Q&A: Can I roll after-tax 401(k) contributions to a Roth IRA?
I made after-tax contributions to my 401(k). When I
retire, can I roll that money into a Roth IRA tax-free?
After-tax funds can be segregated from other funds in
the account and transferred directly to a Roth IRA. In
fact, it would be a mistake not to. (Don't confuse after-tax
contributions to a regular 401(k) with contributions
to a Roth 401(k), which are also made with after-tax
dollars but to which slightly different rules apply.)
Suppose you're retiring and have $400,000 in your
traditional 401(k) plan, including $50,000 of after-tax
contributions. Rather than rolling the entire amount
into a traditional IRA, you could move the $50,000 in
after-tax contributions to a Roth IRA and roll the
remaining $350,000 into a traditional IRA.
But there are some important caveats. You can't
move the entire account to a traditional IRA and
decide later to convert the after-tax portion to a Roth;
you must split off your after-tax contributions at the
time of the rollover. Once the money is in a traditional
IRA, any distributions – including money converted to
a Roth – will be taxed based on the ratio of pretax and
after-tax assets in the plan.
Once your after-tax money is in a Roth IRA, future
earnings will be tax-free rather than simply tax deferred
(as they were in the company plan), and
you'll never be forced to take minimum distributions.
A 100% rollover -- in most cases, you'll need to roll the
entire balance out of your 401(k) to take advantage of
this strategy. Otherwise, you would be subject to the
pro rata rules. Using the example above, suppose you
had $400,000 in your 401(k), including $50,000 of
after-tax contributions. If you pulled out $50,000 to
convert to a Roth and left $350,000 in the company
plan, only 12.5% of the withdrawal, or $6,250, would
be tax-free. You'd have to report the rest as taxable
income for the year of the transfer.
There is an exception to this rule. If your employer
offers a separate account for after-tax contributions,
you can roll that money into a Roth IRA without
emptying your 401(k) plan. Sticking with the above
example, let's say you have $45,000 in contributions
plus $5,000 in earnings in a separate, after-tax
account, and $350,000 in a pretax account. In that
case, you could withdraw $50,000 and invest $45,000
in a Roth. You'd be required to invest $5,000 in a
traditional IRA because the earnings are pretax.
If you're still working and are able to stash a lot of
money away for retirement, it's worth asking if your
company plan allows after-tax 401(k) contributions. If
not, and you're a super saver, you may want to
encourage your employer to add this benefit. A Roth
401(k) offers a better deal and should be used first;
earnings are tax-free rather than tax-deferred, and you can roll the money into a Roth IRA, tax-free,
when you retire. But it comes with lower contribution
limits than after-tax contributions to a traditional
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