After-tax 401(k) to

Roth IRA conversions

Are they right for you?
With a 401(k) after-tax conversion, you may be able to build funds in a Roth IRA
in a more tax-efficient way ─ while still allowing you to maximize your pretax
or Roth 401(k) salary deferrals.
If you earn a high income and want to own a Roth IRA, you may face many barriers, including:
• Income limits that prevent you from making direct contributions to a Roth IRA.
•Y
 ou are allowed to convert a traditional IRA to a Roth IRA, but the tax consequences can
be staggering.
What is an after-tax 401(k) conversion?
With an after-tax 401(k) conversion, you take after-
tax contributions out of your 401(k) plan while you’re
still working for your employer (called an in-service
distribution), and convert it to a Roth IRA.
You may be able to do 401(k) after-tax conversion if you:
• Are permitted to make after-tax contributions to your
401(k) plan.
• Participate in a 401(k) plan that offers in-service
distributions of after-tax amounts.
Many employer-sponsored 401(k) retirement plans allow
after-tax contributions. Review your plan’s summary plan
description (SPD) or plan document to see the rules
regarding after-tax contributions in your 401(k) plan.
Why convert 401(k) after-tax dollars?
After-tax contributions to a 401(k) plan and in-service
Roth IRA conversions can offer these benefits:
• You can contribute more. After-tax contributions to a
401(k) plan are not subject to the contribution limits
that apply to pretax or Roth deferrals. They do count
against the overall limit set by the IRS, which includes
all employer and employee contributions that are
made to your account.
• There are no income limits. Roth IRAs have
income limits that may prevent you from making
contributions. However, if a 401(k) plan allows after-
tax contributions, all plan participants may be eligible
to make them and convert to a Roth IRA regardless of
income level.
• The tax consequences are limited. Although anyone
can convert traditional IRA assets to a Roth IRA,
conversions of pretax money require you to pay taxes
up front. With a 401(k) after-tax conversion, you
don’t pay tax on the after-tax contributions that are
converted. If the earnings portion is directly rolled to a
traditional IRA, no income taxes are due.
How 401(k) to Roth IRA after-tax conversions work
Fund a new Roth IRA in a few simple steps
Here are two examples of how a 401(k) after-tax conversion could work:
Example 1: Example 2:
Jason’s employer allows after-tax contributions in its You also have the option of converting the earnings
401(k) retirement plan into a separate after-tax account. portion and paying income tax if you don’t want to
Jason is 50 years old and makes after-tax contributions establish a traditional IRA. In this example, Sue has
of $25,000.1 Jason directs the 401(k) plan administrator contributed $10,000 to her 401(k) after-tax account
to convert $25,000 of after-tax contributions to a and has $250 of related earnings. Sue doesn’t have
Roth IRA, and to directly roll over $2,000 of related an existing traditional IRA and isn’t concerned about
earnings to a traditional IRA he has established. The the tax consequence of converting $250 of earnings.
administrator issues 1099-R forms showing no taxable For ease of execution, Sue decides to convert
income. $10,250 and pay tax on the $250 of earnings.
401(k) after-tax account 401(k) after-tax account
$27,000 total $10,250 total
$25,000 - After tax contributions $10,000 - After tax contributions
$2,000 - investment earnings $250 - investment earnings
$25,000 (contributions) $2,000 (earnings) $10,000 (contributions) $250 (earnings)
New Roth IRA New Traditional IRA New Roth IRA
$25,000 (contributions are $2,000 (earnings rollover) $10,250 converted to Roth
converted to a Roth IRA) $250 reported as ordinary income
Additional considerations
In some 401(k) plans, after-tax contributions by highly compensated employees could affect the plan’s ability
to pass nondiscrimination testing. This is more likely to be an issue with smaller plans. Check with your plan
administrator if this is a concern.
Depending on your situation, rolling over to an IRA may not be the best plan for you. Disadvantages may include
fees and expenses, creditor protection, ability to contribute to your employer plan, tax treatment of employer
securities, and the timing of your retirement. Be sure to discuss the advantages and disadvantages with both your
financial advisor and your tax advisor before implementing an IRA rollover.
Have questions?
Contact your Ameriprise financial advisor today.
With a 401(k) after-tax conversion, you may be able to build funds in a Roth IRA
in a more tax-efficient way ─ while still allowing you to maximize your pretax
or Roth 401(k) salary deferrals.
If you earn a high income and want to own a Roth IRA, you may face many barriers, including:
• Income limits that prevent you from making direct contributions to a Roth IRA.
•Y
