In-plan rollover of after-tax 401k contributions

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new2bogle
Posts: 1114
Joined: Fri Sep 11, 2009 2:05 pm

In-plan rollover of after-tax 401k contributions

Post by new2bogle » Tue Dec 05, 2017 3:22 pm

My company allows in-plan rollovers of after-tax 401k contributions. My thinking was to do this to get the full benefit limit of $54,000.

When I was reading this page on irs.gov, it made me wonder if I can actually do the rollover of only the after tax amount.

Here's the snippet that is confusing to me:
Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?

No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:

pretax amounts to a traditional IRA or another eligible retirement plan, and
after-tax amounts to a Roth IRA.
The part that is confusing to me is that I can't take a distribution of only the after-tax amounts - that I must include some pretax amounts.

Is that true or am I reading it wrong?

ved
Posts: 653
Joined: Sat Jan 18, 2014 6:56 pm

Re: In-plan rollover of after-tax 401k contributions

Post by ved » Tue Dec 05, 2017 3:53 pm

Think of your 401k account having several sub-accounts:

1. Traditional 401k - with employee pre-tax contributions, and employer matching & discretionary contributions
2. Roth 401k - with post-tax contributions
3. After-Tax 401k: with post-tax contributions

So, what you are doing is having this After-tax sub-account (#3 in the above list) be rolled-over in-service to Roth IRA (or the Roth 401k - #2 in the list above)
Depending on how long you have been contributing to this After-tax account, there maybe gains (or losses) in the account.
What that statement that you quoted from IRS is saying is that, the gains in this after-tax account should also be rolled-over along with the after-tax contributions.

So, you have 2 choices:
Just pay taxes (at an ordinary income level) on the gains in the after-tax account, and rollover both the contributions & gains to a Roth IRA or Roth 401k.
Or, rollover only the after-tax contributions to Roth IRA/Roth 401k. And rollover the gains to a traditional IRA (which could then be rolled over to the Traditional 401k (#1 in the list above ))

new2bogle
Posts: 1114
Joined: Fri Sep 11, 2009 2:05 pm

Re: In-plan rollover of after-tax 401k contributions

Post by new2bogle » Tue Dec 05, 2017 4:17 pm

ved wrote:
Tue Dec 05, 2017 3:53 pm
Think of your 401k account having several sub-accounts:

1. Traditional 401k - with employee pre-tax contributions, and employer matching & discretionary contributions
2. Roth 401k - with post-tax contributions
3. After-Tax 401k: with post-tax contributions

So, what you are doing is having this After-tax sub-account (#3 in the above list) be rolled-over in-service to Roth IRA (or the Roth 401k - #2 in the list above)
Depending on how long you have been contributing to this After-tax account, there maybe gains (or losses) in the account.
What that statement that you quoted from IRS is saying is that, the gains in this after-tax account should also be rolled-over along with the after-tax contributions.

So, you have 2 choices:
Just pay taxes (at an ordinary income level) on the gains in the after-tax account, and rollover both the contributions & gains to a Roth IRA or Roth 401k.
Or, rollover only the after-tax contributions to Roth IRA/Roth 401k. And rollover the gains to a traditional IRA (which could then be rolled over to the Traditional 401k (#1 in the list above ))
Thanks, one more clarification: The IRS snippet is talking about pre-tax amounts that need to be rolled over. I was taking this to mean the pre-tax 401k contribution (#1 in your list), but apparently in this explanation the pretax amount refers to the untaxed gains on the after tax contributions (so pre-taxing of the gains). Correct? (I believe this is where my confusion lies).

Thanks a lot!

SRenaeP
Posts: 643
Joined: Tue Jan 19, 2010 9:05 pm

Re: In-plan rollover of after-tax 401k contributions

Post by SRenaeP » Tue Dec 05, 2017 5:19 pm

I'm also interested in this topic as my employer has just started allowing in-plan Roth conversions. I already have a balance in my after-tax 401k but am considering upping my contributions as much as possible to take advantage. There are penalties for doing an in-service withdrawal so that's not an option I'm considering at this point. Other than the tax impact, are there any downsides to doing this? We're allowed one in-plan Roth conversion per year for a fee of $100 per conversion.

