Distribution of employee after-tax - no rollover

[PMC]

Participant's 401(k) plan account includes employee after-tax contributions (post '87 and not Roth). After this individual terminates employment and requests a distribution from their after-tax account, some of that distribution would have to be considered a return of earnings, correct? Could that individual request a rollover to an IRA of just the taxable portion of their account and receive a distribution of just the after-tax contributions made to the 401(k) Plan - no taxable event?

[ESOP Guy]

Yes

http://benefitslink.com/modperl/qa.cgi?db=...ibtax&id=19

[ETA Consulting LLC]

A few years ago, the IRS changed the rules allowing individuals to take the after-tax only portion while directly rolling the earnings to an IRA. Per the current rule, whenever an amount is rolled while a portion is received in cash, the basis will be split (prorata) between the rollover and the distribution. The only way to achieve your objective would be to take the entire distribution in cash and then roll over the earnings. This creates an issue with the mandatory 20% withholding on the pre-tax portion of the distribution.

I forgot the ruling, but would imagine all special tax notices have been updated with the current language.

Good Luck!

[GMK]

PMC - Posts #4 and #6 here may also help:

http://benefitslink.com/boards/index.php?showtopic=47952