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PhrugalPhan 03-06-2015 06:46 PM

How to Deal With Joint Roth / Non-Roth Withdrawals in Retirement?
 
First let me start by saying this is *not* a question about when to withdraw from Roth vs. Non-Roth accounts. Instead it is about withdrawals from accounts that contain both pre- and post tax monies. Let me explain.

At my work we have a good (in my mind) 457 plan, and it also allows for pre- and post tax contributions. The post tax is relatively new, and I currently have about 12% in as post tax. Based on the balance and rate I am putting in money now, I suspect my ending balance could be as high as 25% post tax contributions. I also have a Roth IRA, plus will be getting a pension when I retire. I would like to have complete control over what is withdrawn and when to maximize benefits tax wise.

Given that, today I contacted my 457 plan administrator and asked this question: "When I start to withdraw funds, will I be able to specify what percentage of a withdrawal comes out of the post tax and pre tax pools of money?" I was told to my disappointment that I could not :nonono:, that the money withdrawn will come out in percentages equal to the balances of each pool of money.

I don't know if this will really be an issue for me, but I have to think this issue has come up for others. So I have the following questions, maybe someone here knows:
  • Is this a requirement from the IRS, or is it something that can be specified by the plan trustee? If it can be changed, perhaps I can talk to the powers that be and see if this change can be incorporated in the future.
  • Is it possible to keep the money that is pre tax from any withdrawals and in some manner roll over the post tax money to another account to preserve the tax free status going forward?
  • Is there any other withdrawal strategy you can think of I should consider?
For me, a full pension is 8 years out, so this is not a rush, but I would like to be prepared for that day when it comes. Thanks for any info.

kaneohe 03-06-2015 07:10 PM

slightly different but somewhat related:
Using the New Basis Isolation Rules - Fairmark.com Fairmark.com

They talk specifically in the body about 401K but in the beginning about company plans so I don't know if this applies to 457s.

PhrugalPhan 03-06-2015 07:34 PM

Thanks for the link. Looking around the site I came across this:
Distributions from Designated Roth Accounts - Fairmark.com Fairmark.com

In it, it says this:
"If you have both traditional and Roth accounts in the same 401k or similar plan and you make a partial withdrawal, you should be able to choose which account the money is coming from."

I don't know if what they are saying is a general rule of thumb, or an IRS regulation. I would really like to know. I know the HR people have seminars for employees within 3 years of retirement - I will have to crash one of them and see if I can get them to look into this further.

kaneohe 03-06-2015 07:38 PM

You might try posting any questions at the retirement forum at fairmark.com
If you get a reply from Alan S., it's usually pretty reliable.

bingybear 03-06-2015 08:20 PM

Quote:

Originally Posted by PhrugalPhan (Post 1566503)

In it, it says this:
"If you have both traditional and Roth accounts in the same 401k or similar plan and you make a partial withdrawal, you should be able to choose which account the money is coming from."

Just from your quote... having a traditional and roth accounts in the same 401k sounds like what I had at a couple previous employers. I could chose to contribute to a traditional or roth 401k within the same plan. The money was really kept in two different sub accounts so the money was segregated. It is like you have a traditional IRA and a Roth IRA.. you can pick which one to take money out of.
For a traditional IRA, if you have both pre and post tax contributions, anything you take out has to be prorated... in the proportions of the account.

I think there was a way to separate out pre and post tax monies from a 401k when converting to an IRA. I've not looked into the details as I'm not in that situation. You might want to check that out. I think if it is mixed in an account and just being withdrawn it has to be prorated.

kaneohe 03-06-2015 09:22 PM

Quote:

Originally Posted by PhrugalPhan (Post 1566503)
Thanks for the link. Looking around the site I came across this:
Distributions from Designated Roth Accounts - Fairmark.com Fairmark.com

In it, it says this:
"If you have both traditional and Roth accounts in the same 401k or similar plan and you make a partial withdrawal, you should be able to choose which account the money is coming from."

I don't know if what they are saying is a general rule of thumb, or an IRS regulation. I would really like to know. I know the HR people have seminars for employees within 3 years of retirement - I will have to crash one of them and see if I can get them to look into this further.

just to reinforce what bingy said..... traditional and Roth 401Ks are not the same as pretax and posttax in a traditional 401K. Sounds similar but the rules are somewhat different.

karluk 03-07-2015 07:18 AM

I also have a 457 plan with some of the money in a designated Roth account. Since retiring, I have made withdrawals from the pretax portion of the 457 while leaving the designated Roth money completely untouched. From pretax I have withdrawn money in three different ways - regularly scheduled monthly distributions, a one-time only larger distribution, and a trustee to trustee rollover to a Roth IRA.

I can't say whether this flexibility is universal in 457 plans. I suppose your plan may be more restrictive, but it's at least worth your time to investigate whether you've been given accurate information about how distributions are prorated between Roth and pretax money. If your options really are so limited, you have enough time before retirement to lobby for changes to the distribution rules.

kaneohe 03-07-2015 09:43 AM

I have to admit to some confusion about OP's situtation:

from OP Title: How to Deal With Joint Roth / Non-Roth Withdrawals in Retirement?

from OP body: this is *not* a question about when to withdraw from Roth vs. Non-Roth accounts. Instead it is about withdrawals from accounts that contain both pre- and post tax monies.

, and it also allows for pre- and post tax contributions.

&then from a later post:
In it, it says this: "If you have both traditional and Roth accounts in the same 401k or similar plan .................

*********************************************
Is it Roth and traditional? or traditional w/ pre & post tax accounts....
seems like 2:2 vote and the answer might depend on the question posed.

PhrugalPhan 03-07-2015 11:51 AM

Quote:

Originally Posted by kaneohe (Post 1566657)
I have to admit to some confusion about OP's situtation:

from OP Title: How to Deal With Joint Roth / Non-Roth Withdrawals in Retirement?

from OP body: this is *not* a question about when to withdraw from Roth vs. Non-Roth accounts. Instead it is about withdrawals from accounts that contain both pre- and post tax monies.

, and it also allows for pre- and post tax contributions.

&then from a later post:
In it, it says this: "If you have both traditional and Roth accounts in the same 401k or similar plan .................

*********************************************
Is it Roth and traditional? or traditional w/ pre & post tax accounts....
seems like 2:2 vote and the answer might depend on the question posed.

Sorry, my question was regarding Regular (pre-tax) vs. Roth. I always think of Roth as "post-tax" (and sometimes say it that way :facepalm:) but as pointed out here, post tax can mean something different. I don't know if a 457 plan can even have the post-tax (but not Roth) option.

PhrugalPhan 03-07-2015 01:33 PM

Quote:

Originally Posted by karluk (Post 1566597)
I also have a 457 plan with some of the money in a designated Roth account. Since retiring, I have made withdrawals from the pretax portion of the 457 while leaving the designated Roth money completely untouched. From pretax I have withdrawn money in three different ways - regularly scheduled monthly distributions, a one-time only larger distribution, and a trustee to trustee rollover to a Roth IRA.

I can't say whether this flexibility is universal in 457 plans. I suppose your plan may be more restrictive, but it's at least worth your time to investigate whether you've been given accurate information about how distributions are prorated between Roth and pretax money. If your options really are so limited, you have enough time before retirement to lobby for changes to the distribution rules.

Thanks, this is what I needed to hear. I have a co-worker on the pension board, and he is very interested in finances and retirement. I'll pass along to him what I was told by the administrator, and I bet if its true he'll get in someone's ear to get this changed.


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