The October 19, 2020 Slott Report article, "Don't Overlook After-Tax Contributions!," explained how after-tax contributions in company plans work and discussed the dollar limits on them. This article will explain how distributions of after-tax contributions are taxed and can be rolled over separately.
If you have both pre-tax deferrals and after-tax contributions in your 401(k), you can’t just take out your after-tax funds to avoid paying taxes on the withdrawal. Instead, a pro-rata rule treats part of your distribution as taxable.
When the chips are down, the providers hold all the cards. This is true for both IRAs and workplace plans. Ultimately, the IRA custodian (through its custodial form) and retirement plan sponsor (through the plan document) will dictate what a person can and cannot do with his retirement dollars. Prior to sauntering into a local saloon and sitting down at the poker table, be sure to know the rules of the game before asking to be dealt in.
For example, if a deceased IRA owner named both his son and daughter as beneficiaries, the custodian can refuse to allow the children to stretch the inherited IRA RMD payments over their own life expectancies. Additionally, what if the beneficiary son wants to disclaim his portion of the IRA? A custodian does not have to accept disclaimers, either.
