I'm quite sure this is a simple one, and I've had such great luck on this board before I thought I'd ask...

I have a 401(k) still with a former employer. It's about $500,000; they tell me that if I roll it out, around $100,000 will be taxable because it was "after tax" contributions. Can you tell me the rate at which it will be taxed? (I'm currently in the ~~40% bracket, and I'm thinking that's the answer, but I don't know.)

I also have a chunk at MSDW which I'm thinking of rolling into the same self-directed IRA (at Schwab) and I assume (and I know how to parse that word) that there won't be any tax implications there, as long as I do it right. Right?

[I've let this linger for far too long, but along with the 401(k) I have at my current employer, the list of "funds" and such is getting ridiculous. And besides, I think I can do better myself. Based on results of my regular port over the past 15 years, I'm sure of it.]

Thanks.

<< I have a 401(k) still with a former employer. It's about $500,000; they tell me that if I roll it out, around $100,000 will be taxable because it was "after tax" contributions. Can you tell me the rate at which it will be taxed? (I'm currently in the ~~40% bracket, and I'm thinking that's the answer, but I don't know.) >>

You will not be taxed at all on the after-tax contributions; you've already paid tax on those amounts. You will be taxed as ordinary income on the earnings on them, plus the 10% premature distribution penalty if it applies.

<< I also have a chunk at MSDW which I'm thinking of rolling into the same self-directed IRA (at Schwab) and I assume (and I know how to parse that word) that there won't be any tax implications there, as long as I do it right. Right? >>

I don't know the chunk's nature. For that matter, I don't know what MSDW is either, but that's not important (I think). If this is not employer plan money, read up on "conduit" IRAs in the FAQ before you consider comingling it with plan money. Tainting conduit IRAs with non-plan money is legal, but it is not generally considered to be a good idea. However, the drawbacks of doing it may not be important to you.

Phil Marti
Tax Preparer

I have a 401(k) still with a former employer. It's about $500,000; they tell me that if I roll it out, around $100,000 will be taxable because it was "after tax" contributions. Can you tell me the rate at which it will be taxed? (I'm currently in the ~~40% bracket, and I'm thinking that's the answer, but I don't know.)

If you are rolling it over to a traditional IRA, I would think there would be no tax implications at this time. The after-tax contributions should be basis is your newly created IRA, which will actually save on tax when you start taking distributions.

I also have a chunk at MSDW which I'm thinking of rolling into the same self-directed IRA (at Schwab) and I assume (and I know how to parse that word) that there won't be any tax implications there, as long as I do it right. Right?

Correct. Simply transfering an IRA shouldn't trigger a taxable event.

PS - Marti, MSDW stands for Morgan Stanley Dean Witter. It's tough keeping up with all the acronyms these days.

Hope I was helpful.

TwoJs

<< If you are rolling it over to a traditional IRA, I would think there would be no tax implications at this time. The after-tax contributions should be basis is your newly created IRA, which will actually save on tax when you start taking distributions. >>

You can't rollover after-tax 401(k) contributions into an IRA.

Phil Marti

{{You can't rollover after-tax 401(k) contributions into an IRA}}

I guess what this means is that the $100,000 in after-tax contributions can't be put into the IRA, but the $400,000 can. However I'm told by the plan administrator (Westinghouse) that the first withdrawals must be the $100,000 after-tax, and only after it is entirely withdrawn can I roll out the other $400,000.

Which means, I guess, that I'm making an "early withdrawal" of the $100,000, since it can't be rolling into a self-directed IRA, and therefore I will pay the early withdrawal penalty as well as interest on the gain?

That seems to effectively "trap" the entire amount in the Westinghouse plan unless I want to take a large hit. It would be one thing to bring the $100k out "in front" of the tax wall, but I think I could get over that. But to pay taxes, penalty, and lose the ongoing tax advantage seems a bit much, at least until I do the math again.

{{If this is not employer plan money, read up on "conduit" IRAs in the FAQ before you consider comingling it with plan money. Tainting conduit IRAs with non-plan money is legal, but it is not generally considered to be a good idea}}

I have not heard this before, either from the Schwab or Dean Witter people. Thanks for the tip. I'll read it later today.

Appreciate the help. I'll be grateful for any other thoughts or comments you might have.

Goofy

<< I guess what this means is that the $100,000 in after-tax contributions can't be put into the IRA, but the $400,000 can. However I'm told by the plan administrator (Westinghouse) that the first withdrawals must be the $100,000 after-tax, and only after it is entirely withdrawn can I roll out the other $400,000.

Which means, I guess, that I'm making an "early withdrawal" of the $100,000, since it can't be rolling into a self-directed IRA, and therefore I will pay the early withdrawal penalty as well as interest on the gain? >>

Let me phrase it a different way, because I'm not sure we're saying the same thing.

Your after-tax contributions to the 401(k) ($100,000?) have already been taxed. There is no tax consequence to you when you withdraw them. You will pay income tax on the earnings on the after-tax contributions. You will also pay the 10% penalty, unless an exception applies, on the earnings.

Phil Marti

{{Let me phrase it a different way, because I'm not sure we're saying the same thing}}

Now I get it. And I appreciate your patience. Sometimes I'm a little slow, but my wife tells me I'm fun anyhow.

Thanks again.

Goofy