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vkg wrote,

The conversion of the 401K after-tax needs to be done before the roll-over.

To which aj485 wrote, No, you can roll the after-tax contributions in a 401(k) directly to a Roth IRA.

In fact the IRS permits you to split any after-tax contributions (cost-basis) from the earnings when you roll the funds out of a 401(k). So if you call your 401(k) provider and ask for a rollover of after-tax funds, you should have the option to rollover the original contributions to a Roth IRA and simultaneously roll any earnings into a Traditional IRA.

I know for a fact that Fidelity is capable to executing such a rollover. This shouldn't require any input from your (previous) employer and it shouldn't be something the plan has to explicitly permit.

The IRS actually issued a notice about this ability in 2014. https://www.irs.gov/pub/irs-drop/n-14-54.pdf

In addition this fact is covered here in on the IRS website: https://www.irs.gov/retirement-plans/rollovers-of-after-tax-...

Specifically this page says:

Can I roll over my after-tax contributions to a Roth IRA and the earnings on my after-tax contributions to a traditional IRA?

Yes. Earnings associated with after-tax contributions are pretax amounts in your account. Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings. Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.


This splitting of contribution amounts from the earnings allows you to avoid incurring additional taxes on future earnings without incurring any additional taxes in the current tax year.

- Joel
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As you stated, safe harbors for withholding are 90% of your 2021 tax shown or 110% of the tax shown on your 2020 return (AGI over $150k). You only need to meet one safe harbor.
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Looking at potential changes in tax policy, which would appear to eliminate or reduce the potential for backdoor Roth or backdoor Mega Roth, I'd like to do a substantial conversion in CY 2021.

I'd suggest that you take a look at tsimi's post https://boards.fool.com/kitces-analyzes-new-tax-proposal-349... and read the Kitces analysis linked to in that post before you start to do any conversions that will push you into another tax bracket or make you subject to NIIT for 2021.

As proposed, the income limits on conversions will not be implemented for 10 years.

AJ
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As proposed, the income limits on conversions will not be implemented for 10 years.

AJ


There are two parts to the proposed changes:
1.) Prohibiting all after tax TIRA/401K conversions to a ROTH
2.) Income limit on conversions of pre-tax TIRA/401K

The first one is of concern to me. I had done after-tax 401K conversions to ROTH 401K this year and last with the plan of finishing my after tax 401K conversions next year.
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I had done after-tax 401K conversions to ROTH 401K this year and last with the plan of finishing my after tax 401K conversions next year.

I'm presuming that since you've done it in chunks and still have after tax contributions in the account, your account has both the original after-tax contributions, and pre-tax gains. I will further presume that the reason you've done it in chunks is to minimize taxes on the conversion of the pre-tax gains. If that's the case, does your plan have an option to roll the pre-tax gains into the pre-tax account of your IRA, while rolling the rest of the after-tax contributions into the Roth IRA? If so, you probably want to do that this year. You can still do a conversion next year of money from the pre-tax 401(k). If your plan doesn't allow that, what are your plan's rules on rolling out the total after-tax account (both contributions and gains)? They may have age restrictions, employment restrictions, or rules that make you fully disburse your 401(k) that would make it untenable for you to roll the after-tax account into IRAs. But, if feasible, you could roll the after-tax contribution amount into a Roth IRA, and, at the same time, roll the pre-tax gains into a T-IRA, to be converted next year.

If neither of those is an option, if you really want the after-tax contributions in a Roth IRA, you may need to bite the bullet and take a tax hit on the pre-tax gains this year. As Kitces indicates in his article https://www.kitces.com/blog/biden-american-families-plan-bil...
If this provision is enacted (which seems likely), it would create a need for a fresh look at the convert-or-not decision for savers with after-tax dollars in retirement accounts. While such individuals, particularly IRA owners (where the pro-rata rule applies), may have been waiting for the optimal time at which to make a conversion, the choice may soon be now or never (at least with respect to the after-tax dollars in their account).

That said, you can always just leave the after-tax contributions in the 401(k) for now, and then just take them out tax-free, move them to a taxable account and move the pre-tax gains into a T-IRA when you disburse the after tax account from the 401(k). Sure, it won't get the money into a Roth account. But a taxable account can be managed to produce very few taxes, and, in general, taxable accounts have a lot more flexibility than retirement accounts.

