Aftertax Earnings 401k Rollover to Roth Question

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Topic Author
pwon
Posts: 4
Joined: Thu Jul 11, 2019 3:25 pm

Aftertax Earnings 401k Rollover to Roth Question

Post by pwon » Thu Jul 11, 2019 3:55 pm

Hi, been lurking here since my college days, but first time creating an account and posting (woohoo!).

After finding out that I can rollover aftertax 401k contributions to my Roth IRA (AKA, mega backdoor), I jumped on the opportunity immediately. However, there's been some confusion as to how the earnings (pretax) on the aftertax amount is taxed.
I'm receiving differing answers from the Vanguard representatives (one even claimed I'd be taxed at withdrawal even after meeting all qualifications for a tax-free withdrawal), and I haven't found solid answers online. Most posts seem to assume there's no earnings on the aftertax portion and leave it at that.

I found this writeup on Bogleheads: https://www.bogleheads.org/wiki/After-t ... tributions
The last line is of particular interest, "Also consider that the earnings may be so small that it makes more sense to do a direct rollover of the entire amount to your Roth IRA and pay taxes on the earnings."

Now, I've already done two in-service withdrawals and moved aftertax 401k contributions (plus the earnings on them) into my IRA Roth. I probably should've checked here before doing so, but I digress.
Anyways, what is considered an amount "so small"? My first rollover had roughly $13 in earnings/pretax while my second had roughly $5. And secondly, when and how do I pay taxes on these earnings? Do I report them via Form 8606 w/ a total of roughly $18 next year, or will I be taxed at the time of withdrawal when I'm qualified? The latter seems to be unlikely, but I'm fearing for the worst after my last call w/ a Vanguard rep.

Last but not least, I understand moving my aftertax contributions to my IRA Roth is a non-taxable event as I've already paid taxes on that amount. However, do I have to report this rollover anywhere? And if so, which form would that be?

Some unrelated questions...
I'm not sure if the in-service withdrawal was a rollover or a transfer. I understand it contains "withdrawal" in the name, but I never received a check under my name (at least not directly). Vanguard took care of this and my funds were available in my IRA Roth after a few days. That said:
1) Is an in-service withdrawal from an aftertax 401k account (plus its earnings) into an IRA Roth considered a rollover or a transfer? And for future reference, what's a good rule of thumb to distinguish the two?
2) Ultimately, for my situation, does it even matter? If so, what are the implications of each?

Many thanks

anon_investor
Posts: 101
Joined: Mon Jun 03, 2019 1:43 pm

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by anon_investor » Thu Jul 11, 2019 4:04 pm

Your 401k administrator should issue you a 1099 at the end of the year that should show the amount you owe taxes on (ie the growth). You will need to report this on your taxes just like any other 1099 you might get.

Topic Author
pwon
Posts: 4
Joined: Thu Jul 11, 2019 3:25 pm

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by pwon » Thu Jul 11, 2019 5:50 pm

Thanks anon. Just to be clear, does that mean I just need to pay taxes on the pretax amount just once?

Don't mean to beat a dead horse, but it just seems too good to be true. If this is the case, I don't know why most people recommend splitting the aftertax and its earnings separately into an IRA Roth and IRA Traditional, respectively. Might as well pay the small tax upfront for the earnings and let the earnings grow tax-free as well!

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by retiredjg » Thu Jul 11, 2019 5:56 pm

pwon wrote:
Thu Jul 11, 2019 5:50 pm
Thanks anon. Just to be clear, does that mean I just need to pay taxes on the pretax amount just once?

Don't mean to beat a dead horse, but it just seems too good to be true. If this is the case, I don't know why most people recommend splitting the aftertax and its earnings separately into an IRA Roth and IRA Traditional, respectively. Might as well pay the small tax upfront for the earnings and let the earnings grow tax-free as well!
Some people have large earnings because the after-tax account has been sitting there for awhile. And some people just don't want to pay any tax, even on that tiny amount.

retiredjg
Posts: 36739
Joined: Thu Jan 10, 2008 12:56 pm

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by retiredjg » Thu Jul 11, 2019 5:59 pm

pwon wrote:
Thu Jul 11, 2019 3:55 pm
I'm not sure if the in-service withdrawal was a rollover or a transfer. I understand it contains "withdrawal" in the name, but I never received a check under my name (at least not directly). Vanguard took care of this and my funds were available in my IRA Roth after a few days. That said:
1) Is an in-service withdrawal from an aftertax 401k account (plus its earnings) into an IRA Roth considered a rollover or a transfer? And for future reference, what's a good rule of thumb to distinguish the two?
2) Ultimately, for my situation, does it even matter? If so, what are the implications of each?

Many thanks
As I recall, it is called an "eligible rollover distribution". But I don't think what you call it matters much.

Colorado13
Posts: 900
Joined: Thu Apr 07, 2011 4:58 pm
Location: Colorado

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by Colorado13 » Thu Jul 11, 2019 6:04 pm

I rollover my after tax earnings to my Traditional IRA at Vgrd and rollover my after tax contributions to my Roth IRA at Vgrd. Vanguard and my employer told me this was the best approach, as it keeps the two contribution types separate. I send Vgrd two separate checks and they seem to have no problem processing them. My understanding is that for tax year 2019, I will complete a form 8606 to report this rollover.

