How Do You Withdraw an After Tax 401(k) Contribution?

Calculating After Tax 401(k) Contributions and Withdrawals

Q: I’ve searched your website but can’t find information about whether or not a distribution of 401(k) after tax contributions is taxable in any way. I have about $10,000 in a 401(k) from a previous employer that includes about $5,000 in after tax contributions. I need about $5,000 to help purchase a car but I don’t want to pay taxes on a $5,000 distribution. If I request the provider to send me only the after tax monies, will I be subject to taxes? I am more than 59 1/2. Thanks, DH

A: DH, when I read your letter, I realized that I had never heard of after tax contributions to a 401(k). I’m much more familiar with Roth IRAs and even Roth 401(k)s. So, I turned to my buddy, Woody Alpern, CPA, for some tax guidance. Here’s what he had to say (with some minor editing changes):

Woody’s Answer

Thanks for your question. There is not much information on this on the web because after tax contributions are very uncommon now especially since the ROTH came into effect. Also, most plans don’t allow after tax 401(k) contributions because they can greatly complicate the plans matching contribution discrimination testing calculations, which is certainly beyond the scope of the question you asked.

Specifically, your company’s plan document will dictate how this after tax contribution has to be treated. At a minimum, the IRS will require that the distribution of $5,000 be pro-rated between pre-tax and after tax contributions and any earnings associated with those contributions. Let me illustrate below with a very simplified example.

Assume your total contributions in the plan since inception are $10,000, and there have been $2000 in earning on this through the date that your actual distribution of $5,000 takes place. Also assume that of the $10,000 contribution, $5,000 of it was with after tax contributions and $5,000 of it was with pre-tax tax contributions. Unfortunately, you would be required to do a proration to determine how much of the $5,000 is from the pretax contributions versus the after tax contributions. Also, an allocation of the earnings would have to be made, which is all taxable. The calculation would be as follows:

Total pre tax contributions = $5,000
Total earnings subject to tax = $2,000

Total contributions and earnings $12,000

Ratio of total pre tax contributions and earnings subject tot total contributions ($7,000/$12,000) = 58.3333 percent

Taxable portion of $5,000 distribution = $5,000 X 58.333 percent = $2,916.67 = taxable portion of distribution subject to ordinary income tax rates, but not penalty since age is over 59 1/2.

You will need to ask your administrator the specifics in their plan document to see if their plan document has language stating something different (more stringent, like all comes from pre-tax first) before being sure this would be the methodology.

I hope this helps.

Woody Alpern – CPA/PFS
www.yourwealthtax.com

Consider Using a Roth IRA Instead

If you qualify, you’re far better off stashing after-tax contributions in a Roth IRA rather than part of a 401(k). You might also be better off making a non-deductible contribution (if you qualify) to a non-deductible IRA. For more details, talk to you tax planner.


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10 Responses to How Do You Withdraw an After Tax 401(k) Contribution?

  1. Johnny says:

    There is another issue that is not addressed in the question or answer. After-Tax contributions can be Pre-1987 or Post-1986. These are handled differently by the IRS. I believe Pre-1987 after-tax contributions were grandfathered in with a new tax law making them treated differently. One person told me that Pre-1987 after-tax contributions can be withdrawn separately without affecting anything else. But I have not been able to verify that. It is very difficult to get any real information on this. And the real kicker is that your plan admin may tell you their version of what is allowed, but the only important thing is how the IRS sees it, and you won’t know that until well after the fact.

  2. JOhnny says:

    There is another issue that is not addressed in the question or answer. After-Tax contributions can be Pre-1987 or Post-1986. These are handled differently by the IRS. I believe Pre-1987 after-tax contributions were grandfathered in with a new tax law making them treated differently. One person told me that Pre-1987 after-tax contributions can be withdrawn separately without affecting anything else. But I have not been able to verify that. It is very difficult to get any real information on this. And the real kicker is that your plan admin may tell you their version of what is allowed, but the only important thing is how the IRS sees it, and you won’t know that until well after the fact.

  3. a little experienced says:

    There is a lot of confusion on this page about how after-tax withdrawals work and I would like to clarify.

    I work for a firm where I specifically handle high balance 401k withdrawals and rollovers. I advise on after-tax transactions on a daily basis and would say that I am very well versed on the matter.

    Johny is correct, there can be Pre-1987, Post-1986, or both types of after-tax money in 401k plans.

    Pre-1987 monies are (with one exception) taken directly off the top for a withdrawal. Example: your 401k balance is $10000.00, and within it there is $1000.00 of Pre-1987 money. Any withdrawal up to $1000.00 will be completely tax free. The only exception that I have ever encountered is when processing Minimum Required Distributions.

