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401K to IRA rollovers and backdoor Roths
Old 07-14-2019, 07:29 AM   #1
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401K to IRA rollovers and backdoor Roths

I am doing some research into DW's retirement accounts and am curious about what knowledgeable people here about know on the topic. It has to do with after tax contributions to 401Ks and other retirement accounts DW made years ago before we were at all cognizant of what is what with investments. She was (still is technically) working for a big law firm and was able to make large contributions to her retirement accounts beyond the $17K or whatever standard limits were in effect at the time. As I recall, she just understood it as some sort of accounting legerdemain that let her set aside $30K or more beyond what would be the normal limit. We always thought those amounts just get mixed into the 401K and and everything comes out as taxable at income levels. But now, looking at distributions coming up in a couple of years it has dawned on us that the after tax contributions may be treated differently - either not taxed on withdrawal on a pro-rata basis, or even rolled over to a Roth if a complete plan rollover to IRA is done at one time.

DW's online accounts for her 401K and a separate "Professional Retirement Plan" do not provide information on which contributions were which. Do any of you know whether the plan administrator is required to keep track of this information and report it to the account owner and IRS when distributions are made? Or is the account owner responsible for keeping track of the information? Or am I missing something simple that says sorry, it is all taxable? We have queries in to the plan administrator but they can be slow.
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Old 07-14-2019, 09:58 AM   #2
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I would think the company would have records of the pre-tax/after-tax contributions. While you are waiting for their answer, I wonder if you could make an educated guess from the W2 and paycheck records for each yr.
I would think those would show at least the total amount contributed to 401K.
Suppose total wages were 150K and pre-tax 401K contributions were 15K with after-tax 401K contributions were 20K. I would think that the W2 would show
federal gross wages as 150K - 15K = 135K since the pre-tax contribution would lower the taxable amount of wages by that 15K.

So if you knew your total 401K contribution was 35K, you could figure out the taxable amount from the reduction in salary reported on W2 vs the total earnings. Then subtract that from from total contributions to get after-tax
contributions.

Obviously this is oversimplified since other deductions can lower your total income leading to a lower federal gross........other pre-tax deductions for health insurance , etc. but you can compensate if you know what those are.
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Old 07-14-2019, 10:08 AM   #3
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Yes, the plan administrator should be keeping (tracking) sources of funds.

Here's a generalization on what you can do with each type:
pre-tax: Can be rolled to a traditional IRA (tIRA).
After-tax: The employee contribution can be rolled to a Roth IRA. The gains can be rolled to a traditional IRA (tIRA).

The plan does not have to allow for specification of source if you do a partial withdraw, but many plans do (my ex-mega plan does as a sample data point). So, if your plan doesn't allow this, you would have to roll over not only the after tax (plus gains) money but also the pre-tax (plus gains) contributions.

There are further (negative) complications if you have other traditional IRA accounts. This is called the pro-rata basis rule. (IRA Aggregation Rule under IRC Section 408(d)(2)). Here is an article that helps to explain it: https://rodgers-associates.com/newsl...pro-rata-rule/
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Old 07-14-2019, 10:46 AM   #4
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My DW was able to contribute after-tax dollars to a Roth 401k along with a normal 401k. Which is different than your case since these were still within the normal 401k contribution limits I think. While we always knew how much was in the Roth, I was never able to specify how the Roth dollars were invested, and never knew where they were. They never really seemed to grow significantly, so maybe all the growth was considered normal 401k taxable.

When I wanted to do a partial rollover of the after-tax amount into a Roth IRA, the 401k would not allow that. I had to rollover prorated amounts of pre-tax and after-tax dollars and I could only specify one destination IRA! I talked to them for quite a while about that. I ended up rolling over into a Roth IRA, treating some of the pre-tax money as a Roth conversion and recharacterizing the rest of the pre-tax money into a traditional IRA. With no recharacterizations of Roth conversions allowed now, that strategy doesn't work as easily anymore.

Later on the 401k finally allowed me to specify pre-tax money and I could take a bunch of it and rollover to tIRA while the taxed money went into a Roth IRA in a separate rollover. Hopefully OP's 401k has this worked out better than ours started out.

Anyway, the 401k did have the records for pre- and post-tax dollars, though it never seemed to make much sense and never said where those post-tax dollar were invested. You'll have to research your rollover/withdrawal options to see what you can do with them.
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Old 07-15-2019, 12:02 AM   #5
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If it is allowed by your plan to do either in-plan conversions or in-service roll overs, you have made a mistake by waiting. The general idea with non-Roth after-tax contributions is to get them rolled into a Roth account ASAP to make future gains tax free.

The plan administrator is required to track the tax status of funds, so you are covered there.

If the plan allows in-service roll overs or in-plan conversions to Roth, you should be able to roll the non-Roth after-tax contributions and the gains on those out ASAP. You can't typically roll out just the after-tax contributions, the associated gains have to go as well. It is allowable to direct the gains into a tIRA account and the contributions into a Roth, deferring the taxes on those gains. The sooner the after-tax contributions are rolled into a Roth, the better. You will eventually pay ordinary income tax on all gains made prior to moving the after-tax contributions into a Roth. Once in a Roth, it grows tax free.

On the chance your employer plan doesn't offer in-service roll overs, you can still roll the whole account over when you separate from the employer. At that time you will be able to separate the after-tax contributions into a Roth without any taxes due, but the gains will have to go into a tIRA or pay tax on the withdrawal.
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