-Steph

Alan S.
Posts: 6948
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: In-plan rollover of after-tax 401k contributions

Post by Alan S. » Tue Dec 05, 2017 7:02 pm

SRenaeP wrote:
Tue Dec 05, 2017 5:19 pm
I'm also interested in this topic as my employer has just started allowing in-plan Roth conversions. I already have a balance in my after-tax 401k but am considering upping my contributions as much as possible to take advantage. There are penalties for doing an in-service withdrawal so that's not an option I'm considering at this point. Other than the tax impact, are there any downsides to doing this? We're allowed one in-plan Roth conversion per year for a fee of $100 per conversion.

-Steph
Some employers are limiting Roth IRA rollovers once in plan Roth rollovers (IRRs) are offered. Generally, if you have a choice, the rollover to a Roth IRA is the better option.

Compared to many plans, limiting IRRs to one per year is restrictive. Adding a $100 fee is also not participant friendly. Don't know why they would need both restrictions, but the added level of plan accounting necessary with IRR adoption does come with a cost. It is not clear how the plan defines a withdrawal, but both an IRR and a direct rollover to an IRA are both distributions and reported as such on a 1099R.

Anytime you can move your after tax contributions from the after tax sub account to a Roth (either 401k or IRA) you should do it. However, if there are to be annual limits, then you should try to contribute the money in a limited time period and then do the distribution at the end of this period to get the funds to a Roth account ASAP so that earnings occur in the Roth and not in the after tax sub account where they will eventually be taxed.

In summary, with the fees and restrictions you are juggling more variables than the usual ones so more detailed planning is required to maximize the benefit. But as long as you can afford the after tax contributions, this option (Known as mega backdoor Roth) is valuable and worth utilizing even with your plan's added restrictions.

SRenaeP
Posts: 643
Joined: Tue Jan 19, 2010 9:05 pm

Re: In-plan rollover of after-tax 401k contributions

Post by SRenaeP » Tue Dec 05, 2017 7:24 pm

Alan S. wrote:
Tue Dec 05, 2017 7:02 pm

Compared to many plans, limiting IRRs to one per year is restrictive. Adding a $100 fee is also not participant friendly. Don't know why they would need both restrictions, but the added level of plan accounting necessary with IRR adoption does come with a cost. It is not clear how the plan defines a withdrawal, but both an IRR and a direct rollover to an IRA are both distributions and reported as such on a 1099R.
Rolling to a Roth IRA would be considered an in-service withdrawal which has a plan-imposed penalty. That's why I'm interested now that they're offering an in-plan conversion option.

-Steph

ved
Posts: 653
Joined: Sat Jan 18, 2014 6:56 pm

Re: In-plan rollover of after-tax 401k contributions

Post by ved » Tue Dec 05, 2017 7:42 pm

new2bogle wrote:
Tue Dec 05, 2017 4:17 pm
ved wrote:
Tue Dec 05, 2017 3:53 pm
Think of your 401k account having several sub-accounts:

1. Traditional 401k - with employee pre-tax contributions, and employer matching & discretionary contributions
2. Roth 401k - with post-tax contributions
3. After-Tax 401k: with post-tax contributions

So, what you are doing is having this After-tax sub-account (#3 in the above list) be rolled-over in-service to Roth IRA (or the Roth 401k - #2 in the list above)
Depending on how long you have been contributing to this After-tax account, there maybe gains (or losses) in the account.
What that statement that you quoted from IRS is saying is that, the gains in this after-tax account should also be rolled-over along with the after-tax contributions.

So, you have 2 choices:
Just pay taxes (at an ordinary income level) on the gains in the after-tax account, and rollover both the contributions & gains to a Roth IRA or Roth 401k.
Or, rollover only the after-tax contributions to Roth IRA/Roth 401k. And rollover the gains to a traditional IRA (which could then be rolled over to the Traditional 401k (#1 in the list above ))
Thanks, one more clarification: The IRS snippet is talking about pre-tax amounts that need to be rolled over. I was taking this to mean the pre-tax 401k contribution (#1 in your list), but apparently in this explanation the pretax amount refers to the untaxed gains on the after tax contributions (so pre-taxing of the gains). Correct? (I believe this is where my confusion lies).

Thanks a lot!
Correct. The pre-tax is the gains in the after-tax account.

