been much pre-planning work and preliminary steps done, on the morning the day of the actual roll-overs, it was only about 15 minutes on the phone with the my assigned retirement rep at Fidelity. Everything was real-time and I watched it happen, noting that the expected $ amounts were going to the right places. All the transfers were in $, as most of my investment items could not be transferred in-kind. I was only out of the market 2 days max, having re-bought similar funds and ETF's the day of the transfer.

I'm sure that having Fidelity as the source and destination helped with a smooth transfer.

Zonian59
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Location: California

Re: Aftertax 401K rollover to Roth IRA

Post by Zonian59 » Fri May 11, 2018 2:53 am

Have Additional questions.
Recap and clarification:
- No longer working for megacorp but still retain 401(k) with megacorp;
- Am now in 12% tax bracket;
- 401K currently has ~$450K pretax portion and ~$6.5K aftertax portion;
-Aftertax portion has ~$4.6K contribution and ~1.9K earnings;
- The aftertax contribution is result of excess pretax deduction from paycheck. Megacorp 401(k) automatically redesignated this portion as “aftertax contribution”.
- NO portion of 401(k) is in 401(k) Roth;
- Have Trad IRA and Roth IRA at Schwab.

Megacorp states they will issue two checks: one for pretax portion; the other for aftertax portion.
When the rollover checks are issued, I understand Megacorp will also issue two separate 1099-R.

Will the aftertax 1099-R segregate aftertax contribution and earnings values?

Plan to rollover 401(k) to both Trad IRA and Roth IRA, i.e.,
pretax 401(k) ----> Trad IRA
aftertax 401(k) ----> Trad IRA or Roth IRA

Will NOT be doing an In-Plan Roth 401(k) as many have pointed out this adds unnecessary complication step.

Questions pertaining to taxation during rollover year:
1. If the entire aftertax 401(k) is rolled over to Roth IRA, is the entire amount subject to taxation or just the earned portion during the rollover year?
2. If the entire aftertax 401(k) is rolled over to Trad IRA, then amount is not subject to taxation, right?

On the other hand, if all taxes are to be deferred and no taxes on the aftertax 401(k) rollover to Roth IRA, Schwab suggested the following rollover:
Pretax 401(k) contribution ----> Trad IRA
Aftertax earnings ----> Trad IRA;
Aftertax contribution (w/o earnings) ----> Roth IRA.

Is this correct?

Also, would it be advisable to request three separate checks from megacorp 401(k) administrator:
- pretax 401(k) contribution;
- aftertax 401(k) contribution;
- earnings from aftertax

Has anyone had any problems requesting rollover checks from their 401(k) administrator in this manner?

Thanks for all your advice and clarifications.

bradpevans
Posts: 302
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Re: Aftertax 401K rollover to Roth IRA

Post by bradpevans » Fri May 11, 2018 6:17 am

Zonian59 wrote:
Fri May 11, 2018 2:53 am
Have Additional questions.
Recap and clarification:
- No longer working for megacorp but still retain 401(k) with megacorp;
- Am now in 12% tax bracket;
- 401K currently has ~$450K pretax portion and ~$6.5K aftertax portion;
-Aftertax portion has ~$4.6K contribution and ~1.9K earnings;
- The aftertax contribution is result of excess pretax deduction from paycheck. Megacorp 401(k) automatically redesignated this portion as “aftertax contribution”.
- NO portion of 401(k) is in 401(k) Roth;
- Have Trad IRA and Roth IRA at Schwab.

Megacorp states they will issue two checks: one for pretax portion; the other for aftertax portion.
When the rollover checks are issued, I understand Megacorp will also issue two separate 1099-R.

Will the aftertax 1099-R segregate aftertax contribution and earnings values?

Plan to rollover 401(k) to both Trad IRA and Roth IRA, i.e.,
pretax 401(k) ----> Trad IRA
aftertax 401(k) ----> Trad IRA or Roth IRA

Will NOT be doing an In-Plan Roth 401(k) as many have pointed out this adds unnecessary complication step.

Questions pertaining to taxation during rollover year:
1. If the entire aftertax 401(k) is rolled over to Roth IRA, is the entire amount subject to taxation or just the earned portion during the rollover year?
2. If the entire aftertax 401(k) is rolled over to Trad IRA, then amount is not subject to taxation, right?

On the other hand, if all taxes are to be deferred and no taxes on the aftertax 401(k) rollover to Roth IRA, Schwab suggested the following rollover:
Pretax 401(k) contribution ----> Trad IRA
Aftertax earnings ----> Trad IRA;
Aftertax contribution (w/o earnings) ----> Roth IRA.

Is this correct?

Also, would it be advisable to request three separate checks from megacorp 401(k) administrator:
- pretax 401(k) contribution;
- aftertax 401(k) contribution;
- earnings from aftertax

Has anyone had any problems requesting rollover checks from their 401(k) administrator in this manner?

Thanks for all your advice and clarifications.
I've found its best to determine what the *receiving* account wants, then have the sending account do it that way.

