post tax 401K contributions and ROTHs

[steady saver]

I'm confused.

We have post tax contributions to our 401K that I wanted to convert to an IRA.

I misunderstood I guess and thought we could roll that entire amount into a Roth IRA. But megacorp said today that, no, I could roll the principal into a Roth but the remaining (and much larger portion) has to go to a Rollover IRA. And if we do it, we have to do it all at once.

Can someone help me understand this? I thought all post tax 401K investments AND the earnings would be tax free.

Geez. I definitely feel like I'm back to first grade when it comes to managing our money.

 

[Alex The Great]

Yes this is what after tax 401K contributions are about. Principal is after tax, therefore no additional tax will be imposed and it can be converted directly to Roth. The earnings part is still not taxed, and by that reason it would come into IRA. It is good for you that earnings are much larger portion. I typically have the opposite.

 

[steady saver]

Yes this is what after tax 401K contributions are about. Principal is after tax, therefore no additional tax will be imposed and it can be converted directly to Roth. The earnings part is still not taxed, and by that reason it would come into IRA. It is good for you that earnings are much larger portion. I typically have the opposite.

Alright, that's what I thought. But she said that we had to roll the principal into a Roth and the earnings into a Rollover and that we'd pay tax on that. It doesn't make sense to me. Plus if we put it in the Rollover, it would be mixed in with 401K money, which is taxable. I even questioned her on this.

 

[steady saver]

and to clarify on that last statement, I meant that it would be mixed with pre-tax 401K contributions and earnings.

 

[steady saver]

okay, I am reading more and I think i am understanding now. Good grief.

It seems that...no surprise...the megacorp person is correct. Principal on post tax can be rolled to Roth but earnings have to go to a Rollover IRA, same as any other pre-tax 401K money, should we roll that over.

I am wanting to simplify this but it's bit confusing so my solution has been to put it off.

It was so much easier just to make money and invest it. Our management strategy was pretty much to just LBYM. But now I need to think about it and strategize, at least to get things set up.

I appreciate being able to come here b/c even though I can look some of this stuff up, honestly I let myself feel overwhelmed. Posting this note helped unstuck me. Now if anyone says I've got it wrong, please enlighten me. And Alex the Great, I appreciate your response. It relaxed me enough to start researching it.

 

[Mark1]

Steady Saver. I believe you have two options, unless the program has changed since I left Megacorp.

1) You can roll the Post-Tax contributions into a Roth IRA and the gains on that specific money (while it was within the Provident 401K fund) into a rollover IRA. The other pretax and company contributions and all their gains can stay within the 401K fund if you want.

Or

2) You can roll the Post-Tax contributions into a Roth IRA and the balance of money (Post-Tax gains, Pretax contributions and gains, and company contributions and gains) can be rolled over into a rollover IRA.

Fido has been keeping track of which gains below to which money source over the years.

Also, years ago when Fido did the rollover it disappeared from the the 401K, but didn't appear immediately within the IRAs (maybe took a day, or two to show up). Fido warned me so it wasn't too upsetting, but I still didn't like it.

 

[Popeye]

Will they be sending one check? My Megacorp said they will send me two checks. The after tax amount is very small at about $4k. I’m going to get more details before I pull the trigger. It’s taking a few days to empty the brokerage account into the stable value fund. That needs to happen before I give them the green light.

 

[steady saver]

Steady Saver. I believe you have two options, unless the program has changed since I left Megacorp.

1) You can roll the Post-Tax contributions into a Roth IRA and the gains on that specific money (while it was within the Provident 401K fund) into a rollover IRA. The other pretax and company contributions and all their gains can stay within the 401K fund if you want.

Or

2) You can roll the Post-Tax contributions into a Roth IRA and the balance of money (Post-Tax gains, Pretax contributions and gains, and company contributions and gains) can be rolled over into a rollover IRA.

Fido has been keeping track of which gains below to which money source over the years.

Also, years ago when Fido did the rollover it disappeared from the the 401K, but didn't appear immediately within the IRAs (maybe took a day, or two to show up). Fido warned me so it wasn't too upsetting, but I still didn't like it.

Thank you Mark1; that's super helpful. I think I had a traditional Roth IRA and a Post Tax 401K in the same camp and they aren't when it comes to paying taxes on earnings.

Still haven't decided whether to keep the 401K or just roll it all over. We are pretty simply invested so either would serve our needs. I'm guessing expenses are about the same regardless. I should check that but I do remember reading about the quarterly fee; as you noted, not alot at $12.50 a quarter. I was mainly wanting to do it to simplify things and just have it all at FIDO. I'm not sure if it matters one way or the other...

Thanks again for the information (and such a quick reply)!

