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Quarterly Tax Tip: Using After-tax Defined Retirement Plans to Fund a Roth IRA
August 29, 2017

An IRS ruling in September of 2014, clarified that after-tax contributions made into a defined contribution retirement plan could be rolled over to a Roth IRA (IRS, Rollovers of After-Tax Contributions in Retirement Plans, 2016). Although this ruling is by no means ground breaking, it could provide an opportunity for high-income earners who otherwise might not be eligible to contribute to a Roth IRA to set aside funds that could eventually be rolled over to a Roth IRA.

For 2017 the maximum contribution limit into a 401(k), 403(b), and most 457 plans is $18,000 with a $6,000 catch-up for individuals aged 50 and older. For an individual aged 50 or older the maximum amount they could contribute into one of these plans is $24,000. If the plan allows, this same individual could then contribute an additional $29,000 via an after-tax contribution as long as the total contribution does not exceed the IRS maximum of $53,000 (IRS, IRS Annouces 2017 Pension Plan Limitations, 2016).

When this plan is eligible to be rolled over, the account owner can specify that the pre-tax portion be rolled into a Traditional IRA and the after-tax contributions be rolled into a Roth IRA. Having Roth assets during retirement allows for some more advanced planning around the investment allocation and ability to withdraw assets tax-free. Because there are no required minimum distributions (RMDs) out of Roth IRAs, there will be no forced liquidations annually after the year in which you turn 70½.

If you feel this strategy could benefit you, please let us know and we can evaluate your options.

IRS. (2016, October 27). IRS Announces 2017 Pension Plan Limitations. Retrieved August 02, 2017, from IRS: https://www.irs.gov/uac/newsroom/irs-announces-2017-pension-plan-limitations-401k-contribution-limit-remains-unchanged-at-18000-for-2017

IRS. (2016, August 24). Rollovers of After-Tax Contributions in Retirement Plans. Retrieved August 02, 2017, from IRS: https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans

Other resources

https://www.irs.gov/pub/irs-drop/n-14-54.pdf

http://news.morningstar.com/articlenet/article.aspx?id=682209

Hudock Capital Group does not render tax or legal advice, but we will be pleased to work with professionals you may employ in these areas. Be sure to consult with your own tax and legal advisors before taking any action that may have tax consequences.

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