HOW TO ROLLOVER AFTER-TAX FROM YOUR 401K. There is the pre-tax, post-tax, and sometimes the after-tax bucket in the 401k. But what do you do with it when you leave?
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One important decision that individuals face when changing jobs or retiring is what to do with their 401k savings. One option is to roll over their 401k into an Individual retirement account (IRA). However, for individuals who have been contributing to a Roth 401k, there are additional considerations to take into account when making this decision.
Unlike traditional 401k contributions, which are made with pre-tax dollars, Roth 401k contributions are made with after-tax dollars. This means that when rolling over a Roth 401k into a traditional IRA, individuals will need to decide how to handle the after-tax contributions they have made.
One option is to roll over the after-tax contributions directly into a Roth IRA. This option allows individuals to continue to benefit from tax-free growth on their investments and tax-free distributions in retirement. However, it is important to note that any earnings on the after-tax contributions will be subject to income tax when withdrawn.
Another option is to roll over the after-tax contributions into a traditional IRA. While this option allows individuals to consolidate their retirement savings into one account, it may not be the most tax-efficient choice. When withdrawing funds from a traditional IRA in retirement, individuals will be subject to income tax on both the after-tax contributions and any earnings.
Lastly, individuals also have the option to leave their after-tax contributions in their former employer’s 401k plan. This option may be beneficial for individuals who have access to a wide range of investment options or lower fees within their 401k plan. However, it is important to keep in mind that managing multiple retirement accounts can be more complex and may make it more difficult to keep track of overall investment performance.
Ultimately, the best option for rolling over after-tax 401k contributions will depend on an individual’s specific financial situation and retirement goals. It is recommended to consult with a financial advisor or tax professional to determine the most suitable course of action. By carefully considering all available options and their potential tax implications, individuals can make an informed decision that aligns with their long-term financial objectives.
Example 1 has pretax and post-tax money. But he drew an arrow from the "after-tax" bucket of the first column. This kind of makes it confusing for the visual learners.
Great video and very informational; I appreciated your explanation. I have a several follow-up questions. (1) If you rollover your after-tax contributions to a Roth IRA does this technically count as a backdoor Roth IRA conversion? (2) If you are high earner and the answer to Question (1) is yes, are you then allowed to contribute money into the Roth IRA? (3) Do you still have to complete Form 8606?
Is there a yearly limit on rollovers from after tax and roth 401k buckets ?
Can rollout aftertax into roth?