Old Employer 401k Rollover...

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Topic Author
Clarice
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Joined: Thu Jun 14, 2018 3:26 pm
Location: Northern NJ

Old Employer 401k Rollover...

Post by Clarice » Fri May 17, 2019 6:25 pm

Thanks in advance. Spent a ton of time reading beforehand but now need collective wisdom.

Rolled over my 401k from my old employer. I had previously contributed pre-tax and after-tax (non-Roth). The after-tax contributions had earnings.

On the phone with the reps, I was told that the pre-tax contributions and the after-tax earnings would roll into the rollover IRA, no tax impact. Separately, I was told the after-tax contributions would roll into the Roth, no tax impact.

Everything I read in advance of this transaction led me to believe that rolling the after-tax earnings (not an in-kind transfer) would result in realized gains and be therefore be taxable. I was also under the impression that the after-tax earnings had to roll into the Roth.

Am I misunderstanding? Can I truly roll the after-tax earnings into the RIRA without a tax impact? I’ve always been concerned about commingling funds, is there a down-the-road issue here...?

Thank you very much team.

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cheese_breath
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Re: Old Employer 401k Rollover...

Post by cheese_breath » Fri May 17, 2019 6:38 pm

I believe the earnings will be taxable, but not until you withdraw them or convert them into a Roth.
The surest way to know the future is when it becomes the past.

fabdog
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Location: Williamsburg VA

Re: Old Employer 401k Rollover...

Post by fabdog » Fri May 17, 2019 7:41 pm

On the phone with the reps, I was told that the pre-tax contributions and the after-tax earnings would roll into the rollover IRA, no tax impact. Separately, I was told the after-tax contributions would roll into the Roth, no tax impact.
What they told you is correct.
Am I misunderstanding? Can I truly roll the after-tax earnings into the RIRA without a tax impact? I’ve always been concerned about commingling funds, is there a down-the-road issue here...?
Assuming RIRA means Roth IRA, This is not what they told you, and no, you cannot roll the earnings from the after tax contributions into a Roth with no tax impact. If you roll the earnings on the after tax contributions into your Roth, that will be a taxable event.

If by RIRA you mean the rollover IRA, then yes, it is correct. There is no "commingling" these are all funds that have not been taxed. The earnings on your post tax contributions are treated the same as your earnings on the pre tax

In summary, to have no tax impact

401(k) pretax- rollover IRa
Post tax contributions- To Roth IRA
Earnings on post tax- to Rollover IRa along with the pre tax contributions

Mike

lakpr
Posts: 1449
Joined: Fri Mar 18, 2011 9:59 am

Re: Old Employer 401k Rollover...

Post by lakpr » Fri May 17, 2019 9:08 pm

Clarice wrote:
Fri May 17, 2019 6:25 pm
Everything I read in advance of this transaction led me to believe that rolling the after-tax earnings (not an in-kind transfer) would result in realized gains and be therefore be taxable. I was also under the impression that the after-tax earnings had to roll into the Roth.
It definitely depends on the plan. There are some plans which refuse to separate earnings from post tax contributions when rolling them out, so in such cases you are stuck having to pay taxes on the earnings that will be moved into Roth IRA.

Topic Author
Clarice
Posts: 64
Joined: Thu Jun 14, 2018 3:26 pm
Location: Northern NJ

Re: Old Employer 401k Rollover...

Post by Clarice » Fri May 17, 2019 10:29 pm

fabdog wrote:
Fri May 17, 2019 7:41 pm
On the phone with the reps, I was told that the pre-tax contributions and the after-tax earnings would roll into the rollover IRA, no tax impact. Separately, I was told the after-tax contributions would roll into the Roth, no tax impact.
What they told you is correct.
Am I misunderstanding? Can I truly roll the after-tax earnings into the RIRA without a tax impact? I’ve always been concerned about commingling funds, is there a down-the-road issue here...?
Assuming RIRA means Roth IRA, This is not what they told you, and no, you cannot roll the earnings from the after tax contributions into a Roth with no tax impact. If you roll the earnings on the after tax contributions into your Roth, that will be a taxable event.

If by RIRA you mean the rollover IRA, then yes, it is correct. There is no "commingling" these are all funds that have not been taxed. The earnings on your post tax contributions are treated the same as your earnings on the pre tax

In summary, to have no tax impact

401(k) pretax- rollover IRa
Post tax contributions- To Roth IRA
Earnings on post tax- to Rollover IRa along with the pre tax contributions

Mike
Perfect. Thank you. I was worried I might have been getting told a story. Awesome.

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

Re: Old Employer 401k Rollover...

Post by Spirit Rider » Fri May 17, 2019 11:13 pm

lakpr wrote:
Fri May 17, 2019 9:08 pm
Clarice wrote:
Fri May 17, 2019 6:25 pm
Everything I read in advance of this transaction led me to believe that rolling the after-tax earnings (not an in-kind transfer) would result in realized gains and be therefore be taxable. I was also under the impression that the after-tax earnings had to roll into the Roth.
It definitely depends on the plan. There are some plans which refuse to separate earnings from post tax contributions when rolling them out, so in such cases you are stuck having to pay taxes on the earnings that will be moved into Roth IRA.
Actually, a plan can not refuse to separate employee after-tax contributions and pre-tax earnings. They can only insist on allowing just one direct rollover instead of a split rollover. If you do a single rollover of both to a Roth IRA, the pre-tax earnings will be taxable.

However, even if they only allow one direct rollover, you can do a direct rollover of the pre-tax earnings to a traditional IRA and they must allow you to take a distribution of the employee after-tax contributions. You can then deposit that distribution in your personal account and do a 60-day indirect rollover into a Roth IRA. This achieves the same end result as a split rollover. Both rollovers are tax-free.

Topic Author
Clarice
Posts: 64
Joined: Thu Jun 14, 2018 3:26 pm
Location: Northern NJ

Re: Old Employer 401k Rollover...

Post by Clarice » Sun May 19, 2019 10:36 pm

Spirit Rider wrote:
Fri May 17, 2019 11:13 pm
lakpr wrote:
Fri May 17, 2019 9:08 pm
Clarice wrote:
Fri May 17, 2019 6:25 pm
Everything I read in advance of this transaction led me to believe that rolling the after-tax earnings (not an in-kind transfer) would result in realized gains and be therefore be taxable. I was also under the impression that the after-tax earnings had to roll into the Roth.
It definitely depends on the plan. There are some plans which refuse to separate earnings from post tax contributions when rolling them out, so in such cases you are stuck having to pay taxes on the earnings that will be moved into Roth IRA.
Actually, a plan can not refuse to separate employee after-tax contributions and pre-tax earnings. They can only insist on allowing just one direct rollover instead of a split rollover. If you do a single rollover of both to a Roth IRA, the pre-tax earnings will be taxable.

However, even if they only allow one direct rollover, you can do a direct rollover of the pre-tax earnings to a traditional IRA and they must allow you to take a distribution of the employee after-tax contributions. You can then deposit that distribution in your personal account and do a 60-day indirect rollover into a Roth IRA. This achieves the same end result as a split rollover. Both rollovers are tax-free.
Odd that this wasn’t mentioned at all. I’m working with Fidelity. They’ve insisted on one direct rollover Of everything pre-tax (both pre-tax contributions and earnings on after-tax contributions) to my rollover IRA. The after-tax contributions would roll to the Roth. @spirit rider, this sounds conflicting with your statement, can you please elaborate? Thank you.

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