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Old 02-02-2010, 11:30 PM   #21
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and this can be a near free lunch, especially if in-service distributions of after-tax contributions are allowed by your employer. For some 401k plans, a person can make $32.5K/yr in after-tax contributions and then "immediately" roll these funds over into a Roth IRA.
I asked Fidelity about this and the rep I talked to said they were allowing clients to do this, but they didn't have a specific ruling from the IRS on it either way if this would be allowed. He said they had been asking the IRS for a specific ruling in this tactic for years and had never received a response. My accountant and pension consultant both said they no specific knowledge of whether this would be allowed or not, and didn't want to second guess the IRS.

I have gone over all of the IRS rules I could find on the topic and it seems like it would be okay, but if the IRS decides at a future date they won't allow it I don't know what the penalties might be.
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Old 02-03-2010, 08:45 AM   #22
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I asked Fidelity about this and the rep I talked to said they were allowing clients to do this, but they didn't have a specific ruling from the IRS on it either way if this would be allowed. He said they had been asking the IRS for a specific ruling in this tactic for years and had never received a response. My accountant and pension consultant both said they no specific knowledge of whether this would be allowed or not, and didn't want to second guess the IRS.

I have gone over all of the IRS rules I could find on the topic and it seems like it would be okay, but if the IRS decides at a future date they won't allow it I don't know what the penalties might be.
I'm in the process of doing this - converting after tax 401(k) to Roth and rolling after tax earnings to a TIRA. I called the IRS and explained exactly what I'm doing and was given the go ahead. Fidelity also confirmed that they are convinced that it is kosher. The IRS rep's main criterion was that pretax monies stayed in a TIRA so the taxes would be paid eventually.
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Old 02-03-2010, 08:47 AM   #23
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I asked Fidelity about this and the rep I talked to said they were allowing clients to do this, but they didn't have a specific ruling from the IRS on it either way if this would be allowed. He said they had been asking the IRS for a specific ruling in this tactic for years and had never received a response. My accountant and pension consultant both said they no specific knowledge of whether this would be allowed or not, and didn't want to second guess the IRS.

I have gone over all of the IRS rules I could find on the topic and it seems like it would be okay, but if the IRS decides at a future date they won't allow it I don't know what the penalties might be.
Since the IRS limits Roth 401k contributions to the $16.5k ( plus possible $5.5k catchup) it seems to me that this (loophole) is beyond the intent of the law. With this method one could put up to $49k (less company contributions) a year into a non-deductible 401k==> Roth IRA.

It doesn't pass the smell test to me.

But I will concede that there have been an awful lot of similar loopholes of questionable legality in the tax law. It seems like it takes em' about a decade or so to close the loophole.

I suppose the worst that could happen is that they make you re-characterize the bandit Roth IRA to a non-deductible (regular) IRA. In that case all of the earnings would then be subject to taxation.
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Old 02-03-2010, 01:23 PM   #24
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It seems like it takes em' about a decade or so to close the loophole.
You have to have a plan that allows after tax contributions, in service distributions, plus the ability to actually save the money, so there is probably a relatively small number of people who can actually do this. So it may not be something the IRS feels they need to address anytime soon.
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Old 02-03-2010, 02:02 PM   #25
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You have to have a plan that allows after tax contributions, in service distributions, plus the ability to actually save the money, so there is probably a relatively small number of people who can actually do this. So it may not be something the IRS feels they need to address anytime soon.
I think this is exactly right. Not all 401(k) plans allow after tax contributions and most people can't afford to do it. anyway. In my case, I was saving like mad in the five years or so before I retired, and this seemed like a good way to defer taxes on the earnings.
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Old 02-03-2010, 06:00 PM   #26
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Since the IRS limits Roth 401k contributions to the $16.5k ( plus possible $5.5k catchup) it seems to me that this (loophole) is beyond the intent of the law. With this method one could put up to $49k (less company contributions) a year into a non-deductible 401k==> Roth IRA.
If catchup and TIRA contributions are included, a maximum of $60.5K can be placed into Roth accounts each year (e.g., $16.5K in a Roth 401k, $5.5K in a Roth 401k catchup, $32.5K rolled over from 401k after-tax contributions, $5K rolled over from nondeductible TIRA contributions, and $1K rolled over from TIRA catchup contributions). $38.5K of this is money that would have otherwise gone into taxable investment accounts. Of course, this assumes the 401k plan allows after-tax contributions, in-service distributions, and that the person can afford it.

No, it doesn't seem like this is something that would be allowed, but essentially all information I've read suggests that it is legitimate. I'm using this strategy now that the $100K income limit for Roth conversions has been eliminated.

If the IRS comes out and says this isn't allowed, in a worse case scenario, I'll roll all 401k funds into the Roth IRA (i.e., pre-tax plus after-tax). This is certainly allowed, just like TIRA to Roth IRA conversions are allowed. Of course, I would need to first leave my employer and I would have to pay taxes on the pre-tax contributions, but overall, this would still be a financial benefit.
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