Pretax 401K --> IRA, upside is a bigger menu of investing options, fees might be higher

AfterTax earnings: you can swing over to IRA, then pay income tax upon withdrawal.
Or, you can pay todays tax hit and move over to Roth IRA. (so tax rate today vs tax rate later)
As an aside, this is why most people try to move funds in short order: taxed in, taxed out on that part
(If that 4.6K would have been after tax, you would only owe LTCG on the $1.9K, not income tax)

After tax contributions --> Roth IRA, no taxes ever

Spirit Rider
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Re: Aftertax 401K rollover to Roth IRA

Post by Spirit Rider » Fri May 11, 2018 11:49 am

Zonian59 wrote:
Fri May 11, 2018 2:53 am
Questions pertaining to taxation during rollover year:
1. If the entire after-tax 401(k) is rolled over to Roth IRA, is the entire amount subject to taxation or just the earned portion during the rollover year?
The pre-tax earnings only would be subject to ordinary income tax rates.
2. If the entire after-tax 401(k) is rolled over to Trad IRA, then amount is not subject to taxation, right?
Correct, but would be very unwise. You will have turned the after-tax contributions into pre-tax rollover contributions.
On the other hand, if all taxes are to be deferred and no taxes on the aftertax 401(k) rollover to Roth IRA, Schwab suggested the following rollover:
Pretax 401(k) contribution ----> Trad IRA
Aftertax earnings ----> Trad IRA;
Aftertax contribution (w/o earnings) ----> Roth IRA.

Is this correct?
Yes.
Also, would it be advisable to request three separate checks from megacorp 401(k) administrator:
- pretax 401(k) contribution;
- aftertax 401(k) contribution;
- earnings from aftertax

Has anyone had any problems requesting rollover checks from their 401(k) administrator in this manner?
If the administrator is willing to do two distributions/three checks, they should do as follows:
  1. Pre-tax account distribution: One check made out to the IRA custodian/account for pre-tax contributions and earnings.
  2. After-tax account distributions: One check made out to the Roth IRA custodian/account for after-tax contributions and one check made out to to the IRA custodian/account for after-tax earnings.
If they will only issue two checks: One for the pre-tax account and one for the after-tax account you have two options:
  1. One check for the pre-tax account to made out to the IRA custodian/account for pre-tax contributions and earnings and one check to made out to the Roth IRA custodian/account for after-tax contributions and after-tax earnings.
  2. One check for made out to the pre-tax account to the IRA custodian/account for pre-tax contributions and earnings and one check made out to YOU for after-tax contributions and after-tax earnings. They will do a 20% tax withholding of the after-tax earnings. You will then do an indirect rollover of the after-tax contribution amount to the Roth custodian account.
Personally, I wouldn't take this last option given the amount of taxable pre-tax earnings. You can only do this if you haven't done an indirect IRA rollover in the last twelve months and more importantly it uses up your one indirect IRA rollover for the next twelve months.

Note: However the administrator allows and you choose, make sure the checks are made out properly to the IRA custodian/accounts, you direct them correctly and the custodian deposits them correctly. You do not want the pre-tax account assets to go to the Roth IRA and after-tax account after-tax contributions to go to the traditional IRA.

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Earl Lemongrab
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Re: Aftertax 401K rollover to Roth IRA

Post by Earl Lemongrab » Fri May 11, 2018 7:15 pm

Spirit Rider wrote:
Fri May 11, 2018 11:49 am
Zonian59 wrote:
Fri May 11, 2018 2:53 am
2. If the entire after-tax 401(k) is rolled over to Trad IRA, then amount is not subject to taxation, right?
Correct, but would be very unwise. You will have turned the after-tax contributions into pre-tax rollover contributions.
That's not true. You have to keep a record of the taxable amount but it doesn't lose its after tax character. It just becomes basis in the IRA just like a non-deductible contribution.

In the old days before the IRS blessed splitting the rollover, it was typical to get a check with a mix of pre and after tax money that went into a TIRA. When I got my first Mega Backdoor rollover from Megacorp I put it all in TIRA, rolled the pretax earnings back into the 401(k), and did a tax-free converstion of the after-tax to Roth.
Last edited by Earl Lemongrab on Fri May 11, 2018 11:20 pm, edited 1 time in total.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Gryphon
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Re: Aftertax 401K rollover to Roth IRA

Post by Gryphon » Fri May 11, 2018 9:58 pm

Zonian59 wrote:
Fri May 11, 2018 2:53 am
Will the aftertax 1099-R segregate aftertax contribution and earnings values?
When I did this I received two 1099-R forms - one for the money that went to the traditional IRA (which included the after-tax earnings), and one for the money that went to the Roth IRA (the after-tax contributions). The taxable amount was $0 on both. The only difference I can see between the two (aside from the amount) is that on the 1099-R for the money going to the Roth IRA, box 5 was non-zero. The 1099-R for the money going to the traditional IRA did not segregate the pre-tax contributions and the after-tax earnings.
On the other hand, if all taxes are to be deferred and no taxes on the aftertax 401(k) rollover to Roth IRA, Schwab suggested the following rollover:
Pretax 401(k) contribution ----> Trad IRA
Aftertax earnings ----> Trad IRA;
Aftertax contribution (w/o earnings) ----> Roth IRA.

Is this correct?
That's how I did it. I didn't bother with 3 checks though, just two.

Alan S.
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Re: Aftertax 401K rollover to Roth IRA

Post by Alan S. » Fri May 11, 2018 10:33 pm

There should be two 1099R forms even though some firms combine on a single 1099R because the Box 7 code is G for both.

However, the instructions for Boxes 2a and 5 differ depending on the type of destination account IRA. For a qualified rollover contribution to the Roth IRA, 2a + 5 must equal Box 1. Not so for a direct rollover to a TIRA.

Some tax programs balk when a single 1099R is issued, and to get the correct output on the 1040 the taxpayer has to break out the correct amounts and enter them separately as if separate 1099R forms had been issued.

That addresses the 1099R issuance. But it is also preferable to have separate checks issued, one payable to the IRA and the other specifically to the Roth IRA (If just IRA is stated it is presumed to be a non Roth IRA). A combined check could be split up incorrectly by the custodian if that custodian holds both IRA types and this has happened in some cases. It is a hassle to get corrected.

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