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My broker tells me that after tax 401k assets may be rolled directly to a
Roth IRA, with no tax consequence now or ever - ie. future earnings would be
tax free. I'd appreciate a pointer to an official explanation/confirmation
of this assertion.
The link below appears relevant, but is focused on a "Designated Roth
Account, apparently newly defined by the IRS from 2007 on. My situation
relates to after tax contributions to a 401k made years ago.
http://www.irs.gov/retirement/article/0,,id=152956,0
0.html#rollovers
Thanks for any help.
-Ron
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Ron wrote:
> My broker tells me that after tax 401k assets may be rolled directly
> to a Roth IRA, with no tax consequence now or ever - ie. future
> earnings would be tax free. I'd appreciate a pointer to an official
> explanation/confirmation of this assertion.
If your plan allows rolling over after-tax contributions, and it allows
rolling directly to a Roth, then maybe. If your contributions were made
prior to 1987, you are good to go and can ignore the rest of this
message.
The thing you have to be aware of is that any after-tax contributions
that were made post-1986 will bring a share of taxable earnings with
them. So you can't designate only after-tax contributions in that case,
and if you go directly to a Roth you'd have to pay the taxes (but not
penalty) on the earnings portion. Your plan should be able to give you
a breakdown of how much taxable money will get dragged along. If you
can handle paying the tax on the earning, you can stop once again.
Don't pay it out of the IRA itself though.
There is a way to extract only the non-taxable portion, but it's more
roundabout. You can also roll money from a traditional IRA to a
qualified plan. However, the law states that only taxable funds can go.
This is an explicit exception to the pro-rata distribution rule for
traditional IRAs.
Here's an example. Suppose you have $5000 in after-tax contributions,
which have $3000 in associated earnings.
1. Roll over all after-tax contributions to a TIRA. You end up with
$8000 in it. You must must must file IRS Form 8606 to establish the
non-taxable cost basis.
2. Roll $3000 back to your 401(k). Now you have $3000 taxable back
there, and $5000 non-taxable (the basis) left in the TIRA. Now you can
transfer this to a Roth or convert the TIRA to a Roth, whichever works
best with your situation.
3. If your plan allows rolling over roll-over contributions (mine does)
you can further roll that $3000 taxable back out into a TIRA. Then you
could convert parts each year if you wanted or leave it as as
tax-deferred. This is useful if your plan isn't that great or if there
are things like TIPS that you can't get in it.
Brian
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> The thing you have to be aware of is that any after-tax contributions
> that were made post-1986 will bring a share of taxable earnings with
> them. So you can't designate only after-tax contributions in that case,
> and if you go directly to a Roth you'd have to pay the taxes (but not
> penalty) on the earnings portion.
They didn't tell me that part!
The "broker" is Fidelity, and since they administer the 401k (via
Netbenefits), I figured they know how this works. I guess I need to get
finer granularity from them. Most of my after-tax contributions are
pre-1986, but not all. The online statement breaks the assets down by
"source," including "after-tax," but not further into pre and post 1986.
So far IRS pub 575, p. 29 is as close as I've found to the official
pronouncement. I also finally located (online) some detail of my 401k plan
that corroborates the distribution requirement for post-1986 after tax
contributions.
Thank you for the detailed and clear response!
Ron
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Ron wrote:
> > The thing you have to be aware of is that any after-tax
> > contributions that were made post-1986 will bring a share of
> > taxable earnings with them. So you can't designate only after-tax
> > contributions in that case, and if you go directly to a Roth you'd
> > have to pay the taxes (but not penalty) on the earnings portion.
>
> They didn't tell me that part!
It makes things trickier, but can be beneficial as the total amount you
can roll over (at any age) is larger.
> The "broker" is Fidelity, and since they administer the 401k (via
> Netbenefits), I figured they know how this works. I guess I need to
> get finer granularity from them. Most of my after-tax contributions
> are pre-1986, but not all. The online statement breaks the assets
> down by "source," including "after-tax," but not further into pre and
> post 1986.
See if the online statement has a withdrawal guide that shows a
breakdown of available pots of money. If so, the after-tax one should
reflect the amount of contributions plus earnings. That's the way mine
did it.
> So far IRS pub 575, p. 29 is as close as I've found to the official
> pronouncement.
Also look at Pub 590. That's the IRA guide, and has some of the
roll-over rules.
Brian
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"Default User" <d...@y...com> writes:
> Ron wrote:
>
>> My broker tells me that after tax 401k assets may be rolled directly
>> to a Roth IRA, with no tax consequence now or ever - ie. future
>> earnings would be tax free. I'd appreciate a pointer to an official
>> explanation/confirmation of this assertion.
[snip]
> The thing you have to be aware of is that any after-tax contributions
> that were made post-1986 will bring a share of taxable earnings with
> them.
Unless the "after-tax contributions" in question were
Roth 401(k) contributions. If so, those can be rolled
straight into a Roth IRA and don't carry any taxable
earnings with them (in fact, the earnings they carry
with them also have the Roth nature).
--
Rich Carreiro r...@r...com
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Rich Carreiro wrote:
> "Default User" <d...@y...com> writes:
> > The thing you have to be aware of is that any after-tax
> > contributions that were made post-1986 will bring a share of
> > taxable earnings with them.
>
> Unless the "after-tax contributions" in question were
> Roth 401(k) contributions.
Correct. In the absence of qualifiers, I always assume 401(k) to mean
"tax-deferred", but this is a valid point.
> If so, those can be rolled
> straight into a Roth IRA and don't carry any taxable
> earnings with them (in fact, the earnings they carry
> with them also have the Roth nature).
How very Zen.
Brian
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