401k After Tax contributions | Ed Slott and Company, LLC

401k After Tax contributions

Client performed a partial 401k rollover. Plan balance was 500k and rolled over 400k. The 400k was Pre Tax, Roth and after tax funds. Rollover check for 325k to clients Trad IRA, 50k to his Roth IRA and after tax funds of 25k payable to client.

If I understand the pro rata rules the remaining funds in 401k are similar ratios of rollover checks.

In hindsight it seems the client could have rolled over all or a majority of his after tax funds to a Roth IRA. Is this correct? I was told by a CPA the after tax amount would have to follow pro rata rules since it was a partial rollover and not a full rollover requiring most of 25k after tax check to be placed on Trad IRA then client would have to track this during redemption period.

Upon receiving the after tax check, can he rollover any of these proceeds to his Roth IRA via 60 day rollover rule?

  • In the vast majority of plans, the after tax sub account can be distributed without regard to pro rating, although the earnings in the after tax account must be pro rated with the after tax contributions. Under Notice 2014-54 the client should have been able to specify the destination IRA account for the after tax portions of the plan, although the Roth 401k obviously must be rolled over to a Roth IRA. If the after tax account still has a balance, client should request another direct rollover in which all after tax amounts go to the Roth IRA.
  • If client wants to they can do a 60 day rollover of the after tax amounts received to the Roth IRA.
  • After tax amounts should NOT be rolled into a TIRA or they will forever be subject to the Form 8606 pro rate rules. CPA is incorrect.
  • It is not clear if the prior distribution was requested correctly. 
  • If client has not separated from service, rollover composition can be restricted.

So client can rollover his after tax check which will be payable to him? This would not be considered an excess contribution and what form does he report the rollover on? Great news to hear but worried CPA will have no idea how to report!!!!  Does coding on after tax distribution help IRS determine after tax can be rolled to his Roth IRA via 60 day rule.

The after tax check will be reported on it's own 1099R, which will show the amount of basis in Box 5, and there will be no taxable amount in Box 2a. This is reported directly on Form 1040 on line 4a as a rollover. So reporting is not complex at all, but of course the other transactions also need to be reported correctly and will also have separate 1099R forms. Form 8606 does not apply to this since the after tax amount is never rolled into a traditional IRA.

 

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