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Rolling Over Money to a Roth IRA

Q: I have some after-tax money in a former employer’s 401(k). This is not a Roth 401(k), it is a traditional 401(k). Can the money be taken out tax-free? Can it be taken out and rolled into a Roth IRA? We are not income eligible for a Roth IRA. And are the earnings on that portion treated differently? The earnings are being tracked separately by the plan administrator.

A: Withdrawals and rollovers of after tax money from a 401(k) can get a little tricky. You can take the after tax contributions out tax free; however, you probably have some earnings on that money as well. If you take a withdrawal, the IRS considers it to be taken out proportionately. As such, part of the distribution may be subject to taxes and penalty.

You can roll over your after-tax contributions to a Roth IRA and the earnings on your after-tax contributions to a traditional IRA. For your convenience, I have also included a link for further explanation:

http://www.irs.gov/Retirement-Plans/Rollovers-of-After-Tax-Contributions-in-Retirement-Plans


 

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