SJR
Posts: 99
Joined: Sun Aug 02, 2015 10:51 am

Re: In-plan rollover of after-tax 401k contributions

Post by SJR » Tue Dec 05, 2017 8:49 pm

ved wrote:
Tue Dec 05, 2017 7:42 pm
new2bogle wrote:
Tue Dec 05, 2017 4:17 pm
ved wrote:
Tue Dec 05, 2017 3:53 pm
Think of your 401k account having several sub-accounts:

1. Traditional 401k - with employee pre-tax contributions, and employer matching & discretionary contributions
2. Roth 401k - with post-tax contributions
3. After-Tax 401k: with post-tax contributions

So, what you are doing is having this After-tax sub-account (#3 in the above list) be rolled-over in-service to Roth IRA (or the Roth 401k - #2 in the list above)
Depending on how long you have been contributing to this After-tax account, there maybe gains (or losses) in the account.
What that statement that you quoted from IRS is saying is that, the gains in this after-tax account should also be rolled-over along with the after-tax contributions.

So, you have 2 choices:
Just pay taxes (at an ordinary income level) on the gains in the after-tax account, and rollover both the contributions & gains to a Roth IRA or Roth 401k.
Or, rollover only the after-tax contributions to Roth IRA/Roth 401k. And rollover the gains to a traditional IRA (which could then be rolled over to the Traditional 401k (#1 in the list above ))
Thanks, one more clarification: The IRS snippet is talking about pre-tax amounts that need to be rolled over. I was taking this to mean the pre-tax 401k contribution (#1 in your list), but apparently in this explanation the pretax amount refers to the untaxed gains on the after tax contributions (so pre-taxing of the gains). Correct? (I believe this is where my confusion lies).

Thanks a lot!
Correct. The pre-tax is the gains in the after-tax account.
I've been reading up a lot on this the last few days. (seems that there are more posts on this forum lately as well on this topic)
My tax advisor/accountant seems to think that it's not 100% -absolutely, without a doubt- ok to do this.
We reviewed multiple IRS notices and publications and the IRS does not specify that separate sub-accounts are independent of each other in a single plan and would therefore not be subject to the pro-rata rule. For tax purposes, he believes they are all considered one until the IRS states otherwise.

It seems that there are a select few who share this viewpoint, and most disagree. I personally think that it's ok (at the very least, questionable enough that it's doubtful that the IRS would cause an issue about it), but I would not go ahead with this without his blessing.

To that end, I am considering this solution: Max out the after-tax portion at the beginning of each year, and then rollover all sub-accounts. Pre-tax to tIRA and after-tax to rIRA. Then roll the tIRA right back into the pre-tax subaccount in my 401k. I assume this should cover all questions regarding the pro-rata rule, correct?

One other thing that he is questioning as well, and for which I do not have the answer- where can I find a source that allows a 401k plan to allow in-service non-hardship distributions. I would need this proverbial OK, in order for this to work properly.

Alan S.
Posts: 6948
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: In-plan rollover of after-tax 401k contributions

Post by Alan S. » Tue Dec 05, 2017 9:05 pm

SRenaeP wrote:
Tue Dec 05, 2017 7:24 pm
Alan S. wrote:
Tue Dec 05, 2017 7:02 pm

Compared to many plans, limiting IRRs to one per year is restrictive. Adding a $100 fee is also not participant friendly. Don't know why they would need both restrictions, but the added level of plan accounting necessary with IRR adoption does come with a cost. It is not clear how the plan defines a withdrawal, but both an IRR and a direct rollover to an IRA are both distributions and reported as such on a 1099R.
Rolling to a Roth IRA would be considered an in-service withdrawal which has a plan-imposed penalty. That's why I'm interested now that they're offering an in-plan conversion option.

-Steph
Both a direct rollover to a Roth IRA and an IRR are technically distributions. While a "withdrawal" is an unofficial term, be sure that the plan provision is clear that the withdrawal penalty only applies if funds are actually removed from the plan, and not when distributed from one part of the plan. If so, this could be a sign that eventually the plan will consider eliminating in service "withdrawals" from the after tax sub account.

SonnyDMB
Posts: 6
Joined: Sun Nov 26, 2017 5:48 pm

Re: In-plan rollover of after-tax 401k contributions

Post by SonnyDMB » Wed Dec 06, 2017 12:19 am

SJR, I went thru the same process with my tax guy. Page 17 in publication 575 is what got me comfortable
https://www.irs.gov/pub/irs-pdf/p575.pdf

Key Excerpt:
Defined contribution plan. A defined contribution plan is a plan in which you have an individual account. Your benefits are based only on the amount contributed to the account and the income, gains or losses, etc., which may be allocated to that account. Under a defined contribution plan, your contributions (and income allocable to those contributions) may be treated as a separate contract for figuring the taxable part of any distribution. The employer contributions (and income allocable to those contribu- tions) wouldn't be considered part of that separate con- tract.