    Post-1986 money is a much more complicated situation. Let’s use the same example as above, accept that the $1000.00 is Post-1986 money, and there is $2000.00 worth of earning ON THE Post-86 money. The “typical” way this is handled for a $1000.00 withdrawal would be to divide the after-tax contributions buy the earnings on the after-tax and that would yields the ratio of pretax to after tax = $333.33 non-taxable and $666.67 taxable.

    HOWEVER, Woody Alper is correct in that any 401k plan can create a completely different formula.

    Thank you Woody, as this point was exactly what I came to this site to learn. I’ve been trying to develop a formula and have determined that it was correct to the penny ~85% of the time for a withdrawal, but would fluctuate wildly for the other 15%.

  4. CP says:

    I have 401k account with General Dynamics that is managed by Hewitt. I no longer work for GD. I am only 55 and recently made a $20k withdrawl from the account. Prior to the withdrawl, the quarterly statements balances showed about $5000 in after tax money. After the withdrawl, the after tax balance shows as zero..
    They witheld 20% ($4k) and I received a 1099R at the end of the year showing the entire $20k withdrawl amount as taxable. I called and the rep from Hewitt he told me that the amount labeled “after tax money is not really after tax”. I clearly remember from the time I was employed there that after tax contributions were exactly that and the day you withdrew those funds you did not have to pay federal taxes on it.
    The only option they offered was to appeal and submitt check stubs to prove my case. Image, that was 30 years ago and the stubs are long gone.
    I think they are wrong and thousands of people may very well be unfairly overcharged extra taxes.
    Anyone else out there with this same situation?

    • Tom says:

      I had the same situation with Hewitt as I was a Northrop Grumman employee who is 54. I had to battle with them but finally after about 10 calls found someone who understoood the situation. The anser is that i took only the After Tax portion and rolled the dividend portion into qualified 401k plan and had NO tax consiquence. I have had to batlle with them with other employees atemting the same thing. Each time I give my social security number and they reluntently give in. I am very disapointed with their lack of knowlage with our life savings as they give poor, inacurate advice.

      • Margaret Bjarkman says:

        Hi, Tom! I hope you don’t mind that I am ‘replying’ to a post you made in November, 2012, regarding getting Hewitt to cough up some of my 401K funds that I made with the same ‘after-tax’ dollars that you did at Northrup. I did mine at General Dynamics. I know Darn well that those were after-tax dollars we put in there because I was so confused about it I had to ask my dad which to pick, and he said choose the After-tax dollars. I have to ask for some of that soon. If I get flack from Hewitt, may I just tell them to look at Your payout to see how to handle Mine? Not asking for SSN, but your name maybe. Might help. Thanks,Margaret Bjarkman

  5. jack wilson says:

    I’m rolling over my 401k to an ira, 14,000 is pre 1986 after tax money that I want to put down on a car. Should this be a problem with the irs.

  6. RF says:

    CP – same situation as you – just a little older. Just got off the phone with them today (the analyst who answered and then subsequently with Dave, her supervisor). GD/HP will not allow withdrawals from only the After-Tax contributions. Further, they do not have any forms that one could request to spell this out. Also, I wanted to make the withdrawal only from the Fixed Income fund, not the stock fund. They will not do this either. As far as i can see, only a class action suit will address this.

  7. 1retiree1 says:

    In 2010, I have to take requirement min. distribution both pretax 401K and post tax 401K at same time. the RMD calculation is from total $$(pretax + post tax)
    After RMD, I have rollover to other places post tax $ to tira and pretax $ to roth ira without problem.
    pls. advice how to file tax.
    Any question?
    Did I have to file something (like 8606) at the time I contribute to the post tax $$? I did not know at that time. So I did not file. I heard someone said my company should file 8606 for me at that time.
    What should do now? what form should I file to irs for the roth ira?
    I received two 1099Rs-
    1st one is for post tax $. there is only $$ in box 1(gross distribution), all other box is blank.(it looks like pretax $$)
    2nd one has $$ box1 (gross distribution), $$ in box2 taxable amountt.
    $$ box 4 (fed. tax withheld), box 5 is blank.
    $$ in box 5 (employee contribution)- it looks like my post tax $$.
    7 in box 7

  8. jerry taylor says:

    the company i work for DOES NOT have an automatic turn off of 401K deductions when the limit for the year has been reached. The payroll just keeps taking the percentage you requested out of the check and sticking it into the 401K. However, it is smart enough to recognize you reached the limit for the year and begins taxing you for money the put into your 401K that was above the limit. We have to manually change our 401K deduction to $0 when we notice our checks are smaller due to the taxes being taken out of the deduction after the limit has been reached….sounds crazy, right?…it is strange but true!!!!

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