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Author: kktm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: "After tax" money in 401K. Date: 2/1/2002 11:16 PM
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I recently retired and rolled over my 401K into my self-directed brokerage account. There was appx. $7,500. in "after tax" funds in the account and I had thought I would be issued a check. Not so. All was rolled over and is now in the self-directed IRA account.

Does anyone know: Do I simply withdraw the amount shown on my last statement before distribution - and how is it handled with regard to IRS reporting?
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Author: jtr56 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33625 of 76237
Subject: Re: "After tax" money in 401K. Date: 2/2/2002 12:19 AM
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In 2002, for the first time, after-tax money can also be rolled over. This is part of the new reg's passed last year along with the tax cuts. I wish it had been true for 2001, because I got a big check when I left, which I'd rather have rolled over but couldn't.

If I'm not mistaken, you can withdraw the after-tax portion, or any part of it, if you wish, without penalty or more tax. But I hope some of our more savvy posters will correct me if I'm wrong.

Good luck and cheers!
jtr

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Author: buc99 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33632 of 76237
Subject: Re: "After tax" money in 401K. Date: 2/2/2002 4:47 AM
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I would assume that the after tax monies are treated the way non-deductible contributions are. That is, you have a cost basis in the IRA in the amount of the after-tax monies. Withdrawals are then pro-rated and the part attributed to basis is not taxed again. This avoids penalty on these amounts, but since it is pro-rated, penalty is still possible on early withdrawals on the taxable portion. So, if you have a balance of 50,000 and the after-tax portion is 10,000, you would have a taxable (and potential penalty) amount of 80% of a withdrawal. Likewise, 20% would be tax and penalty free.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33636 of 76237
Subject: Re: "After tax" money in 401K. Date: 2/2/2002 10:21 AM
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Buc99 writes:

I would assume that the after tax monies are treated the way non-deductible contributions are. That is, you have a cost basis in the IRA in the amount of the after-tax monies. Withdrawals are then pro-rated and the part attributed to basis is not taxed again. This avoids penalty on these amounts, but since it is pro-rated, penalty is still possible on early withdrawals on the taxable portion. So, if you have a balance of 50,000 and the after-tax portion is 10,000, you would have a taxable (and potential penalty) amount of 80% of a withdrawal. Likewise, 20% would be tax and penalty free.

Your assumption is absolutely correct. When after-tax 401k contributions are transferred to a traditional IRA, they will be treated just like any other after-tax contribution to that IRA. That means part of any withdrawal is always taxed and part is not just as in the example you outlined.

Regards..Pixy

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Author: emma06 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33989 of 76237
Subject: Re: "After tax" money in 401K. Date: 3/14/2002 10:59 AM
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Pixy,

Isn't is also important to keep records of "after-tax" money for when withdrawals are taken later ? The only record I have is from my 401(k) plan where they show the exact amount of after tax money being rolled over to an IRA. The IRA told me they won't distinguish after-tax money on the 5498 form. It will all be tallied as a rollover.

Since this is a new ruling in 2002 I wondered why this "after-tax" money couldn't be rolled into a Roth since taxes were already payed. The only answer I've been able to get is that you can't go directly to a Roth, you have to go to an IRA. OK, so if the "after tax" money is in an IRA can I easily roll it into my Roth ?

Michelle

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33990 of 76237
Subject: Re: "After tax" money in 401K. Date: 3/14/2002 11:33 AM
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Michelle writes:

Pixy,

Isn't is also important to keep records of "after-tax" money for when withdrawals are taken later ? The only record I have is from my 401(k) plan where they show the exact amount of after tax money being rolled over to an IRA. The IRA told me they won't distinguish after-tax money on the 5498 form. It will all be tallied as a rollover.


Prior to this year, you could not transfer after-tax money from a 401(k) plan into a traditional IRA. That was always distributed to the account holder in a separate check, and the money was returned to that person free of any taxes or potential early withdrawal penalty. As of the first of this year, though, after-tax monies in a retirement plan may now be transferred into a traditional IRA.

As you point out, when they are transferred to the IRA, it then becomes very important for the owner to keep track of the after-tax money to ensure those funds are not taxed again when withdrawals commence from that IRA. While I have not yet seen the guidance for how this money will be tracked, most in the financial services industry anticipate the tracking will be required via reporting on a form such as Form 8606. You will need to pay attention to IRS announcements this year to see what the final reporting requirements will entail.

Since this is a new ruling in 2002 I wondered why this "after-tax" money couldn't be rolled into a Roth since taxes were already payed. The only answer I've been able to get is that you can't go directly to a Roth, you have to go to an IRA. OK, so if the "after tax" money is in an IRA can I easily roll it into my Roth?

You can't just transfer the after-tax money in a traditional IRA to a Roth. The procedure doesn't work that way. If after-tax contributions have been made to a traditional IRA, then part of every distribution from that IRA (or any other if you have multiple traditional IRAs) will be considered to consist of partly taxable and partly untaxable distributions. A conversion to a Roth IRA falls into that category. For details on that issue, see the discussion beginning on page 32 of IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html.

Regards..Pixy


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