Example. Ryan participates in a defined contribution plan that treats employee contributions and earnings allo- cable to them as a separate contract. He received a non-annuity distribution of $5,000 before his annuity start- ing date. He had made after-tax contributions of $10,000. The earnings allocable to his contributions were $2,500. His employer also contributed $10,000. The earnings allo- cable to the employer contributions were $2,500.

To determine the tax-free amount of Ryan's distribu- tion, use the same formula shown above. However, be- cause employee contributions are treated as a separate contract, the account balance would be the total of Ryan's contributions and allocable earnings.

Thus the tax-free amount would be $5,000 × ($10,000 ÷ $12,500) = $4,000. The taxable amount would be $1,000 ($5,000 - $4,000).

If the employee contributions weren't treated as a sepa- rate contract, the tax-free amount would be $2,000 ($5,000 × ($10,000 ÷ $25,000)) and the taxable amount would be $3,000 ($5,000 - $2,000).


Note: Employee contribution is the after-tax voluntary contributions. Elective deferrals are actually employer contributions (elected by the participant/employee and contributed by the employer)
http://fairmark.com/retirement/roth-acc ... treatment/

Hope this helps.

SRenaeP
Posts: 643
Joined: Tue Jan 19, 2010 9:05 pm

Re: In-plan rollover of after-tax 401k contributions

Post by SRenaeP » Wed Dec 06, 2017 8:15 am

Alan S. wrote:
Tue Dec 05, 2017 9:05 pm
SRenaeP wrote:
Tue Dec 05, 2017 7:24 pm
Alan S. wrote:
Tue Dec 05, 2017 7:02 pm

Compared to many plans, limiting IRRs to one per year is restrictive. Adding a $100 fee is also not participant friendly. Don't know why they would need both restrictions, but the added level of plan accounting necessary with IRR adoption does come with a cost. It is not clear how the plan defines a withdrawal, but both an IRR and a direct rollover to an IRA are both distributions and reported as such on a 1099R.
Rolling to a Roth IRA would be considered an in-service withdrawal which has a plan-imposed penalty. That's why I'm interested now that they're offering an in-plan conversion option.

-Steph
Both a direct rollover to a Roth IRA and an IRR are technically distributions. While a "withdrawal" is an unofficial term, be sure that the plan provision is clear that the withdrawal penalty only applies if funds are actually removed from the plan, and not when distributed from one part of the plan. If so, this could be a sign that eventually the plan will consider eliminating in service "withdrawals" from the after tax sub account.
The penalty only applies if funds are completely removed from the plan. "In-service withdrawal" and "in-plan Roth conversion" are the terms used in the plan document. I suspect they may remove the in-service withdrawal ability altogether. I can't imagine many people use it in light of the penalty that would be imposed.

-Steph

SJR
Posts: 99
Joined: Sun Aug 02, 2015 10:51 am

Re: In-plan rollover of after-tax 401k contributions

Post by SJR » Wed Dec 06, 2017 9:45 am

SonnyDMB wrote:
Wed Dec 06, 2017 12:19 am
SJR, I went thru the same process with my tax guy. Page 17 in publication 575 is what got me comfortable
https://www.irs.gov/pub/irs-pdf/p575.pdf

Key Excerpt:
Defined contribution plan. A defined contribution plan is a plan in which you have an individual account. Your benefits are based only on the amount contributed to the account and the income, gains or losses, etc., which may be allocated to that account. Under a defined contribution plan, your contributions (and income allocable to those contributions) may be treated as a separate contract for figuring the taxable part of any distribution. The employer contributions (and income allocable to those contribu- tions) wouldn't be considered part of that separate con- tract.

Example. Ryan participates in a defined contribution plan that treats employee contributions and earnings allo- cable to them as a separate contract. He received a non-annuity distribution of $5,000 before his annuity start- ing date. He had made after-tax contributions of $10,000. The earnings allocable to his contributions were $2,500. His employer also contributed $10,000. The earnings allo- cable to the employer contributions were $2,500.

To determine the tax-free amount of Ryan's distribu- tion, use the same formula shown above. However, be- cause employee contributions are treated as a separate contract, the account balance would be the total of Ryan's contributions and allocable earnings.

Thus the tax-free amount would be $5,000 × ($10,000 ÷ $12,500) = $4,000. The taxable amount would be $1,000 ($5,000 - $4,000).

If the employee contributions weren't treated as a sepa- rate contract, the tax-free amount would be $2,000 ($5,000 × ($10,000 ÷ $25,000)) and the taxable amount would be $3,000 ($5,000 - $2,000).


