Taxation of After-Tax Amounts

[KateSmithPA]

Participant, age 68, is taking a total in-service distribution. He is rolling the distribution into an IRA. $48,000 of the balance is after-tax money.

Can he receive a non-taxable $48,000 lump sum distribution and rollover the balance to his IRA?

Thank you.

Kate Smith

[Guest Sieve]

If the funds are separately accounted for, then distributions from the after-tax employee contribution account will be pro rata from principal & income, so taking a distribution of after-tax funds will carry some taxable income with it--no way around it. Likewise, however, a distribution can be made only from the pre-tax account, so that those assets can be directly rolled over.

[Bird]

I believe the rule is that pre-1987 money, which most after-tax money is, but not necessarily, can be taken on a first-in first-out basis, so you can effectively take the tax-free part out at any time with no tax consequences. In this case, I don't think it matters, because it is a total distribution, so the participant can just roll the taxable part and keep the tax-free part.

[mbozek]

Participant, age 68, is taking a total in-service distribution. He is rolling the distribution into an IRA. $48,000 of the balance is after-tax money.

Can he receive a non-taxable $48,000 lump sum distribution and rollover the balance to his IRA?

Thank you.

Kate Smith

What the participant needs to do is roll the pre tax money over to a traditional IRA first and then elect to recieve the balance of the acount in a lump sum as a separate distribution. See IRC 402©(2) flush language at end.