 ou are allowed to convert a traditional IRA to a Roth IRA, but the tax consequences can
be staggering.
What is an after-tax 401(k) conversion?
With an after-tax 401(k) conversion, you take after-
tax contributions out of your 401(k) plan while you’re
still working for your employer (called an in-service
distribution), and convert it to a Roth IRA.
You may be able to do 401(k) after-tax conversion if you:
• Are permitted to make after-tax contributions to your
401(k) plan.
• Participate in a 401(k) plan that offers in-service
distributions of after-tax amounts.
Many employer-sponsored 401(k) retirement plans allow
after-tax contributions. Review your plan’s summary plan
description (SPD) or plan document to see the rules
regarding after-tax contributions in your 401(k) plan.
Why convert 401(k) after-tax dollars?
After-tax contributions to a 401(k) plan and in-service
Roth IRA conversions can offer these benefits:
• You can contribute more. After-tax contributions to a
401(k) plan are not subject to the contribution limits
that apply to pretax or Roth deferrals. They do count
against the overall limit set by the IRS, which includes
all employer and employee contributions that are
made to your account.
• There are no income limits. Roth IRAs have
income limits that may prevent you from making
contributions. However, if a 401(k) plan allows after-
tax contributions, all plan participants may be eligible
to make them and convert to a Roth IRA regardless of
income level.
• The tax consequences are limited. Although anyone
can convert traditional IRA assets to a Roth IRA,
conversions of pretax money require you to pay taxes
up front. With a 401(k) after-tax conversion, you
don’t pay tax on the after-tax contributions that are
converted. If the earnings portion is directly rolled to a
traditional IRA, no income taxes are due.
How 401(k) to Roth IRA after-tax conversions work
Fund a new Roth IRA in a few simple steps
Here are two examples of how a 401(k) after-tax conversion could work:
Example 1: Example 2:
Jason’s employer allows after-tax contributions in its You also have the option of converting the earnings
401(k) retirement plan into a separate after-tax account. portion and paying income tax if you don’t want to
Jason is 50 years old and makes after-tax contributions establish a traditional IRA. In this example, Sue has
of $25,000.1 Jason directs the 401(k) plan administrator contributed $10,000 to her 401(k) after-tax account
to convert $25,000 of after-tax contributions to a and has $250 of related earnings. Sue doesn’t have
Roth IRA, and to directly roll over $2,000 of related an existing traditional IRA and isn’t concerned about
earnings to a traditional IRA he has established. The the tax consequence of converting $250 of earnings.
administrator issues 1099-R forms showing no taxable For ease of execution, Sue decides to convert
income. $10,250 and pay tax on the $250 of earnings.
401(k) after-tax account 401(k) after-tax account
$27,000 total $10,250 total
$25,000 - After tax contributions $10,000 - After tax contributions
$2,000 - investment earnings $250 - investment earnings
$25,000 (contributions) $2,000 (earnings) $10,000 (contributions) $250 (earnings)
New Roth IRA New Traditional IRA New Roth IRA
$25,000 (contributions are $2,000 (earnings rollover) $10,250 converted to Roth
converted to a Roth IRA) $250 reported as ordinary income
Additional considerations
In some 401(k) plans, after-tax contributions by highly compensated employees could affect the plan’s ability
to pass nondiscrimination testing. This is more likely to be an issue with smaller plans. Check with your plan
administrator if this is a concern.
Depending on your situation, rolling over to an IRA may not be the best plan for you. Disadvantages may include
fees and expenses, creditor protection, ability to contribute to your employer plan, tax treatment of employer
securities, and the timing of your retirement. Be sure to discuss the advantages and disadvantages with both your
financial advisor and your tax advisor before implementing an IRA rollover.
Have questions?
Contact your Ameriprise financial advisor today.
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1
T his example takes into account the most recent IRS guidance, and is the recommended conversion method for minimization of tax
consequences. Distributions of after-tax contributions made post-1986 must be distributed with the related earnings. (After-tax contributions
made prior to 1987 can be withdrawn exclusively.)
A Roth IRA is tax free as long as you leave the money in the account for at least 5 years and are 59½ or older when you take distributions or
meet another qualifying event, such as death, disability or purchase of a first home (up to $10,000).
Ameriprise Financial and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding
their specific situation.

The Confident Retirement approach is not a guarantee of future financial results.

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