Note: Employee contribution is the after-tax voluntary contributions. Elective deferrals are actually employer contributions (elected by the participant/employee and contributed by the employer)
http://fairmark.com/retirement/roth-acc ... treatment/

Hope this helps.
This is huge. Thank you very much. Would have taken me many more hours to have found this, assuming I'd have found it at all.

This would seem to allow irr or rollover to rIRA.

I think that all the bases have been covered at this point.

Until now the best I had was this section of: Ruling 2004-12.

The rules restricting the timing of distributions, other than those relating to required
minimum distributions under § 401(a)(9), generally apply to employer contributions made
to the plan or annuity. For example, §§ 401(k)(2)(B) and 403(b)(11) prohibit the
distribution of employer contributions that are elective deferrals (within the meaning of
§ 402(g)(3)) prior to the occurrence of certain events. Section 403(b)(7)(A)(ii) provides
that employer contributions to custodial accounts treated as § 403(b) tax-sheltered
annuities may not be distributed prior to the occurrence of certain events. Section
457(d)(1)(A) provides generally that an eligible plan meets the distribution requirements of
§ 457(d) if under the plan amounts will not be made available to participants or
beneficiaries earlier than the calendar year in which the participant attains age 70 1/2 or
when the participant has a severance from employment. Similarly, regulations under
§ 401 provide general rules regarding the timing of distributions of employer contributions
to pension, profit-sharing and stock bonus plans (see § 1.401-1(b)(1)(i), (ii) and (iii)). Thus,
§ 1.401-1(b)(1)(i) provides that a pension plan is a plan established and maintained by an
employer primarily to provide systematically for the payment of definitely determinable
benefits to employees over a period of years, usually for life, after retirement. The Service
has interpreted this to mean that employer contributions to a pension plan may not be
distributed prior to retirement, death, disability or other severance from employment, or
termination of the plan.

Rev. Rul. 69-277, 1969-1 C.B. 116, and Rev. Rul. 94-76, 1994-2 C.B. 46, address
distributions of other types of contributions. Rev. Rul. 69-277 provides that a pension plan
may permit distribution to an employee of amounts attributable to the employee's after-tax
contributions prior to the employee's termination of employment. Rev. Rul. 94-76 provides
that a profit-sharing plan may permit the immediate distribution of amounts attributable to a
rollover.


In essence I was extrapolating that if elective deferrals are only able to be accessed at certain times, while employee after-tax contributions don't have those restrictions, then the pro rata rule would not apply provided that those circumstances aren't present.

new2bogle
Posts: 1114
Joined: Fri Sep 11, 2009 2:05 pm

Re: In-plan rollover of after-tax 401k contributions

Post by new2bogle » Wed Dec 06, 2017 11:27 am

Wow, that was a lot of IRS reading I had to do last night :|

It seems like then that if the plan allows, then going from after-tax to my personal Roth IRA is the best option. My employer does allow this but provides no information, literally they said "We now allow in-plan rollovers, check with Fidelity on how to do this." Fidelity agreed and said I could do it as often as every paycheck from after-tax 401k to my personal (i.e., not 401k associated) Roth IRA. With additional information from you guys here I am now thinking I am good to go (Fidelity didn't calm all my fears the way you guys do here!).

Thanks for the information and continued support!

SJR
Posts: 99
Joined: Sun Aug 02, 2015 10:51 am

Re: In-plan rollover of after-tax 401k contributions

Post by SJR » Wed Dec 06, 2017 12:52 pm

SonnyDMB wrote:
Wed Dec 06, 2017 12:19 am
SJR, I went thru the same process with my tax guy. Page 17 in publication 575 is what got me comfortable
https://www.irs.gov/pub/irs-pdf/p575.pdf

Key Excerpt:
Defined contribution plan. A defined contribution plan is a plan in which you have an individual account. Your benefits are based only on the amount contributed to the account and the income, gains or losses, etc., which may be allocated to that account. Under a defined contribution plan, your contributions (and income allocable to those contributions) may be treated as a separate contract for figuring the taxable part of any distribution. The employer contributions (and income allocable to those contribu- tions) wouldn't be considered part of that separate con- tract.

Example. Ryan participates in a defined contribution plan that treats employee contributions and earnings allo- cable to them as a separate contract. He received a non-annuity distribution of $5,000 before his annuity start- ing date. He had made after-tax contributions of $10,000. The earnings allocable to his contributions were $2,500. His employer also contributed $10,000. The earnings allo- cable to the employer contributions were $2,500.

