Can I Roll After-Tax 401(k) Funds to a Roth IRA?
Here's how you roll after-tax 401(k) funds to a Roth IRA
Some 401(k) plans allow after-tax contributions. When you retire you can rollover this after-tax 401(k) money to a Roth IRA. This is advantageous as money in a Roth accumulates interest, dividends and capital gains that are tax-free.
Here are some common questions about how this type of rollover works.
I've Heard the IRS Regulations Are Not Clear About Rolling After-Tax Funds to a Roth?
For many years the financial planning and tax community was not sure if after-tax funds in a company plan could legally be rolled into a Roth IRA. In September 2014 an IRS ruling clarified this and the answer is a definitive "Yes." As a result, you are permitted to roll the after-tax contributions from a qualified company retirement plan to a Roth IRA. For details on the regulations and interpretation of the rules see:
Administrator Will Cut Two Separate Checks
To facilitate the rollover of after-tax 401(k) funds to a Roth IRA your plan administrator will cut two checks--one for the after-tax contributions and one for the pre-tax money. You can direct the after-tax contributions to go right toward a Roth IRA account while the pre-tax money gets rolled into a traditional IRA. You would designate the appropriate account for each respective contribution type on your 401(k) distribution paperwork.
What If You Deposit the Funds in the Wrong Account?
When you receive a rollover check you have 60 days to deposit it into the appropriate account. If you miss the 60-day deadline, your rollover will not count as a rollover. On occasion, someone writes to me trying to correct such a rollover mistake. Below is one such question we received:
I just recently retired and had the opportunity to rollover my 401(k). I think I made a very big mistake as I had after-tax money that, as I understand, I could have rolled into a Roth IRA. Since it is past the 60 day rollover deadline and I deposited the after-tax check in a brokerage account do I have any recourse as I believe I really blew a golden opportunity? (I can prove that it is all after-tax money and is still sitting in the account in cash.)
Unfortunately, the answer to this question is no, there is not any recourse available. Exceptions to the 60 day rollover time frame are hard to come by unless your financial services company made a gross error. You can look at other ways to get money into a Roth by converting an IRA to a Roth, or if you or a spouse still have earned income than you could contribute to a Roth IRA.
At retirement make sure you follow all the rollover rules so that you don't encounter any negative tax surprises. Read all paperwork carefully before you submit it to your plan administrator, and double check account numbers before you make deposits. You can look at your most recent 401(k) statement to see about how much should be in after-tax funds, and make sure the check amount you are depositing to your Roth is approximately that same amount (it likely won't be exactly the same amount as on your statement as funds fluctuate daily as the investments change in value).
Other Rollover Options
If you're retiring or separating from a company, you have other options besides a Roth IRA. You could roll the funds into a traditional IRA, move them into a new company's 401(k) plan, or leave them where they are. Since 401(k) plans are portable, you don't have to do anything with the money until you're ready. The 60-day clock doesn't start until you start the transfer process.
For that reason, take your time, talk to a financial adviser, figure out the best way to rollover the funds, and then start the process. There's no need to do it as soon as you separate from the company, especially if you have a high balance.