After Tax Contributions
I have a client with the following in his 401(k):
$90,000 pre-tax
$88,000 after-tax
Total $178,000
Of the after-tax amount, $37,000 is his After-Tax Contribution.
Here are the questions:
The client would like to pull out some of the money without paying taxes and roll the balance into an IRA. Can he do this and if so , how much can he pull out?
How and when does he pull this after-tax money out? The 401k custodian will only issue one check for the entire $178k.
Is the difference between the after-tax total ($88k) and the after-tax contribution ($37k) subject to taxes when that money is pulled out? Is that money subject to the pro-rata rule?
Permalink Submitted by Alan Spross on Sat, 2008-02-02 05:09
The only distributions not subject to pro ration are pre 1987 after tax contributions separately accounted for by the plan. If client is eligible for distributions, those could be requested first, if he has any. Other than this specific situation, all distributions are pro rated between post and pre tax balances in the plan.
The earnings on the after tax contributions become pre tax. Therefore, his after tax balance is only 37,000, and the pre tax balance is 141,000. 20.8% of any distribution is tax free, and he can either deposit the tax free amount in a taxable account or roll it over to an IRA and file Form 8606 to add to any basis in the IRA.
I believe that a plan can limit the number of transfer recipients to two, however I have never heard of a plan refusing to cut an after tax check to an employee while directly transferring the rest to a TIRA. A supervisor for the plan administrator should be contacted about this situation to get it rectified.