AJ
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But a taxable account can be managed to produce very few taxes, and, in general, taxable accounts have a lot more flexibility than retirement accounts.

AJ


Most likely would be to distribute the remaining After-Tax next year. Two goals: to lower RMDs when they start and to move as much as possible of the after-tax funds into a ROTH.

Once the after tax has been handled, I can look at what to do about the 401K. I've retired so there are no restrictions on distributions. It isn't the best of plans.

The decision on how much to add to taxable income has been made for this year and that request has been made. The 401K administrator is slow on processing those requests. I was burnt the first year by waiting until mid-December to request the conversion.

Also, tied into this is when I start Social Security. So many interrelated decisions to be made.
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Thanks, read the Kitces article and will probably read a few more times and wait and see a little before acting.

In my particular case, while an after-tax 401k is more flexible than the Roth, I have a pretty decent non tax advantaged nest egg that serves for my flexibility. Continuing to contribute to the 401k, contribution limits on the pre-tax/Roth component + employer match leads to a different asset allocation than I would like. I've been converting my traditional IRA outside the 401k to Roth, doing backdoor Roth, and converting within the 401k as funds allow to handle the taxes. But the potential tax change has me thinking of converting at least enough of the after-tax 401k to fill up my tax bracket.

After tax 401k contributions will continue in 2022 and beyond, but conversion seems like that option will be gone for that bucket. So I'll be working on converting pre-tax dollars in 2022 and beyond.
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...I can look at what to do about the 401K. I've retired so there are no restrictions on distributions. It isn't the best of plans.

The decision on how much to add to taxable income has been made for this year and that request has been made. The 401K administrator is slow on processing those requests.


Since you are retired I think there would be no issues in rolling the 401k into a traditional IRA at a regular broker such as Fidelity*. Doing a ROTH conversion from my Fidelity IRA to my Fidelity ROTH is a simple on-line transaction, no processing delays, it happens immediately in my experience.

*(Give the broker with the regular IRA the job of dealing with the 401k administrator. They will know what you need to provide.)
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Once the after tax has been handled, I can look at what to do about the 401K. I've retired so there are no restrictions on distributions. It isn't the best of plans.

If it's not a great plan, I'd be looking to roll everything into IRAs (Roth for after-tax and any Roth subaccount, and Traditional for pre-tax) sooner, rather than later.

AJ
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Since you are retired I think there would be no issues in rolling the 401k into a traditional IRA at a regular broker such as Fidelity*. Doing a ROTH conversion from my Fidelity IRA to my Fidelity ROTH is a simple on-line transaction, no processing delays, it happens immediately in my experience.

The conversion of the 401K after-tax needs to be done before the roll-over. I have existing TIRAs and don't want to contaminate the tax basis.
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The conversion of the 401K after-tax needs to be done before the roll-over.

No, you can roll the after-tax contributions in a 401(k) directly to a Roth IRA.

AJ
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No. of Recommendations: 2
vkg wrote,

The conversion of the 401K after-tax needs to be done before the roll-over.

To which aj485 wrote, No, you can roll the after-tax contributions in a 401(k) directly to a Roth IRA.

In fact the IRS permits you to split any after-tax contributions (cost-basis) from the earnings when you roll the funds out of a 401(k). So if you call your 401(k) provider and ask for a rollover of after-tax funds, you should have the option to rollover the original contributions to a Roth IRA and simultaneously roll any earnings into a Traditional IRA.

I know for a fact that Fidelity is capable to executing such a rollover. This shouldn't require any input from your (previous) employer and it shouldn't be something the plan has to explicitly permit.

The IRS actually issued a notice about this ability in 2014. https://www.irs.gov/pub/irs-drop/n-14-54.pdf

In addition this fact is covered here in on the IRS website: https://www.irs.gov/retirement-plans/rollovers-of-after-tax-...

Specifically this page says:

Can I roll over my after-tax contributions to a Roth IRA and the earnings on my after-tax contributions to a traditional IRA?

Yes. Earnings associated with after-tax contributions are pretax amounts in your account. Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings. Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.


This splitting of contribution amounts from the earnings allows you to avoid incurring additional taxes on future earnings without incurring any additional taxes in the current tax year.

- Joel
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