To determine the tax-free amount of Ryan's distribu- tion, use the same formula shown above. However, be- cause employee contributions are treated as a separate contract, the account balance would be the total of Ryan's contributions and allocable earnings.

Thus the tax-free amount would be $5,000 × ($10,000 ÷ $12,500) = $4,000. The taxable amount would be $1,000 ($5,000 - $4,000).

If the employee contributions weren't treated as a sepa- rate contract, the tax-free amount would be $2,000 ($5,000 × ($10,000 ÷ $25,000)) and the taxable amount would be $3,000 ($5,000 - $2,000).


Note: Employee contribution is the after-tax voluntary contributions. Elective deferrals are actually employer contributions (elected by the participant/employee and contributed by the employer)
http://fairmark.com/retirement/roth-acc ... treatment/

Hope this helps.
Sonny, I know I replied above that this looks great, but my CPA shot it down.

Here is his reply:

"I know very little about annuities, I'd have to study that publication. However, I don't think what you're quoting has anything to do with this. When you get a distribution from an annuity, part of it is recovery of capital, part is income. If the pre-tax and after-tax accounts hold different contracts the taxable portion of distributions will be different.

I don't see how plan documents can control against IRS rules. Therefore Rev. Rul. 69-277 seems to be useless unless there is no pre-tax money in the 401(k). So you can put money in after-tax 401(k), you just can't roll it over unless you first convert the pre-tax money to a Roth.

Also, notice 2014-54 says annuities are subject to different rules.

If a participant’s account balance in a plan qualified under § 401(a) or in a § 403(b) plan includes both after-tax and pretax amounts, then, under § 72(e)(8), each distribution from the account (other than a distribution that is paid as part of an annuity, which is subject to a different rule) will include a pro rata share of both after-tax and pretax amounts."

I feel like I'm back a square one here on this pro-rata issue. I personally don't know anything about annuities so your post sounded great but I didn't truly understand it, I guess.

SonnyDMB
Posts: 6
Joined: Sun Nov 26, 2017 5:48 pm

Re: In-plan rollover of after-tax 401k contributions

Post by SonnyDMB » Wed Dec 06, 2017 4:56 pm

The publication name of 'pensions & annuity income' had thrown me off as well. Some additional pages i would read is page 2, 15, 16. I'd have your tax person review it thoroughly, as i see they mention "I'd have to study that publication". While i'm not a tax accountant, it certainly says to me it applies to qualified profit sharing plans (aka 401k). Fairmark referencing it is also of significance. Some excerpts from those pages:

"What is covered in this publication? This publication contains information that you need to understand the fol- lowing topics:"

" How to figure the tax-free part of nonperiodic pay- ments from qualified and nonqualified plans, and how to use the optional methods to figure the tax on lump-sum distributions from pension, stock bonus, and profit-sharing plans.
How to roll over certain distributions from a retirement plan into another retirement plan or IRA. "

"non periodic distributions are also known as amounts not received as an annuity"

"For this purpose, a qualified retirement plan is:
A qualified employee plan (or annuity contract pur- chased by such a plan),
A qualified employee annuity plan, or
A tax-sheltered annuity plan (403(b) plan)."

and then it gets into the defined contribution plan aspects....posted in prior post.

let me know what you here after your tax person has some time for a closer look. I know the title of the publication didn't resonate with me but after fairmark referenced it and it discussed the aspects I highlighted, it certainly seems it applies. (note: page 30 specifically discusses 401k related to in-plan roth rollover....aka, there are clearly parts of this publication that applies to 401k plans....for the most part they use the more generic term of 'qualified plan' when they are referring to 401k)

EddyB
Posts: 359
Joined: Fri May 24, 2013 3:43 pm

Re: In-plan rollover of after-tax 401k contributions

Post by EddyB » Wed Dec 06, 2017 7:06 pm

SonnyDMB wrote:
Wed Dec 06, 2017 12:19 am
SJR, I went thru the same process with my tax guy. Page 17 in publication 575 is what got me comfortable
https://www.irs.gov/pub/irs-pdf/p575.pdf

Key Excerpt:
Defined contribution plan. A defined contribution plan is a plan in which you have an individual account. Your benefits are based only on the amount contributed to the account and the income, gains or losses, etc., which may be allocated to that account. Under a defined contribution plan, your contributions (and income allocable to those contributions) may be treated as a separate contract for figuring the taxable part of any distribution. The employer contributions (and income allocable to those contribu- tions) wouldn't be considered part of that separate con- tract.

