After-Tax 401(k) Money and Gold IRA Rollovers

Some 401(k) plans hold after-tax amounts as well as pretax amounts. When such a plan pays out, the question is where each kind of money goes. This page explains the IRS guidance, using a worked example. It matters for anyone planning a Gold IRA rollover, because the metals account is just one of the destinations for the money.

This page explains rules. It does not say how you should split your money. That depends on your situation, so talk with a qualified tax professional.

What is after-tax 401(k) money?

It is money you contributed after paying income tax on it. The IRS calls the opposite kind "pretax amounts." The IRS notes that earnings on after-tax contributions count as pretax (IRS). So a plan balance can contain two layers: after-tax principal, and pretax money that includes the earnings on it.

How does the IRS split pretax and after-tax money in a payout?

The default is a pro rata split. The IRS page says that "any distribution will generally include a pro rata share of both" pretax and after-tax amounts, and that you cannot take only the after-tax amounts and leave the rest in the plan, because "Any partial distribution from the plan must include some of the pretax amounts" (IRS).

Notice 2014-54 adds the key rule for rollovers. Disbursements from a plan that are scheduled to be made at the same time are treated as a single distribution, even if the recipient sends them to more than one place. In the notice's words, they "are treated as a single distribution without regard to whether the recipient has directed" where they go (Notice 2014-54). The recipient "must inform the plan administrator of the allocation prior to the time of the direct rollovers."

How can pretax and after-tax amounts go to different accounts?

The notice says direct rollovers get the pretax amounts first, "so that each direct rollover consists entirely of pretax amounts". The IRS describes this as allowing pretax amounts to a traditional IRA and after-tax amounts to a Roth IRA (IRS).

The notice includes worked examples. Examples 1 and 4 use the same facts: an account balance of $250,000, made up of $200,000 of pretax amounts and $50,000 of after-tax amounts, and a $100,000 distribution. The notice computes the pretax share of that distribution as $80,000 ($100,000 x $200,000/$250,000). That leaves $20,000 of after-tax amounts in the distribution.

In Example 1, the same $100,000 is split differently: $70,000 is rolled directly to a new employer's plan and $30,000 is paid to the employee. Because the pretax share ($80,000) is larger than the direct rollover, that rollover is entirely pretax, and the $30,000 paid out consists of $10,000 pretax and $20,000 after-tax amounts.

We summarize these examples from the notice's text. Read the notice itself for the full facts.

Where does a Gold IRA fit in?

A Gold IRA is an IRA, so it can be a destination if your custodian offers the type you need (traditional or Roth). We did not find a source that compares the tax treatment of a Gold IRA with other IRAs for this purpose. The metal rules are separate: metals must meet the collectibles exceptions, and acquiring a collectible is treated as a distribution of its cost (IRS). See our collectibles rule and Roth Gold IRA guides.

Two things the sources we opened do not tell us:

• The IRS pages did not discuss basis tracking or Form 8606 in the passages we reviewed. If you hold after-tax money in a traditional IRA, ask your tax professional how it is tracked. Our tax forms guide lists the common forms.
• We did not find a source on what happens when the same payout is split among several custodians, beyond the notice's rule for multiple destinations.

What are the common mistakes?

• Expecting to take only the after-tax dollars out and leave the rest. The IRS says any partial distribution must include some pretax amounts.
• Not telling the plan administrator about the allocation before the direct rollovers. The notice says the recipient must inform the administrator in advance.
• Assuming pieces of a payout are separate. The notice treats disbursements scheduled to be made at the same time as one distribution.
• Overlooking reporting. The notice says each disbursement may be reported on a separate Form 1099-R (Notice 2014-54).
• Overlooking the rollover basics: a payout made to you is subject to mandatory 20% withholding "even if you intend to roll it over later," and you have 60 days to complete a rollover (IRS). See our direct vs indirect rollover guide and the rollover mistakes list.

Related questions

What about Roth 401(k) money? See our Roth 401(k) rollover guide and ask a tax professional.

What if the plan only allows one destination? The plan's own rules control what it offers. Ask the administrator.

This page is general information about IRS guidance. A tax professional can apply it to your plan statement.