Alan S.
Posts: 8473
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by Alan S. » Thu Jul 11, 2019 6:16 pm

pwon wrote:
Thu Jul 11, 2019 3:55 pm

Anyways, what is considered an amount "so small"? My first rollover had roughly $13 in earnings/pretax while my second had roughly $5. And secondly, when and how do I pay taxes on these earnings? Do I report them via Form 8606 w/ a total of roughly $18 next year, or will I be taxed at the time of withdrawal when I'm qualified? The latter seems to be unlikely, but I'm fearing for the worst after my last call w/ a Vanguard rep.

Last but not least, I understand moving my aftertax contributions to my IRA Roth is a non-taxable event as I've already paid taxes on that amount. However, do I have to report this rollover anywhere? And if so, which form would that be?

Some unrelated questions...
I'm not sure if the in-service withdrawal was a rollover or a transfer. I understand it contains "withdrawal" in the name, but I never received a check under my name (at least not directly). Vanguard took care of this and my funds were available in my IRA Roth after a few days. That said:
1) Is an in-service withdrawal from an aftertax 401k account (plus its earnings) into an IRA Roth considered a rollover or a transfer? And for future reference, what's a good rule of thumb to distinguish the two?
2) Ultimately, for my situation, does it even matter? If so, what are the implications of each?
Surely, the amounts you mentioned above are plenty small enough to warrant including them in the direct Roth IRA rollover. Larger amounts may or may not be "too small" depending on your marginal tax rate. When doing a split rollover, there is a small risk that incorrect amounts might end up in the wrong IRA type as well. It is worthwhile to avoid this risk since correction of such an error can be difficult. Another benefit of sending the entire distribution to your Roth is that the 1099R is simpler. Were you to do a split rollover to avoid ANY current taxes (pre tax earnings to TIRA), there will be a single 1099R issued and entering this into some tax programs is difficult because this is actually two types of rollover combined on a single 1099R. Therefore, keeping this transaction simple is advisable unless the pre tax earnings are clearly "not small".

The rollover would be reported directly on lines 4a and 4b of your Form 1040. No additional forms are needed including no Form 8606.

All withdrawals (technically distributions) FROM the qualified plan must be reported on Form 1099R and on your tax return whether they are taxable or not. A direct rollover is a two part transaction, first a rollover and then a contribution even when done physically by transfer. There is plenty of terminology confusion over proper use of these terms, mainly because the terms the IRS uses are more effected by tax reporting than by the physical process of moving the money. What you have done is a direct rollover and is reported in Box 2 on the Roth custodian issued Form 5498.

1) For tax reporting, a direct transfer applies only to IRA to IRA transactions and is non reportable. What you did is a direct rollover and is reportable, EVEN THOUGH the physical movement of the money is done by transfer. Thus the confusion.
2) For your situation, all you need do is report the 1099R correctly on lines 4 and 4a. 4a would show the taxable amount (the earnings) rolled into your Roth IRA.

Topic Author
pwon
Posts: 4
Joined: Thu Jul 11, 2019 3:25 pm

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by pwon » Thu Jul 11, 2019 6:57 pm

Beautiful, I sincerely thank you for the detailed response @Alan S, you pretty much answered all my questions.

I also appreciate the rest of you that took the time to read my post and respond - this community rocks!

Cheers :sharebeer

Spirit Rider
Posts: 10761
Joined: Fri Mar 02, 2007 2:39 pm

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by Spirit Rider » Thu Jul 11, 2019 9:29 pm

Colorado13 wrote:
Thu Jul 11, 2019 6:04 pm
I rollover my after tax earnings to my Traditional IRA at Vgrd and rollover my after tax contributions to my Roth IRA at Vgrd. Vanguard and my employer told me this was the best approach, as it keeps the two contribution types separate. I send Vgrd two separate checks and they seem to have no problem processing them. My understanding is that for tax year 2019, I will complete a form 8606 to report this rollover.
You only report non-deductible traditional IRA contributions, traditional, SEP and/or SIMPLE IRA Roth conversions and non-qualified Roth IRA distributions. As stated by Alan S., rollovers from qualified plans are never reported on Form 8606.

Split-rollovers of employee after-tax contributions to a Roth IRA and pre-tax earnings to a traditional IRA are both tax-free rollovers and not reported on Form 8606. Even a single rollover of employee after-tax contributions and taxable pre-tax earnings to a Roth IRA is not reported on Form 8606.

magicrat
Posts: 688
Joined: Sat Nov 29, 2014 7:04 pm

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by magicrat » Fri Jul 12, 2019 9:57 am

I roll the earnings into tIRA because I can then roll them back into my 401k.

pyld76
Posts: 181
Joined: Thu Feb 09, 2012 4:15 pm

Re: Aftertax Earnings 401k Rollover to Roth Question

Post by pyld76 » Fri Jul 12, 2019 11:10 am

I roll yearly. I pay the taxes on any earnings because I don't want a tIRA in place screwing up my ability to backdoor my Roth IRA. Alan S (as he usually does) explained brilliantly.

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