Take Advantage of After-tax Contributions with an In-Plan Rollover

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Published by Taylor Financial Group

When it comes to strategies to help increase your retirement savings, you may have heard us speak of the many benefits of doing a Roth conversion. And, now we are introducing a new twist!  Under the Roth conversion rules, a 401(k) participant can make an after-tax contribution to her 401(k) and immediately convert the balance to a Roth inside of the 401(k) plan.  The IRS has recently confirmed that all vested accounts are eligible for this conversion as long as the plan allows for Roth monies.  This clever technique allows you to transfer your pre-tax account balances into an after-tax Roth within a retirement plan.  Sound complicated?  Let us explain…

The Benefits of This Clever Conversion
This unique strategy offers several benefits which allow for making after-tax contributions that can be converted to a Roth within the 401(k) plan. Performing this conversion will allow the earnings to grow on a tax-free basis and to be distributed tax-free, and penalty-free, since it is considered a qualified distribution. A distribution is considered qualified if it is taken at 59 ½ (or five years after the conversion year).

Who should consider this conversion?

1.  Individuals who are looking to increase their tax-free retirement assets for tax diversification purpose or to catch up on savings.
2.  Individuals whose low plan compensation creates deterrents in attainment of the annual maximum in a 401(k) plan.
3.  Individuals who cannot reach the annual 401(k) plan maximum due to deduction limits applicable to some 401(k) profit-sharing and defined benefit/cash balance plans combinations.

In addition, if you are a high-income earner who participates in your employer-sponsored plans, you may also be eligible to take advantage of this opportunity, depending on the plan’s available options. In the event that in-plan conversions are not an option, you should still consider taking advantage of after-tax contributions to fund the Roth. At the time of retirement, you will also need to determine whether you wish to convert the earnings to a Roth or send the after-tax balances to a Roth and the tax-deferred earnings to a rollover IRA.

By taking advantage of these Roth conversion options, you can see a substantial increase in your tax-free account balance, and overcome the Roth 401(k) contribution limit of $18,000.

Although the options may seem somewhat complex, the benefits of stashing away additional Roth dollars when paired with an expanded in-plan Roth conversion may offer new planning options with Roth balances. Since Roth dollars grow tax-free, and there is no tax for qualified distributions, investors may be much better off considering this option.

Contact us to if you have questions about implementing this type of conversion, or if you have any other questions.

 

Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Adviser. Cetera Adviser Networks is under separate ownership from any other named entity.

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