 

[steady saver]

Will they be sending one check? My Megacorp said they will send me two checks. The after tax amount is very small at about $4k. I’m going to get more details before I pull the trigger. It’s taking a few days to empty the brokerage account into the stable value fund. That needs to happen before I give them the green light.

Popeye, I'm not sure in your situation. I know with our company, it's directly deposited. I'd check with your employer.

 

[jim584672]

I'm confused.

We have post tax contributions to our 401K that I wanted to convert to an IRA.

I misunderstood I guess and thought we could roll that entire amount into a Roth IRA. But megacorp said today that, no, I could roll the principal into a Roth but the remaining (and much larger portion) has to go to a Rollover IRA. And if we do it, we have to do it all at once.

Can someone help me understand this? I thought all post tax 401K investments AND the earnings would be tax free.

Geez. I definitely feel like I'm back to first grade when it comes to managing our money.

That is how it worked with me. Only the after tax contributions go to the Roth, the earnings do not.

 

[Alex The Great]

Will they be sending one check?

I do have 401K at Empower Retirement and all IRAs at Fidelity. When I decide to move after tax 401K money into IRAs, I make a phone call and Empower does a direct transfer to Fidelity. No check is involved. I guess it depend which brokerage firm administer your 401K.

 

[steady saver]

That is how it worked with me. Only the after tax contributions go to the Roth, the earnings do not.

Thank you for the confirmation!

 

[NgineER]

I always roll it over to a Roth as soon as I can, that way the gains are tax free. I do however have the option of rolling over gains to the Roth also, but then I’d have to pay taxes on it.

 

[gauss]

The earnings on the after-tax contributions to a (tradtional) 401k are taxable. [-]That is why you cannot roll them to a Roth IRA.
[/-]

edit: Retracted line above about not being able to rollover 401k assets to Roth IRA


If you had the money in a Roth 401k instead, then the earnings would NOT be taxable (and no penalties would apply for a qualified distribution - ie over 59 1/2 years and 5 years since first contribution).

Do you have a Roth 401k available at your employer?

-gauss

 

[markfuj]

The earnings on the after-tax contributions to a (tradtional) 401k are taxable. That is why you cannot roll them to a Roth IRA.

If you had the money in a Roth 401k instead, then the earnings would NOT be taxable (and no penalties would apply for a qualified distribution - ie over 59 1/2 years and 5 years since first contribution).

Do you have a Roth 401k available at your employer?

-gauss

That's my question too. If so, can you do an in-plan rollover to the Roth 401(k) bucket with your after-tax contributions?


Given that you already have some after-tax 401(k) money with earnings, you might (should?) be able to roll the earnings into a Roth IRA if you're willing to pay the tax on those earnings.

 

[bada bing]

What you're posting about is popularly called a mega-backdoor Roth on the interwebs, and if you search for that term you'll get all kinds of info.

Generally, it is a mistake to not do the rollover as soon as you are able. I used to do mine while an active employee 2-3 times per year. Different 401K's have different restrictions on when and how often you can do a roll over. As soon as the contributions are rolled into a Roth all future gains are tax free, so it's important to not procrastinate. Some plans also allow the after-tax contributions to be recharacterized into Roth within the 401K, which is equivalent from a tax perspective.

 

[gauss]

IRS Notice 2008-30, concerning the rule changes from the Pension Protection Act of 2006 that seem to address this.

In particular see Q&A #1 on page 1 and 2 suggests that this would be allowed going forward.

Note it is *possible* that there could have been law/rule changes since 2008 that would preempt this, but I am not aware of any.

If the employer is being difficult, it sounds like you can do a 60 day/indirect rollover where you take a plain distribution from the 401k. Note however that mandatory withholding will apply (20%) , so you will need to come up with the additional cash to make up the difference to complete the full rollover within 60 days or else you will be taxed and penalized .

If you plan allows partial distributions maybe you should consider doing a small rollover this year first, to confirm that everything works how you believe it does, and then after all the taxes have been paid next year you could do a larger amount.

Note that I edited my reply above (#14) that initially said that this could not be done. Sorry for the confusion.

-gauss

p.s. Here is a summary from Deloitte.

 

[steady saver]

Already retired and we didn't have a Roth 401K, was not an option. We are able to roll over the principal in a Roth and the earnings into a Rollover IRA. When I'd asked the question initially, I was confused because I thought a post-tax 401K acted just like a Roth IRA but that isn't the case. What I learned was that the earnings from a post-tax 401K are taxable unlike in a Roth IRA. They will not be taxed when I roll the earnings into a Rollover IRA but those earnings will be taxed when we go to withdraw them.

Thank you all for your input and helpful information. You helped me resolve the issue.