Taxation of after tax contributions to a 401k
mitchfalter
responsibilities are regarding money that originated as an
after tax contribution to my 401k. The account was with
Merrill, where the amount originating from pre-tax employee,
employer, and after-tax contribution sources were
delineated.
I rolled the account to an IRA. I expected that my original
after-tax contributions would be returned to me, and the
rest rolled over to the IRA. The entire amount was rolled
over. This raises several questions. Can I keep this money
in my IRA? How will it be taxed upon distributions? What
records am I responsible for keeping, and what do I need to
make sure that my IRA recordkeeper knows? I am flummoxed and
would appreciate any help you folks could offer.
Mitch
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Phil Marti
> I rolled the account to an IRA. I expected that my original
> after-tax contributions would be returned to me, and the
> rest rolled over to the IRA.
That's what happened until the law changed (2003?) to allow
a rollover of the after-tax contributions.
> The entire amount was rolled
> over. This raises several questions. Can I keep this money
> in my IRA?
Yes.
> How will it be taxed upon distributions?
Each distribution will be a combination of taxable income
and a nontaxable return of your previously taxed
contributions. See Part I of Form 8606.
> What
> records am I responsible for keeping, and what do I need to
> make sure that my IRA recordkeeper knows?
See the instructions for Line 2 of Form 8606. Your IRA
custodian has no responsibilities regarding this, so you'll
need to track your previously-taxed basis.
Phil Marti
Topeka, KS
A.G. Kalman
> I am having a tough time understanding what my tax
> responsibilities are regarding money that originated as an
> after tax contribution to my 401k. The account was with
> Merrill, where the amount originating from pre-tax employee,
> employer, and after-tax contribution sources were
> delineated.
>
> I rolled the account to an IRA. I expected that my original
> after-tax contributions would be returned to me, and the
> rest rolled over to the IRA. The entire amount was rolled
> over. This raises several questions. Can I keep this money
> in my IRA? How will it be taxed upon distributions? What
> records am I responsible for keeping, and what do I need to
> make sure that my IRA recordkeeper knows? I am flummoxed and
> would appreciate any help you folks could offer.
The answer is going to depend upon when the transaction took
place. If the rollover occurred before 1/1/02, the
after-tax contributions were not allowed to be rolled over.
They would be an excess contribution subject to an annual
excise tax of 6% until you either remove them or reclassify
them as annual contributions if allowed. If the rollover
occurred after 12/31/01 then it was an allowed transaction.
I instruct all clients to file a Form 8606 in the year of
rollover and place the amount of the after-tax contributions
on Line 2, complete the rest of that section to establish
your cost basis with the IRS. Upon taking distributions in
the future you use Form 8606 to compute how much of any
distribution is not taxable and to compute your adjusted
cost basis.
On another note, if you ever want to roll over this IRA back
to an employer retirement plan, you can not rollover your
cost basis.
--
Alan
http://taxtopics.net