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New rules for taking after-tax money out of your 401(k)?

http://www.forbes.com/sites/ashleaebeling/2014/09/19/irs-issues-401k-after-tax-rollover-rules/ There are new rules for taking after-tax money out of your 401(k), and they are taxpayer-friendly. Basically, if you have after-tax money in your 401(k) retirement account, you can roll it into a Roth IRA where it will then grow tax-free (as opposed to tax-deferred). You don’t have to pay pro rata taxes on the distribution, accounting for the percentage of the pre-tax money in your 401(k).

My husband has Post-1986 After Tax Contributions $19,919.45 in his 401k.

We do not currently have a Roth IRA. We have a substantial amount of pre-tax $ in his 401k and I have a smaller inherited ira. We do not any other traditional IRA. Can the 401k admins regulate whether we can make this withdrawal?

His salary is about $110,000 per year. Mine is about 25,000. Per this new rule should we roll over this after tax money? It makes sense to me....

Nov 15, 2014 by C from Foristell, MO in  |  Flag
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Peter C. Karp Level 20

C

The new rules for taking after-tax money out of your 401(k) may be taxpayer-friendly but it is a complicated process. You need to sit down with an experienced advisor in your area to discuss your entire financial situation and determine the best options for you and your husband to reach your financial goals for retirement. Don’t rely only on information found on websites. We are located in California if you would like to contact me to discuss your personal situation.

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Comment   |  Flag   |  Dec 10, 2014 from San Francisco, CA

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Good afternoon and thank you for your question. Also thank you for clarifying that the after tax money are post 86 as this makes a difference. There are couple of things to know: 1. If your spouse is till working for the company and he is under the age of 59 1/2 he might not be able to take any money out it is up to his plan document that is put together by his employer. If he is over the age of 59 1/2 or no longer with the company. The after tax money's that were contributed after 86 are subject to proration . What that means is that you can not just take the after tax out only it has to be prorated with pretax as well.
2.Here is what I mean. You have to process a direct rollover of roughly 40-45k of that 19k will be the after tax and the rest will be pretax. You can directly roll the pretax to a rollover or traditional IRA(so that it's not taxable to you) and at the same time you can either convert after tax sum in to a Roth or just take the money and either place it in to a non-retirement account or spend it. The return of after tax contributions is not taxable to you. Obviously if you don't need the money converting it to a Roth is probably a good option as the money will grow tax free. However they are still subject to a 5 year conversion rule, meaning you have to leave it in the Roth for 5 years. However you wil never have to pay taxes on gains when you take money out in the future. Also Roth iras are not subject to RMD and pass more favorable through the estate. I hope this makes sense, after tax are a complicated issues let me know if you have any questions or need help. Best of luck Michael Mezheritskiy www.VisionaryWealthMgmt.com

View all 7 Comments   |  Flag   |  Nov 15, 2014 from Farmington, CT
Michael V Mezheritskiy

When you are processing a rollover the pretax portion of the check should be made payable to the receiving custodian and the after tax check will be made payable to your self and you can code it as a Roth conversation when you are depositing the check. If the iras are with the same custodian as a 401k plan then it's all done electronically. Please let me know if this makes sense

Flag |  Nov 15, 2014 near Farmington, CT
Michael V Mezheritskiy

Iras do have a lot of investment choices the key is if you are self directed to work with a custodian like Vanguard or Schwab where you have access to inexpensive index funds. If you are working with a planner make sure he is a Registered Investment Advisor who is Fee-only. You can go to broker check site on finra website and if your advisor has a green check mark next to "broker" that means he is compensated potentially for selling you products that compensate him for it. You want to make sure there is an "x" next to broker and check mark next to investment advisor only. Best of luck to you in your search and let me know if you have any questions

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Flag |  Nov 15, 2014 near Farmington, CT

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Whether or not you can do any of this depends on what is permitted by the plan. Most plans will not permit money to be withdrawn from the plan unless the employee has separated from service. Check with your HR department or look at the plan summary information you were given. If your husband is still employed by the company you likely will not be able to transfer money anywhere. If he has separated from service it seems to me you would want to do one of the following: 1. Rollover the pre-tax money to an traditional IRA (tax free) and rollover the post tax money to a Roth IRA 2. Convert the pre-tax money to a Roth IRA, pay the tax due on that amount and rollover the post tax money to the Roth also The power of the Roth comes from time, allowing the earnings to compound tax free and then withdrawn tax free. Whether or not doing a conversion to a Roth with the pre-tax money is more likely to be advantageous, the longer you will leave that money in the Roth. There are a number of complex issues here that relate to your age, your future retirement plans and other goals. You should discuss this in more detail with a qualified planner.

Comment   |  Flag   |  Nov 15, 2014 from Fort Washington, PA

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C,

You asked if the Admins can regulate this withdrawal. The answer has two parts:

In-Service Withdrawals:

An in-service withdrawal is just what it sounds like - a withdrawal from your retirement account while you are still employed by the company. The Admins do regulate this withdrawal based on the plan document. Some plans allow in-service withdrawals, some allow only after a certain age, and others don't allow it at all. Check the plan document or summary plan description to find out.

Tax treatment of withdrawal:

Assuming your husband is allowed to take an in-service withdrawal, the Admins do not regulate the tax treatment. If you are allowed to take the withdrawal, then you are allowed to pursue the strategy you outlined above (technically this starts Jan 1st).

Just remember that your husband would need to withdraw his entire 401(k) balance to remove all of the after-tax dollars from the plan. If he makes a withdrawal of 50% of the account balance, only 50% of his after-tax dollars will come out.

It's worth your time to discuss this with a good advisor or CPA before making a move.

Best wishes!

Comment   |  Flag   |  Nov 21, 2014 from Midland, MI

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