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After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

So $10k in affer-tax 401k rolled in plan to Roth 401k. $6k basis and $4k gains. I have individual IRA. Does prorata rule apply when 401k is rolled to Roth 401k by in plan rollover?

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8 Replies
DanaB27
Employee Tax Expert

After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

Yes, the pro-rata rule does apply when 401k is rolled to only the Roth 401k. Therefore some of the rollover will be included in your taxable income. To avoid this you could take a full distribution (all pretax gains 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. 

Please see Rollovers of After-Tax Contributions in Retirement Plans for additional information.

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dmertz
Level 15

After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

Your traditional IRA has no bearing on determining the taxable amount of your In-plan Roth Rollover.  The 401(k) plan administrator is required to determine the taxable amount of the IRR will be reported by the 401(k) plan in box 2a of the code G Form 1099-R that they issue reporting the IRR.  If less than the full amount of your after-tax sub-account in the 401(k) was rolled over to the designated Roth account, the plan administrator will do a pro-rata calculation of the taxable amount based on your after-tax basis in this sub-account and the total value of this sub-account.

After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

In reading the IRS link from response 1 this speaks to rolling to Roth IRA which is outside of the 401k plan. The money I moved stayed in-plan,  so it is roth 401k. So any special rules related to Roth 401k. The IRS site does not have anything easy to find on  this topic. I know the treatment of the money in the roth 401k and roth ira for growth. I am asking asking about transfers or rollovers. Anyone aware of the IRS writing how the roth 401k is the same in treatment during rollovers? I have not located anything. 

dmertz
Level 15

After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

"any special rules related to Roth 401k?"

 

An entire section of the tax code, section 402A, covers designated Roth accounts in qualified retirement plans.  From that the IRS developed sections 1.402A-1 and 1.402A-2 of the Code of Federal Regulations.

 

https://www.law.cornell.edu/uscode/text/26/402A

https://www.law.cornell.edu/cfr/text/26/1.402A-1

https://www.law.cornell.edu/cfr/text/26/1.402A-2

 

The IRS has provided additional guidance on In-plan Roth rollovers in Notice 2010-84 and Notice 2013-74:

 

https://www.irs.gov/pub/irs-drop/n-10-84.pdf

https://www.irs.gov/pub/irs-drop/n-13-74.pdf

 

"Anyone aware of the IRS writing how the roth 401k is the same in treatment during rollovers?"

 

The taxable amount of an In-plan Roth Rollover is explained in Q&A-7 of Notice 2010-84.

After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

@Roth401k   i have a similar situation where I want to rollover the after tax 401k into the in plan Roth 401K. Were you able to do this and what are the things to watch out for? I will have contributions and earnings in the after tax 401k account and wondering about  how the earnings are rolled over into what? 

 

I have been doing a rollover to outside Roth (contribution) and rollover IRA (earnings) in the past but i like to stay inside the 401k plan due to the fund options. 

dmertz
Level 15

After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

@esarnc , any amount of an In-Plan Roth Rollover from the after-tax account is a proportionate mix of after-tax basis and pre-tax earnings and it all ends up in the designated Roth account.  Whatever portion of the IRR is from pre-tax funds (earnings) will be taxable.

 

Be aware that the MAGI for a Roth IRA contribution subtracts from AGI the amount of taxable rollovers to a Roth IRA but does not subtract the taxable amount of an IRR, so this could have an effect on the amount you our your spouse is eligible to contribute to a Roth IRA.  Also, the ordering rules for distributions from a Roth IRA do not apply to distributions form designated Roth account in the 401(k).  Distributions from the designated Roth account in the 401(k) before the account is qualified, should you make any, are a proportionate mix of nontaxable after-tax funds and taxable earnings.

After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

@dmertz 

Thank you for the information. Based on what I have read, this is my understanding. Please correct me if I am wrong.

 
1. I have been contributing to a 401K ROTH account through my work plan (Fidelity) since 2019. 
2. The plan also allows after tax contribution and in service withdrawal and rollover into 401K ROTH.
3. My after tax account within my 401k plan has about $1,100 for this year (2023) ($1,000 contribution + $100 earnings)
4. If I rollover this after tax amount into 401K ROTH, the whole amount ( $1,100) will be rolled over into 401K ROTH and I have to pay taxes  on the earrings ($100)  when I file my 2023 return.
5. When I file my tax return for 2023 using TT, I am not sure how the 1099-R form will look like, but I will choose the option of  "this money rolled over to a designated ROTH 401(K).."
 
MAGI
I need to look into the MAGI calculation if I do IRR.
 
QUALIFIED 401K  
Not concerned about 401K qualification since I am not planning to withdraw anytime soon (aka less than 5 years of opening the ROTH 401K)
 
Again thank you for taking time to provide the information.
dmertz
Level 15

After tax 401k in plan rollover to Roth 401k but have individual IRA does prorata apply?

Correct.  The Form 1099-R for the IRR will have $1,100 in box 1, $100 in box 2a and code G in box 7.

 

A $100 taxable amount will only increase your MAGI by $100, so it won't have much, if any, effect on your eligibility to contribute to a Roth IRA should you choose to do so.

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