As a follow up to my post last week Beyond 401k and IRA, I discovered this week that I had neglected to point out a relatively new option that is very well worth considering.
This option was brought to my attention by my friend and colleague (and fellow GPN member) Lisa Weil of Clarity Northwest Wealth Management in Seattle, WA: as of late last year with the issuance of IRS Notice 2014-54, there is the option of over-funding your 401k with after-tax dollars, and then rolling over those monies to a Roth IRA when you leave employment.
The way it works is that after you max out your regular deducted 401k contributions, plus your company provided the matching funds, there is usually quite a bit of headroom available within the annual funding limits. You can (if your 401k administrator allows) make after-tax contributions to your 401k up to the limit of $53,000. This limit includes the “regular” contributions of $18,000 and your employer matching dollars. If you’re over age 50 the limit is $59,000 due to the catch-up.
When you leave employment, you can rollover your pre-tax contributions, employer contributions, and the growth in the account to a traditional IRA; THEN, you can take these after-tax contributions and rollover to a Roth IRA. Sort of a super-charged Roth IRA contribution method.
This is an excellent place to put your additional savings dollars after you’ve maxed out all of the other options. You need to be careful about the rollover when you retire, and your plan administrator also has to allow these after-tax contributions. If the administrator doesn’t currently allow the extra contributions, the plan can be amended to allow the extra contributions.
I applaud Lisa for pointing this out – and it shows once again that the rules for retirement plan contributions are complicated and constantly changing, and it pays to question everything as you go. I wrote about the change with Notice 2014-54 late last year in the article A New Way to Fund Your Roth IRA – and had forgotten about it when I wrote the article last week.
Thanks again, Lisa!
Sterling Raskie, MSFS, CFP®, ChFC®
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This article says, “… rolling over those monies to a Roth IRA when you leave employment.” If the company allows in-service distributions, can the after-tax contributions and gains be split into Roth and Traditional IRAs while still employed? That likely requires the plan administrator to separately account for the after-tax contributions and gains.
You may delete (reject) the comment I am replying to. The last sentence of my comment is confusing, so the entire comment can be rejected. I’m pretty sure (or hope so since Fidelity did it for me), that after-tax non-Roth contributions and their gains can be rolled over to Roth IRA and TIRA while still employed by that company.
If your administrator allows an in-service distribution then this may be possible. Inservice distributions are fairly uncommon, that’s why I hadn’t addressed it in the original article.
jb
Jim, I think for 2015 the catch up is $6,000 if over 50; hence $59,000 limit if over 50.
Yes, thanks. I’ve updated the article. Appreciate your speaking up!
jb
Hi Jim, Love your Financial Ducks blog…excellent information. Just a quick clarification that, for 2015, the maximum qualified plan total is actually $59,000 for folks age 50+ ($6,000 catch-up on top of $53,000 max). Keep up the great work!
Thanks – it’s been updated. Appreciate your pointing it out!
jb