"after tax" and 401k statement | Ed Slott and Company, LLC

"after tax" and 401k statement

I have 401k. I receive a statement from 401k custodian. This statement shows that I have "after tax money" in my 401k account. I would like to rollover my 401k to IRA and utilize NUA as well. I understand that basis in "after tax money" can be rolled over into ROTH IRA or used to reduce taxable NUA basis. And earnings on "after tax' money can be rolled over into regular IRA. However, there is nothing in my statement that splits "after tax" money into basis and earnings -- as I only have one singular amount for "after tax" money. How would anyone then know which part of "after tax" to go into ROTH IRA (or used to reduce basis for NUA purposes) and which part to go into regular IRA upon rollover.

The pre-tax earnings from employee after-tax contributions = total employee after-tax balance - total employee after-tax contributions. What is not contributions must be earnings.

I understand this. But My statement only shows after tax balance? nothing on earnings or contributions for after tax account. 

The after tax balance on your statement does not include earnings, it is the actual amount that was contributed to your 401k as non Roth after tax contributions.  With respect to the application of this amount to either a Roth IRA rollover or to reduce the taxable amount cost basis (Box 2a of employer share distribution 1099R), the plan may not offer this choice, it might require the after tax amount to be used to reduce the tax on the cost basis. You will have to ask the plan if you can have the after tax amount directly rolled to your Roth IRA. You would then have  split Notice 2014-54 direct rollovers, and a distribution of the employer shares you elect to apply NUA on. You must complete the lump sum distribution by 12/31/2020 so you have plenty of time to check into your options with the plan administrator.  Of course, if you have any Roth 401k balance in the plan, that is yet another direct rollover to your Roth IRA.

I talked with my company benefit representative and he actually (and strangely)  told that the amount shown for my after tax amount on the statement  includes BOTH earnings and my contributions (I went back to my contribution statements and that appears to be correct). He also told me that when I will perform the rollover of my 401k account – the company  will issue me a check for the total amount of after tax money and in addition they will also issue me a letter showing separately the amount of earnings and the amount of my contributions for after tax. Then the rep told me that I need to provide this letter to the new custodian of my rollover account -- so the new   custodial can properly rollover my after tax money  -- such that my  contributions would go to Roth IRA and the earning portion would go to regular IRA. Does it make sense to you or have you ever heard of this type of arrangement? I worked for the Fortune 30 company -- and it would seem  that just due  to its shear size they would know what they are doing?

  • Plan statements can be set up in different ways, but the actual non Roth after tax balance should be separately stated somewhere on the statement. Your particular plan is showing the total balance of the after tax sub account which is OK as long as the basis/earnings breakdown shows up somewhere on the statement. The participant cannot make an informed decision without this information. It is correct that any gains on the after tax contributions must be distributed pro rata with the after tax amount. With respect to split direct rollovers per Notice 2014-54, if the earnings are modest enough the entire after tax balance should be directed to the Roth IRA even though you will owe taxes on those gains. The split rollovers sometimes lead to the wrong amounts being deposited in the respective IRA types. If the earnings are substantial enough and a split rollover is desired, the plan should issue separate checks with the payee being your IRA (TIRA) for the earnings check and your Roth IRA for the after tax amount. A single check for both means the receiving custodian must properly separate the amounts and sometimes they don't. This error is a real hassle to get corrected. That said, if you are doing back door Roth conversions, any balance sent to your TIRA will result in those conversions becoming partially taxable, so you need to determine if you will be doing back door Roth conversions. If so, this is another reason to direct the entire rollover to your Roth IRA. This assumes that all you are rolling out of the plan is the after tax sub account. If you are rolling out the entire plan balance, then of course you would need to split the direct rollovers, requesting that the after tax amount be rolled to your Roth IRA and the entire pre tax amount to your TIRA.
  • Sending you a check for the actual after tax amount (no earnings) is done by some plans that are operating under an older system where this was typical. This practice goes back decades. You then do a 60 day rollover of that check to your Roth IRA (unless you choose to spend the money). Sending this check payable to you also produces a separate 1099R and Box 2a should be 0 with the after tax amount in Box 5. The direct rollover of pre tax amounts goes on a separate G coded 1099R. It is easier to enter separate 1099R forms into a tax program than a combined one.
  • However you do these rollovers, check immediately afterwards to make sure things look right and the right amounts went into the correct IRA types. 
 

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