401K Rollover with Post-Tax Contributions
I have a 53 year old client who is planning to roll his 401K balance from his former employer into his existing Traditional IRA. Client over-contributed to his 401k in 2022 so his employer credited his contributions to a post-tax account in his 401k. He has the option to receive the balance of the post-tax contribution upon requesting the rollover of his pre-tax balance. Will he be subject to early withdrawal penalties on the distribution of his post-tax balance? Any suggestions on best in class strategies for this scenario? Considering opening a separate Traditional IRA to receive the balance of the post-tax contributions and then immediately converting to Roth IRA in his existing Roth, but will require a lot of paperwork for a small balance of $2,000.
Permalink Submitted by Alan - IRA critic on Thu, 2022-05-05 18:48
Client should request split direct rollovers, with his pre tax balance going to his TIRA and the post tax balance to his Roth IRA. There would be no tax due for these rollovers, but they should be requested together. Rolling the after tax amount to a TIRA is a bad idea, as it would subject the conversion to prorating with pre tax dollars on Form 8606. There is no need to open a new TIRA, just a Roth IRA if he does not already have one.
Permalink Submitted by Michael Dearing on Thu, 2022-05-05 19:47
Thanks, Alan. THis was very helpful.