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After tax funds in before tax 401k - rollover to IRAs
Old 03-25-2014, 06:52 PM   #1
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After tax funds in before tax 401k - rollover to IRAs

Lets say for example I have $200,000 in my 401k. $50,000 of it being after tax contributions.

According to my research, in order to roll it to a traditional IRA and a Roth IRA I would need to get a check from my previous employer for the $200,000 (less 20% withholding on the $150,000), and then do an indirect rollover to the Traditional IRA FIRST for $150,000. Then write the check for $50,000 to the Roth IRA SECOND. I would have to come up with the withheld amount and get it back when I file my tax return. This is done to avoid the prorata rules of the after tax amount and to get "clean" IRAs, free of before/after tax mingling and the perpetual form 8606 that comes with it.

Has anyone done this? It seems like contradictory information surrounds this issue and the IRS has not clarified things.

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Old 03-25-2014, 09:14 PM   #2
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No. When I did mine two years ago they sent me two checks. One for the $150,000 pre-tax balance made out to "Vanguard FBO pb4uski" and another for the $50,000. Since the check was made out to Vanguard rather than to me I didn't need to have withholding done.

I turned around and mailed the $150,000 to Vanguard and they added it to my IRA.

At the time I didn't know I could roll my after-tax funds into my Roth (the amount was much smaller than yours) so I just spent it and reduced my taxable account withdrawals for that year.

Knowing what I know now I would have had the after-tax check also made out to "Vanguard FBO pb4uski" and send that to Vanguard separately and have it deposited to my Roth IRA.

BTW, FBO is short for "for the benefit of"

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Old 03-25-2014, 09:51 PM   #3
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When I had to liquidate my 401k/ESOP back in 2008 in order to use NUA on the company stock I wished to cash out, I had some after-tax contributions in the 401k. Although I could have conceivably done a direct rollover of those after-tax contributions into a Roth IRA, I decided instead to take them as cash in order to pay some of the taxes on the cashed-out company stock. I simply asked the plan administrator to send that money, along with the proceeds of the company stock, into my local bank's checking account. The after-tax contributions were, of course, not subject to any further income taxes and the 1099-R form reflected that.

The rest of the 401k, other than the company stock cash-out and the after-tax contributions, I chose to do a direct rollover into an IRA. There were no income taxes due on that, either. I had no taxes withheld from anything although I did have to make some estimated tax payments on the NUA.
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Old 03-26-2014, 05:32 AM   #4
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I'd suggest that you post over at Fairmark, as there is a regular poster there (Alan S.) that is very informed on this topic and it has been widely discussed. I had about $100K in after tax $ in my 401(k) in addition to the pretax $ and using guidance from the Fairmark forum, I was able to be cut two separate checks which I deposited in a rollover traditional IRA and a Roth.

I did this a couple of years ago at which time the IRS was quite fuzzy on the necessity for prorata distribution. It may have been clarified by now. If any one knows, it would be Alan S.

Incidentally, both my Fidelity rep and a woman that I talked to at the IRS affirmed the legality at the time.
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