Her 401(k) Holds After-Tax Money. At Rollover, That Part Can Go Into a Roth IRA Tax-Free

A line on many 401(k) rollover forms is easy to skip: “after-tax contributions.” That line means after-tax contributions from a 401(k) can go into a Roth IRA tax-free, and once they’re there, they can grow tax-free for the rest of the owner’s life. If your 401(k) holds after-tax money, you can use this move. It’s called a 401(k) after-tax rollover to a Roth IRA.

Three Kinds of 401(k) Money, and Why One Stands Apart

A 401(k) can hold three types of dollars. Pretax money went in before income tax, so you owe tax when it comes out. Roth 401(k) money went in after tax, and qualified withdrawals come out tax-free. After-tax money is a third bucket. You already paid tax on what you put in, but the earnings on it haven’t been taxed yet. For rollover purposes, those earnings count as pretax money.

One Rollover, Two Destinations

When you roll over your balance, you can send it to two places at once. The pretax money goes to a traditional IRA, including every dollar of earnings on your after-tax contributions. The after-tax contributions go to a Roth IRA. Neither piece triggers tax. After that, the Roth piece grows tax-free.

IRS Rules That Make the Split Work

The rule comes from IRS Notice 2014-54, which sets out how to divide pretax and after-tax money when a plan pays “disbursements that are made to multiple destinations”. Two parts of the tax code back it up. Under 26 U.S.C. § 72(e)(8), every distribution includes “a pro rata share of both after-tax and pretax amounts.”

In plain terms, each withdrawal carries a proportional slice of both kinds of money. Under § 402(c)(2), the amount rolled over is treated as coming “first of the portion of such distribution that is includible in gross income.” That means the taxable dollars fill the traditional IRA first, and the after-tax dollars go to the Roth. IRS Publication 575 confirms you can roll “the nontaxable part of a distribution (such as your after-tax contributions)” into a traditional or Roth IRA.

Who Qualifies and Who Doesn’t

You need after-tax contributions in a 401(k), 403(b), or governmental 457(b) plan, and Notice 2014-54 covers all three. You also need a distribution that’s eligible for rollover. Usually that means you’ve left the job or hit the plan’s withdrawal age. Required minimum distributions don’t count as eligible rollover distributions. If you only ever made pretax or Roth 401(k) contributions, you have no after-tax money to move.

How to Set Up the Two-Way Rollover

1. Ask your plan for three numbers: your total balance, your after-tax contributions, and the earnings on those contributions. Later, your Form 1099-R reports the after-tax contributions, usually in box 5.
2. Open a traditional IRA and a Roth IRA before you ask for the distribution.
3. Request two direct rollovers from the same distribution. Pretax money and earnings go to the traditional IRA, and after-tax contributions go to the Roth IRA. With a direct rollover, the plan pays the IRA firm directly, so no tax is withheld. If the plan pays you instead, it generally must withhold 20% of the taxable portion, and you have 60 days to complete the rollover. You’ll need to replace any withheld amount from other funds to roll over the full balance tax-free.
4. Expect plans to handle this differently. Some use one form with boxes for each destination, and others want separate requests. In Notice 2026-49, dated August 12, 2026, the IRS released sample rollover forms as part of a push to standardize the process.

Why the Roth Side Pays Off for Decades

Roth IRAs have no required withdrawals while you’re alive. IRS Publication 17 states: “You aren’t required to take distributions from your Roth IRA at any age.” The rule comes from 26 U.S.C. § 408A(c)(4). Earnings come out tax-free once a withdrawal qualifies. To qualify, it must occur after the 5-year period beginning with the first tax year in which a contribution was made to a Roth IRA, and it generally must happen on or after age 59½. There’s also a separate five-year rule for rollovers. The 10% additional tax applies only to rolled-over money that you had to include in income, and your after-tax contributions were already taxed.

Routing Mistakes That Cost You the Tax-Free Money

If you send after-tax money to a traditional IRA, it becomes basis, meaning money you’ve already paid tax on, and you have to track it on Form 8606. If you convert it to a Roth later, the tax gets prorated across all your traditional IRA balances, so part of that conversion is taxed. You also can’t pull out just the after-tax dollars in a partial withdrawal, because each payout carries its pro-rata share of pretax money. And if earnings on your after-tax contributions end up in the Roth, they’re taxable.

A Shortcut Some Workers Use Before They Leave

Some plans let current employees make after-tax contributions and convert them to Roth soon after, often through an in-plan Roth rollover. People call this the mega backdoor Roth. Converting quickly keeps taxable earnings small, since untaxed amounts are included in income. Whether you can do it depends on your plan’s rules.

One Number to Get Before You Sign

Before you sign a rollover form, ask your plan for your after-tax contribution basis. It’s the total of the after-tax dollars you put in, and it tells you how much can go into the Roth IRA tax-free.

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