topic rolling over of after tax contributions to a 401k in Retirement tax questions

rolling over of after tax contributions to a 401k

lisay — Fri, 27 Dec 2019 16:31:17 GMT

I am retiring (age 63) and have a 401K that I have made some after tax contributions to (in addition to before tax contribution), these after tax contributions were invested in company stock (publicly traded). Can I/should I roll these after tax contributions, and the appreciation of the stock, into a Roth IRA?

Re: rollover of 401k

macuser_22 — Fri, 27 Dec 2019 16:38:07 GMT

delete

Re: rolling over of after tax contributions to a 401k

dmertz — Fri, 27 Dec 2019 17:17:03 GMT

See IRS Notice 2014-54 regarding splitting a distribution from a 401(k) that is partly after-tax:

https://www.irs.gov/pub/irs-drop/n-14-54.pdf

However, instead of doing a rollover of company stock you might want to consider NUA treatment if you qualify and the company stock is highly appreciated.

Re: rolling over of after tax contributions to a 401k

lisay — Fri, 27 Dec 2019 20:10:21 GMT

Why would NUA treatment be more advantageous than just rolling the stock to a Roth IRA, if I'm not planning on withdrawing from the Roth IRA for a long time, if ever?

Re: rolling over of after tax contributions to a 401k

dmertz — Fri, 27 Dec 2019 20:43:00 GMT

If your company shares in the after-tax sub-account are highly appreciated, the gains will be taxable if you roll the shares in-kind over to a Roth IRA and you would pay ordinary income tax on those gains. NUA treatment allows the gains to instead be taxed at long-term capital gains rates. Depending on your situation, the lower taxes on the gains might outweigh the benefit of future tax-free growth in the Roth IRA. The analysis is beyond what is practical to do via a forum like this one. You would be better off finding a tax advisor with experience in this area.

Perhaps you don't even qualify for distribution of NUA. To qualify for NUA you must make a lump-sum distribution from your 401(k), distributing everything in a single tax year with no distributions in the intervening years between the year of your qualifying event (generally age 59½ or separation from service from the company) and the year of the lump-sum distribution. Other parts could be rolled over to a traditional IRA to continue to defer taxes.