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Case of the Week: Converting 401(k) After-tax Accounts to Roth IRAs

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Colorado is representative of a common inquiry involving a 401(k)-to-Roth IRA conversion. The advisor asked:

“Can my client, who is still working, convert his after-tax contributions in his 401(k) plan to a Roth IRA and, if so, what would be the tax consequences?”

Highlights of Discussion

• Yes, plan document permitting, it may be possible for your client who is still working to request an in-service distribution of his 401(k) after-tax account balance and convert it to a Roth IRA. Beginning in 2008 and for later tax years, qualified plan participants may directly convert qualified plan assets to Roth IRAs (pursuant to the Pension Protection Act of 2006 and IRS Notice 2008-30). Prior to this, a plan participant was first required to roll over the assets to a traditional IRA and then convert the traditional IRA to a Roth IRA.
• The income restriction for conversion eligibility was eliminated in 2010 and for future years pursuant to the Tax Increase Prevention and Reconciliation Act of 2005. As a result, any individual with convertible assets may follow the standard rules to complete a conversion to a Roth IRA.
• Whether a plan participant may take a distribution of plan assets while working is dependent upon the terms of his or her respective plan. Generally speaking, over 70% of all 401(k) plans today are written in such a way so as to allow participants to take in-service distributions.
• Similarly, the ability of a plan participant to set aside a portion of his or her salary on an after-tax basis is plan dependent. Fifty-six percent of 401(k) plans allow participants to make after-tax contributions.
• After-tax contributions can be targeted specifically for conversion purposes if: (1) the terms of the plan permit it; and (2) the record keeper has maintained a separate account for the after-tax contributions and their earnings (see IRS Notice 87-13).
Pre-1987 after-tax contributions potentially can be recovered and converted without associated earnings (and, therefore, without tax) if the recordkeeper has tracked these dollars.
• Post-1986 after-tax contributions and earnings are subject to special “basis recovery rules” that require the participant to treat recovered amounts as consisting of a pro rata share of after-tax contributions and earnings (see IRS Notice 87-13). Any recovery of earnings is a taxable distribution.
• The Columbia Management Learning Center has numerous client-approved, printed support materials on this topic, available through Columbia Management wholesalers.


The ability of a plan participant to complete a conversion of his or her 401(k) after-tax contribution account to a Roth IRA while working is highly dependent on the provisions of the plan document. If permitted, the taxability of the conversion depends on: (1) whether the plan’s record keeper has separately accounted for the after-tax contributions and earnings; (2) the source of after-tax contributions by date (i.e., whether pre-1987 or post-1986); and (3) for the post-1986 amounts, the ratio of after-tax contributions to earnings. While the decision to conduct a conversion should be made by the client and his/or her tax advisor, working with the employer, financial advisors who can demonstrate their knowledge of the conversion of 401(k) after-tax contributions to Roth IRAs set themselves apart from the average advisor and are better positioned to support their clients.

The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.