401k Rollover Question | Ed Slott and Company, LLC

401k Rollover Question

If someone has a $200k 401k balance and $50k is after-tax (not Roth 401k), if they do a rollover of the full amount, can they direct the $50k to go into a Roth IRA, or would the funds have had to be part of a Roth 401k? Secondly, if they are able to roll the after-tax money to a Roth IRA, was this something that was allowed, say, 10 years ago?

  • Pursuant to IRS Notice 2014-54, a split rollover can be requested sending the  after tax balance to a Roth IRA and the remainder to a TIRA account. This is what the person should clearly request unless there is a reason to roll the entire balance (or more than 50k) to the Roth IRA and paying taxes on the pre tax amount rolled to the Roth IRA.
  • Prior to Sept, 2014 there were certain ways to accomplish the same thing such as doing an indirect rollover with the taxable portion being deposited in the TIRA first and providing cash to replace the mandatory withholding, but the basic IRS rule was to pro rate the distribution to all destinations and not to treat the 401k distribution as a single distribution. Therefore, prior to 2014 achieving the split took extra effort and often did not happen. Prior to 2001, any after tax money had to simply be paid in cash to the participant as there was no rollover options at all for after tax balances.

Thanks, Alan. 

 

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