allocation of Roth 401k and “after tax” among different 401k “buckets” on rollover
I have an old 401k account. I plan to rollover the funds from this account this calendar year (including NUA portion). I have before tax, company match, Roth 401k, and after tax. My 401k consists of Equity Funds, Company Common Stock, and ESOP. I do not plan to use my contribution in “after tax” to reduce cost basis of ESOP (for NUA purpose) and plan to have this part of “after tax”to be directly rolled over into the Roth IRA. Am I correct to say that my IRA rollover portion for Equity Funds, and Company Common Stock will be proportionally reduced by Roth 401k and “after tax” amounts? Also am I correct to say that no reduction will take place for the ESOP account? Also am I correct to say that the “company common stock” will be proprtionaly reduced regardless of whether i would use this company common stock for NUA purpose or not.
Permalink Submitted by Alan - IRA critic on Tue, 2020-01-14 23:32
Most of these questions depend on the plan rules, not IRS rules. Some plans require after tax contributions to offset the cost basis of NUA shares if you elect NUA. But the plan could allow you to make a choice how the after tax is allocated. Some plans might average the cost basis over the 401k and ESOP, while others may have an average cost basis for employer shares in each plan, or even track various lots of purchases that have their own cost basis. Given that you have the most possible variables in these plans (pre tax, after tax, Roth, NUA 401k, and NUA ESOP) the planning is complex and requires specific plan info to make the best decisions. The largest pitfall however is remaining overly concentrated in employer shares, which is very risky.
Permalink Submitted by Nicole limson on Wed, 2020-01-15 02:56
Alan, my plan gives me a choice on whether to reduce cost basis in NUA or using “after tax” money. I choose not to reduce cost basis and put it into ROTH IRA. My plan uses average cost basis for employer stock. Considering the above, if you can, — can you provide some guidance on how 401k Roth and “after tax” are allocated between Equity Funds, Company Common Stock, and ESOP upon rollover. Thank you very much for all your help.
Permalink Submitted by Alan - IRA critic on Wed, 2020-01-15 03:13
Most plans spread your investments equally over all sub accounts in the plan. The designated Roth would hold the same proportion of a given investments as the pre tax account and the after tax account. Of course, the ESOP is all company stock and the pre tax 401k would hold company stock bought with matching contributions. With respect to non Roth after tax contributions, you are indicating that you can apply that amount to roll investments or cash of equal value to your Roth IRA. In many plans the investments are proprietary to the plan and cannot be accepted in kind by IRA custodians, therefore they must be sold in the plan and cash rolled out. Of course, that does not apply to company shares. These are general statements, not necessarily correct for your particular plan.