17 Oct Taxes differ for pre- or post-tax IRAs

Q. I turn 70 this month. I know I must take Required Minimum Distributions (RMDs) the year after I turn 70 1/2, which would be in 2019. My statement shows my pre-tax contributions, the employer match, post-1986 employee contributions after tax, and pre-1987 employee contributions after tax. Do the after-tax monies count toward the calculation?
— RMD-ready

A. Congrats and happy birthday!

First, let’s talk about whether or not you need to take your distribution when you think you do.

If you are still working at the employer where the 401(k) is, you may not be required to take a distribution until you actually retire, said Cynthia Fusillo, a certified public accountant with Lassus Wherley in New Providence.

“This is the `still working’ rule and is met if you are considered employed throughout the entire year and are not a more than 5 percent owner of the company,” she said.

Then, your first RMD must occur by April 1 following the calendar year in which you turn 70 1/2, so for you that would be no later than April 1, 2019, she said.

“Your entire balance in the account will be used at year end each year to calculate the RMD for the next year,” she said. “However, the 1099-R you will receive each year will show your gross distribution in box 1, and then the pro-rated taxable portion in box 2a.”

Fusillo said you have the ability to take your RMD solely from your pre-1987 post tax amount because it is separately accounted for in the plan records, provided it is enough to cover the RMD. Of course, any shortfall would then come from a pro-rata share of the other plan balance categories, she said.

Earnings on post-tax contributions are not tax free withdrawals, but when you retire, you may wish to consider rolling over the post-tax portion of the 401(k) to a Roth IRA where future withdrawals will be tax-free, she said.

The pre-tax portion would be rolled over to a traditional IRA at that time, she said.

Because these rules are complex, consult with a tax or financial advisor about your specific situation.

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This post was originally published in October 2017.