after-tax distribution

[Santo Gold]

Participant age 49 has both 403(b) and after-tax (non-Roth) ee money in a 403(b) plan. She has left employment and now wants to roll the money from old employer to new employer. New employer will accept the 403(b) and employer money, but not the after-tax. What can she do with the after-tax money? She doesn't need the money right now and does not really want to take a cash distribution.

A roth IRA might be a good fit. But she would be taxed on her after-tax plan earnings, correct? I'm not sure how much we are talking about, but lets say the earnigns amount to $2,000 and that her overall after-tax account has $10,000. So if she rolls to a Roth IRA, She rolls the entire $10,000, but is taxed on $2,000? In other words, she has to pay tax on money that she really will not get her hands on? That's a little tough. Is the alternative to roll $8,000, take $2,000 in cash and pay tax on the $2,000, but you now have money for the tax (because you are taking $2,000 in cash)?

Finally, due to her age, is there a 10% early distribution tax and if so, how does putting money in the Roth affect that? If she put the entire $10,000 into the Roth, would she avoid the 10% tax? If she took $2,000 in cash, is only that portion subject to 10%? Is nothing subject to the 10% because it is after-tax regardless of what she does with the after-tax monies?

Thanks for any comments.

[mbozek]

Participant age 49 has both 403(b) and after-tax (non-Roth) ee money in a 403(b) plan. She has left employment and now wants to roll the money from old employer to new employer. New employer will accept the 403(b) and employer money, but not the after-tax. What can she do with the after-tax money? She doesn't need the money right now and does not really want to take a cash distribution.

A roth IRA might be a good fit. But she would be taxed on her after-tax plan earnings, correct? I'm not sure how much we are talking about, but lets say the earnigns amount to $2,000 and that her overall after-tax account has $10,000. So if she rolls to a Roth IRA, She rolls the entire $10,000, but is taxed on $2,000? In other words, she has to pay tax on money that she really will not get her hands on? That's a little tough. Is the alternative to roll $8,000, take $2,000 in cash and pay tax on the $2,000, but you now have money for the tax (because you are taking $2,000 in cash)?

Finally, due to her age, is there a 10% early distribution tax and if so, how does putting money in the Roth affect that? If she put the entire $10,000 into the Roth, would she avoid the 10% tax? If she took $2,000 in cash, is only that portion subject to 10%? Is nothing subject to the 10% because it is after-tax regardless of what she does with the after-tax monies?

Thanks for any comments.

If she is taking the entire 10 as a taxable distribution she will be subect to 20% withholding tax on the $2000k pre tax earnings or 400. She could then roll over $2000 to the new employers plan using $400 of her own funds and convert $8000 to the roth. She could also reduce her w-2 witholding for the rest of 2011 to offest the $400 taxes withheld. This solutuon assumes that her entire distribution from the 403b plan consists of $2000 in pre tax funds and $8000 in after tax contributions. It also assumes that the plan treats the amount contributed as after tax contributions as a separate plan from any employer contributions for distribution purposes. There is no 10% penalty tax if all taxable funds are rolled over.

[Santo Gold]

Participant age 49 has both 403(b) and after-tax (non-Roth) ee money in a 403(b) plan. She has left employment and now wants to roll the money from old employer to new employer. New employer will accept the 403(b) and employer money, but not the after-tax. What can she do with the after-tax money? She doesn't need the money right now and does not really want to take a cash distribution.

A roth IRA might be a good fit. But she would be taxed on her after-tax plan earnings, correct? I'm not sure how much we are talking about, but lets say the earnigns amount to $2,000 and that her overall after-tax account has $10,000. So if she rolls to a Roth IRA, She rolls the entire $10,000, but is taxed on $2,000? In other words, she has to pay tax on money that she really will not get her hands on? That's a little tough. Is the alternative to roll $8,000, take $2,000 in cash and pay tax on the $2,000, but you now have money for the tax (because you are taking $2,000 in cash)?

Finally, due to her age, is there a 10% early distribution tax and if so, how does putting money in the Roth affect that? If she put the entire $10,000 into the Roth, would she avoid the 10% tax? If she took $2,000 in cash, is only that portion subject to 10%? Is nothing subject to the 10% because it is after-tax regardless of what she does with the after-tax monies?

Thanks for any comments.

If she is taking the entire 10 as a taxable distribution she will be subect to 20% withholding tax on the $2000k pre tax earnings or 400. She could then roll over $2000 to the new employers plan using $400 of her own funds and convert $8000 to the roth. She could also reduce her w-2 witholding for the rest of 2011 to offest the $400 taxes withheld. This solutuon assumes that her entire distribution from the 403b plan consists of $2000 in pre tax funds and $8000 in after tax contributions. It also assumes that the plan treats the amount contributed as after tax contributions as a separate plan from any employer contributions for distribution purposes. There is no 10% penalty tax if all taxable funds are rolled over.

What if she wants to take the after-tax just in cash. Is it correct then that out of the $10,000 distribution, she would receive a check for $9,600, with $400 going towards taxes. What is the 10% early distribution tax applied to, $10,000 or $2,000?