Example. Ryan participates in a defined contribution plan that treats employee contributions and earnings allo- cable to them as a separate contract. He received a non-annuity distribution of $5,000 before his annuity start- ing date. He had made after-tax contributions of $10,000. The earnings allocable to his contributions were $2,500. His employer also contributed $10,000. The earnings allo- cable to the employer contributions were $2,500.

To determine the tax-free amount of Ryan's distribu- tion, use the same formula shown above. However, be- cause employee contributions are treated as a separate contract, the account balance would be the total of Ryan's contributions and allocable earnings.

Thus the tax-free amount would be $5,000 × ($10,000 ÷ $12,500) = $4,000. The taxable amount would be $1,000 ($5,000 - $4,000).

If the employee contributions weren't treated as a sepa- rate contract, the tax-free amount would be $2,000 ($5,000 × ($10,000 ÷ $25,000)) and the taxable amount would be $3,000 ($5,000 - $2,000).


Note: Employee contribution is the after-tax voluntary contributions. Elective deferrals are actually employer contributions (elected by the participant/employee and contributed by the employer)
http://fairmark.com/retirement/roth-acc ... treatment/

Hope this helps.
Also look at these other Fairmark articles:

http://fairmark.com/retirement/roth-acc ... onversion/
http://fairmark.com/retirement/roth-acc ... ion-rules/

Although I'm not a fan of forum shopping, if your CPA doesn't think this works, it's time for a new CPA.

SJR
Posts: 99
Joined: Sun Aug 02, 2015 10:51 am

Re: In-plan rollover of after-tax 401k contributions

Post by SJR » Sun Dec 10, 2017 9:01 pm

SonnyDMB wrote:
Wed Dec 06, 2017 4:56 pm
The publication name of 'pensions & annuity income' had thrown me off as well. Some additional pages i would read is page 2, 15, 16. I'd have your tax person review it thoroughly, as i see they mention "I'd have to study that publication". While i'm not a tax accountant, it certainly says to me it applies to qualified profit sharing plans (aka 401k). Fairmark referencing it is also of significance. Some excerpts from those pages:

"What is covered in this publication? This publication contains information that you need to understand the fol- lowing topics:"

" How to figure the tax-free part of nonperiodic pay- ments from qualified and nonqualified plans, and how to use the optional methods to figure the tax on lump-sum distributions from pension, stock bonus, and profit-sharing plans.
How to roll over certain distributions from a retirement plan into another retirement plan or IRA. "

"non periodic distributions are also known as amounts not received as an annuity"

"For this purpose, a qualified retirement plan is:
A qualified employee plan (or annuity contract pur- chased by such a plan),
A qualified employee annuity plan, or
A tax-sheltered annuity plan (403(b) plan)."

and then it gets into the defined contribution plan aspects....posted in prior post.

let me know what you here after your tax person has some time for a closer look. I know the title of the publication didn't resonate with me but after fairmark referenced it and it discussed the aspects I highlighted, it certainly seems it applies. (note: page 30 specifically discusses 401k related to in-plan roth rollover....aka, there are clearly parts of this publication that applies to 401k plans....for the most part they use the more generic term of 'qualified plan' when they are referring to 401k)

He's still not convinced. I've been throwing whatever I got at him and I have nothing left. He has shown me explicitly where the pro-rata rule is written and is absolute, and unless he sees something equally explicit, it does not seem that he will roll over.

EddyB wrote:
Wed Dec 06, 2017 7:06 pm
SonnyDMB wrote:
Wed Dec 06, 2017 12:19 am
SJR, I went thru the same process with my tax guy. Page 17 in publication 575 is what got me comfortable
https://www.irs.gov/pub/irs-pdf/p575.pdf

Key Excerpt:
Defined contribution plan. A defined contribution plan is a plan in which you have an individual account. Your benefits are based only on the amount contributed to the account and the income, gains or losses, etc., which may be allocated to that account. Under a defined contribution plan, your contributions (and income allocable to those contributions) may be treated as a separate contract for figuring the taxable part of any distribution. The employer contributions (and income allocable to those contribu- tions) wouldn't be considered part of that separate con- tract.

Example. Ryan participates in a defined contribution plan that treats employee contributions and earnings allo- cable to them as a separate contract. He received a non-annuity distribution of $5,000 before his annuity start- ing date. He had made after-tax contributions of $10,000. The earnings allocable to his contributions were $2,500. His employer also contributed $10,000. The earnings allo- cable to the employer contributions were $2,500.

