Rollovers of After-Tax Contributions in Retirement Plans
Many savers have made after-tax contributions to a 401(k) or other defined contribution retirement plan. If your account balance contains both pretax and after-tax amounts, any distribution will generally include a pro rata share of both.
Example: Your account balance is $100,000, consisting of $80,000 in pretax amounts and $20,000 in after-tax amounts. You request a distribution of $50,000. Your distribution consists of $40,000 pretax and $10,000 after-tax.
Rollovers to multiple destinations
Distributions sent to multiple destinations at the same time are treated as a single distribution for allocating pretax and after-tax amounts (Notice 2014-54). This means you can roll over all your pretax amounts to a traditional IRA or retirement plan and all your after-tax amounts to a different destination, such as a Roth IRA.
Example: You withdraw $100,000 from your plan, $80,000 in pretax amounts and $20,000 in after-tax amounts. You may request:
• A direct rollover of $80,000 in pretax amounts to a traditional (non-Roth) IRA or a pretax account in another plan,
• A direct rollover of $10,000 in after-tax amounts to a Roth IRA, and
• A distribution of $10,000 in after-tax amounts to yourself.
Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?
No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:
- pretax amounts to a traditional IRA or another eligible retirement plan, and
- after-tax amounts to a Roth IRA.
Can I roll over my after-tax contributions to a Roth IRA and the earnings on my after-tax contributions to a traditional IRA?
Yes. Earnings associated with after-tax contributions are pretax amounts in your account. Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings. Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.
Prior distribution rules
Prior to the 2014 guidance, each distribution from a participant’s account contained a pro rata share of both the pretax and after-tax amounts. For example, if a participant’s account was 80% pretax, then each distribution or rollover was made up of 80% pretax and 20% after-tax. A transfer of pretax amounts to one destination and after-tax amounts to another could have been done through a 60-day rollover, but the distribution was subject to mandatory 20% withholding on the pretax amounts.
Taxpayers can use the new rule for distributions on and after September 18, 2014. For distributions prior to September 18, 2014, taxpayers can also use the new rule, except for distributions from designated Roth accounts.
- Rollovers of Retirement Plan and IRA Distributions
- Rollover Chart
- Individual Retirement Arrangements (IRAs)
- Types of retirement plans
- FAQs: Waivers of the 60-Day Rollover Requirement