Roth Conversion from After-Tax 401(k)
In Oct 2016, client (age 67) retired and had $1,400,000 in his former employer’s 401(k). $25,000 of that was after-tax contributions which he rolled to a Roth IRA and the remaining $1,375,000 rolled to a Traditional IRA. At the time time of the rollover, he also had $200,000 in another Roth IRA, but no other Traditional IRA’s. Of the $25,000 after tax money, I do not know what portion is earnings and what portion is contributions.
One year later, the after-tax money that was rolled to the Roth IRA is now worth $30,000. Is there any issue with him rolling the $25,000 to a Roth IRA as it relates to the pro-rata rule or any other tax issues he should be aware of? If so, how does he unwind it?
Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2017-12-13 22:12
Sounds like there was two direct rollovers done from the 401k with the 25,000 in after tax contributions going to a Roth IRA. When that rollover was done, the earnings on the after tax contributions were rolled to the traditional IRA. Once the 25,000 is in the Roth IRA it is treated as a non taxable conversion. However, since the client had 200,000 in another Roth IRA, I will assume that his first Roth IRA contribution was prior to 2013. If so, his Roth IRA is fully qualified (5 years and age 59.5) and all distributions are tax and penalty free. Therefore, there is no need for any further accounting or for tracking the amount of gains on the Roth contributions. No need to unwind any of this. Remember that for tax purposes, all of his Roth IRAs are treated as a single combined Roth. Once the first one is qualified, they are all qualified and fully tax free.