After-tax payins to a 401(k) plan can be converted to a Roth IRA tax-free. New guidance from IRS makes it clear that employees taking distributions eligible to be rolled over can direct the plan administrator to send the pretax dollars to a regular IRA or another plan and roll the after-tax payins into a Roth IRA tax-free. Under prior rules, this favorable tax treatment was possible, but required a series of complex steps. The Service now makes it much easier to achieve this tax nirvana, as long as the transfers to separate retirement accounts are done simultaneously and the employee expressly states that the after-tax funds go to another account. Go to www.kiplinger.com/letterlinks/aftertaxpayins to get the complete details.
(Folks have always been able to roll their Roth 401(k) balances to Roth IRAs tax-free.) This easing doesn’t apply to after-tax funds in a regular IRA. You aren’t able to roll over just the nondeductible contributions tax-free to a Roth. In that situation, only a portion of the amount rolled over to the Roth will be tax-free, based on the ratio of your nondeductible contributions to the total amounts in all of your regular IRAs.