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!