How Do You Withdraw an After Tax 401(k) Contribution?
Added July 20, 2009 by Ilyce R. Glink
Summary: What happens when you make after tax contributions to a 401(k) plan and you now need the money? Can you withdraw just the after tax contributions and not pay any tax? Or, will the IRS require you to withdraw the funds in a proportionate way, based on the total amount in the plan?
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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Comments
Dahlia Madison says
Depending on the rules of 401k plan, DH might also be able to take a loan on the pre-tax portion so as not to incur the taxes at the time of distribution.
Jenn@thinkglink.com says
@Dahlia Thanks for reading and for your comment
bj says
Only the after-tax earnings are taxable. Your employer should have the amounts separated. You don't have to pay tax again on the after-tax amount you withdraw only the earnings if you withdraw them. Why would he have to pay taxes on after-tax money? He already paid taxes on it.
tim says
This information is incorrect. After -tax money in a 401(k) is segregated from pre-tax and can be removed separately. Pro-ration applied to IRA conversions. Beginning in 2010, the after tax portion of a 401(k) can be directly rolled into a Roth IRA without any tax at all.
Pam says
Tim, Is this correct? My company has tracked the before tax and the after tax amounts. My additional question is the matching funds. For example: Let say you have $10K total. $5K is before tax, $2K is after tax, and $3K is matching funds. How is this taxed. My company will cut an after tax check to me. I am over 59 1/2. thanks so much Pam