Author Topic: What are implications on withdrawing converted after tax money?  (Read 384 times)

ender

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I have aftertax contributions as an option in my 401k. I also can setup auto conversions to Roth inplan (so not doing a rollover).

What are withdrawal implications on this (assuming I've left my employer) as compared to rolling directly to a Roth IRA via an inplan rollover?

I know that if I converted aftertax --> Roth IRA directly, I can withdraw contributions at any time.

Imagining that I do the following:

  • Contribute $10k in aftertax with inplan conversion
  • Contribute $5k in regular Roth contributions
  • Quit and roll 401k into Roth IRA (which has grown the $10k to $12k, and $5k to $6k)


If I've had Roth IRAs for 5+ years, can I withdraw that $10k immediately if I have left the company? And then the $5k after 5 years?


seattlecyclone

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Re: What are implications on withdrawing converted after tax money?
« Reply #1 on: March 07, 2020, 08:29:58 PM »
Imagining that I do the following:

  • Contribute $10k in aftertax with inplan conversion
  • Contribute $5k in regular Roth contributions
  • Quit and roll 401k into Roth IRA (which has grown the $10k to $12k, and $5k to $6k)

Per 26 CFR 1.408A-10, $15k (the total of your regular and converted contributions) would count as "regular contributions" and the $3k of earnings within the Roth 401(k) would count as "earnings" for the purpose of the Roth IRA distribution ordering rules. You would be able to withdraw $15k from the Roth IRA immediately with no tax due, regardless of how long your Roth IRA has been open.

Note that this assumes the $10k in-plan conversion was made fully with after-tax amounts and did not grow at all prior to the Roth conversion. If part of the $10k in-plan conversion was taxable growth, the full $15k does still go into the "regular contributions" bucket, but there's a separate special recapture rule that would apply the 10% early withdrawal tax to the portion that was includible in your income at the time of the in-plan conversion if it is withdrawn within five years of that conversion. The amount that was already post-tax at the time of the in-plan conversion is not subject to this rule.

What happens if you do have a small amount (say, $100) that is subject to this recapture rule and you make a partial distribution from your "regular contributions" bucket of your Roth IRA? Are you supposed to pro-rate the special recapture tax based on what percentage of your regular contributions is subject to this tax, or are you free of it as long as you leave at least $100 behind? \_(ツ)_/

ender

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Re: What are implications on withdrawing converted after tax money?
« Reply #2 on: March 08, 2020, 07:04:19 AM »
Awesome, perfect!