To determine the tax-free amount of Ryan's distribu- tion, use the same formula shown above. However, be- cause employee contributions are treated as a separate contract, the account balance would be the total of Ryan's contributions and allocable earnings.

Thus the tax-free amount would be $5,000 × ($10,000 ÷ $12,500) = $4,000. The taxable amount would be $1,000 ($5,000 - $4,000).

If the employee contributions weren't treated as a sepa- rate contract, the tax-free amount would be $2,000 ($5,000 × ($10,000 ÷ $25,000)) and the taxable amount would be $3,000 ($5,000 - $2,000).


Note: Employee contribution is the after-tax voluntary contributions. Elective deferrals are actually employer contributions (elected by the participant/employee and contributed by the employer)
http://fairmark.com/retirement/roth-acc ... treatment/

Hope this helps.
Also look at these other Fairmark articles:

http://fairmark.com/retirement/roth-acc ... onversion/
http://fairmark.com/retirement/roth-acc ... ion-rules/

Although I'm not a fan of forum shopping, if your CPA doesn't think this works, it's time for a new CPA.
I read those articles and got really excited after reading the second one. Thought that it would be enough. It wasn't. He's not a tax lawyer obviously, so certain aspects of this whole shindig would not be among his strengths. He's kind of black and white if that makes any sense.

I may need to find a reputable tax lawyer who I can consult with or have him speak with. My understanding and knowledge is limited (even though I have spent countless hours reading and researching this) and paraphrasing others and copy/pasting what they write doesn't seem to be working.

If anyone else has any other suggestions, I would really appreciate it.

EddyB
Posts: 359
Joined: Fri May 24, 2013 3:43 pm

Re: In-plan rollover of after-tax 401k contributions

Post by EddyB » Mon Dec 11, 2017 12:10 am

Does your plan permit in-service distributions of pre-tax contributions? If it doesn’t, then what does your CPA think is going to be distributed?

If your plan does permit in-service withdrawals of pre-tax contributions (which would be rare), does it also accept incoming rollovers (which is not so rare)? If so, why can’t you just split the the pre-tax and after-tax amounts of the withdrawal into two checks (per https://www.irs.gov/pub/irs-drop/n-14-54.pdf, see example 4), roll the after-tax money in your Roth and the pre-tax money into a traditional IRA, and then roll that right back to your 401(k)? That’s a lot of work to make your CPA happy, but would seem to address his (misguided) objection.

Also check out this article if you haven’t seen it already: http://fairmark.com/retirement/roth-acc ... yer-plans/

SJR
Posts: 99
Joined: Sun Aug 02, 2015 10:51 am

Re: In-plan rollover of after-tax 401k contributions

Post by SJR » Mon Dec 11, 2017 8:49 am

EddyB wrote:
Mon Dec 11, 2017 12:10 am
Does your plan permit in-service distributions of pre-tax contributions? If it doesn’t, then what does your CPA think is going to be distributed?

If your plan does permit in-service withdrawals of pre-tax contributions (which would be rare), does it also accept incoming rollovers (which is not so rare)? If so, why can’t you just split the the pre-tax and after-tax amounts of the withdrawal into two checks (per https://www.irs.gov/pub/irs-drop/n-14-54.pdf, see example 4), roll the after-tax money in your Roth and the pre-tax money into a traditional IRA, and then roll that right back to your 401(k)? That’s a lot of work to make your CPA happy, but would seem to address his (misguided) objection.

Also check out this article if you haven’t seen it already: http://fairmark.com/retirement/roth-acc ... yer-plans/
My accountant didn't bite at that argument. I actually have not set up the 401k yet and will be able to custom make it to my specifications. He basically said that if the pro rata rule is in effect, then he doesn't see how the plan's rule of not allowing pre-tax to be distributed would overrule the pro rata rule. Essentially, one would not be able to withdraw at all because the plan doesn't allow pre-tax to be removed and the pro rata rule requires that it be removed. He basically flipped the hypothetical on its head. I know that it's an extreme argument but based on my research his point is valid. At least enough to discard that circumstantial logic.

I considered doing it the long way which you suggested, but I haven't found a source that allows you to create a plan that allows pretax (from elective deferrals) distributions without a triggering event (while in service). Would you have one ?

I read the article you quoted which lead me to another article which is what sonnydmb was referring to if I'm not mistaken.

http://fairmark.com/retirement/roth-acc ... treatment/

I emailed both the article you quoted and the above one to my accountant. Waiting to hear back.

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