celia wrote: ↑Tue Jan 11, 2022 11:30 pm
Here you go:
MrRE wrote: ↑Tue Jan 11, 2022 5:37 pm
So my 2 big questions holding me back are:
1) Am I breaking any IRS rules by rolling over a partial 401k distribution that contains after-tax contributions into a Roth IRA?
2) Why does the IRS rollover chart just say "pre-tax" for allowed rollovers from 401k's to Roth IRA?
First, any kind of Roth account can be rolled into any other Roth account. And any kind of pre-tax account can be rolled into any other pre-tax account.
(Take a minute and look at the IRS Rollover chart to confirm this is true.)
Then any kind of pre-tax account can be rolled over to a Roth account in what is called a Roth conversion and taxes will be due.
(Confirm this on the chart.)
The only thing that is disallowed is rolling Roth or After-tax funds into a pre-tax account. But why would anyone want to do that since taxes were already paid on that money?)
(Confirm this on the chart.)
Now, let’s look at your money.
There are 3 possible kinds of 401K contributions and an employer plan can allow one, two, or all three of these:
contributions are pre-tax. Employer contributions are always in this category. All growth from these are also pre-tax.
contributions are post-tax. All growth from these contributions are also post-tax. Some plans allow you to convert pre-tax contributions and growth to post-tax Roth.
contributions are post-tax too but the growth on them is pre-tax
. Many plans that allow these also allow you to transfer out the After-tax contributions to Roth IRAs frequently to enable tax-free growth instead.
I think some others were like me in not knowing if you were referring to “after-tax contributions” or “After-tax contributions” where the first (lower-case) is an adjective referring to both the Roth and After-tax (second and third categories) or you were referring to After-tax (the last category only). This choice of terminology in the field of finances is unfortunate. This is possibly why it is not in the IRS chart—because it could be mis-read easily.
But everyone familiar with IRAs and 401Ks pretty intuitively know what the chart will say. I think it was created to avoid disagreement on the lesser-known types of rollovers.
I will also admit that I almost always hear of someone withdrawing from a 401K with 2 checks, one to be deposited in a Roth IRA, and one to be deposited in a Rollover (traditional) IRA. But you spoke upfront about requesting one check for both types of money. Between that and trying to understand your terminology, I started thinking the one check was due to not being able to do 2 INDIRECT distributions in the same year. (I thought your 401K administrator was sharp in preventing you from making a rollover error.) But now I see that I was wrong on the “INDIRECT” issue.
1) You can rollover either After-tax or after-tax to a Roth IRA. But the first will be partly a Roth conversion if there is any pre-tax money going in. If you are rolling over post-tax money, that part will be an untaxed rollover.
2) In my opinion, it would lead to lots of confusion if there was a row in the chart for “After-tax 401K” as I described.
The chart also has 401Ks split between two lines. The pre-tax parts are included in "Qualified plan (pre-tax)" and are taxed (footnote 3) while the post-tax parts are included in "Designated Roth Account" as a clean rollover (not taxed). Since the chart is flagging when the rollover (ie, Roth conversion) will be taxed, the Traditional 401K would be included in "Qualified plan (pre-tax)", the Roth 401K would be included in "Designated Roth Account", but how would the "After-tax 401K" (upper case) be shown in this chart when the contributions are rolled over tax-free but the growth is yet to be taxed?
Is there any rationale for why it CAN'T be rolled over?
If you still don't feel comfortable putting the pre-tax part in the Roth IRA, then put it a Rollover (traditional) IRA instead. But, that will make the distribution be tax-free. Then if you convert it to Roth the next day or in a few months, you will have a Roth conversion that will be taxed this year
, instead of last year.
(edited to add to chart rationale)