Rollover Roth 401k To Roth IRA But Employer Matching Contributions Classified As Pre-Tax

[frank527]

I have a 401k from a previous employer which is roughly 4.5 years old and am over 59 ½. When I setup the 401k, I designated it as a Roth 401k. I wanted to start the process of doing a direct rollover to avoid the 20% withholding and have the Roth 401k funds directly deposited into a Roth IRA at another brokerage. When I contacted the 401k Roth brokerage, I was told that my contributions were classified as Roth contributions. However, the prior employer’s matching contributions were classified as pre-tax contributions though deposited into a Roth 401k.

Is there a way to resolve this problem or am I stuck transferring part of the Roth 401k funds to my Roth IRA and the other part, the pre-tax matching contributions, to a traditional IRA? I doubt the employer will help as many are leaving.

I imagine converting the pre-tax matching contributions in the Roth 401k to the Roth IRA will cost a lot of money.

(Hope I didn’t confuse anyone.)

Thanks for any help.

[Opus 17]

The broker and employer were correct.  Because the employer match was contributed pre-tax (not included in your wages), it must go into a pre-tax 401(k) account, even if your own contributions go into an after-tax Roth-option 401(k) account.  You will have to rollover the Roth 401(k) funds into a Roth IRA, and the pre-tax 401(k) funds into a traditional pre-tax IRA**.  

After you do the rollover to the pre-tax IRA, you can do the math to think about how much you might want to convert to a Roth IRA, and how fast.  If you spread out the conversions over time, that may lower the tax burden.  Also, there are certain long-term advantages to have some funds in a traditional IRA.  You may want to discuss your options with a financial planner.  

**Yes, you could rollover everything into the Roth IRA all at once, but that will result in an immediate conversion with tax due.  If you do a pre-tax rollover to a traditional IRA, you can then take some time to plan the best way to manage those funds. 

[dmertz · Accepted solution]

Beginning with 2023, the SECURE 2.0 Act allows employer contributions to be Roth contributions.  However, few 401(k) plan agreements have been modified to allow these, so most plans still require that employer contributions are pre-tax, particularly since the IRS has not issued any guidance on how the employer is to report employer Roth contributions on your W-2 so that you can be taxed on them.   Any employer contributions made before 2023 were required to be pre-tax as Opus 17 said, so most, if not all, of your employer's contributions are indeed pre-tax.

The only way to have gotten the  pre-tax funds into the designated Roth account in your 401(k) is to have done In-plan Roth Rollovers which would have been reported on Forms 1099-R with code G in box 7.  Given that you haven't mentioned anything about doing IRRs, it does seem that the plan is correct that all of the employer contributions are pre-tax.

You can move the pre-tax funds to a traditional IRA by direct rollover and continue to defer that income or, as you indicated, you can roll them directly over your Roth IRA and pay the tax.  Direct rollovers where the funds are paid directly to the IRA avoid the 20% mandatory tax withholding.