New IRS guidance on After Tax 401 to Roth conversions ?

[Delawaredave5]

Had a call yesterday from an advisor interested in getting my business. Said that "new rules were just enacted about converting after tax 401k money to Roth IRA"

Have you seen anything ? Found below article.

I talked to an accountant last year who proposed this complicated and controversial process of extracting after tax Megacorp 401k money and moving to Roth. I didn't do anything because it looked like it was being scrutinized by IRS and potentially challenged.

IRS Issues 401(k) After-Tax Rollover Rules - Forbes

 

[Fermion]

We have been doing this for a year now. Contribute an extra $20k into 401K after tax, then convert it directly to Roth IRA with no tax due.

Too bad we are ER soon, it would have been nice to have done this for the past 10 years.

 

[REWahoo]

More info here: IRS Notice 2014-54 Acquiesces On Splitting After-Tax 401(k) Contributions For Roth Conversion | Kitces.com

And here: https://www.irahelp.com/slottreport...till-apply-when-converting-ira-funds-roth-ira

 

[travelover]

This is great news. I did this a few years back when it was an extremely grey area. I just did it and whistled past the graveyard.

My 401(k) rules allowed me to continue contributing past the tax deferred limit and I ended up with over $100,000 in after tax contributions. Being able to slide those monies into a Roth was sweet.

 

[woodguy00]

This is what I love about this board. I was not aware of the new guidance.

Just changed my 401(k) election to also withhold 10% of pay post tax - the most our plan allows. I wish I could take more for the rest of this year but I'll be targeting the max $52,000 ($53,000??) total contributions next year. Excellent

Thanks Dave!

 

[NgineER]

Thanks Dave,

I'll max out my After tax 401(k) now, my Megacorp limit is 9%.

 

[retire2020]

I learned this recently and have been converting after tax 401k to Roth for last six months. It'll be nice to have extra 15K-20K going into Roth IRA every year. My megacorp limit is 10%.

 

[Nunyaa]

Any current Federal employees know if TSP allows this? The website makes it sound like it's an option, but I don't think my organization allows it or the HR/Payroll folks don't know how to handle it.

Annual Addition Limit: $52,000
IRC §415(c)
An additional limit imposed on the total amount of all contributions made on behalf of an employee in a calendar year. “All contributions” include employee contributions (tax-deferred, after-tax, and tax-exempt), Agency Automatic (1%) Contributions, and Matching Contributions.

https://www.tsp.gov/planparticipation/eligibility/contributionLimits.shtml

 

[tinlizzy]

We have been doing this for a year now. Contribute an extra $20k into 401K after tax, then convert it directly to Roth IRA with no tax due.

Too bad we are ER soon, it would have been nice to have done this for the past 10 years.

Tax is still due on the earnings in the year of the conversion, correct?


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[panacea]

Tax is still due on the earnings in the year of the conversion, correct?


Sent from my iPad using Early Retirement Forum

No, from the article it appears not because you are really only converting the after-tax contributions... Not the contributions and earnings.

 

[Mo Money]

Oh great tax gurus out there: My 401K has a Roth component, which I fully fund. (I am in my 50s, and so for 2014, I put in $17,500, plus the $5,500 catch-up contribution.) Is there any way I can use these new IRS rules to my advantage? Could I contribute additional money into the 401K - beyond the $23,000 above, as an after-tax contribution, and then convert that additional money to a Roth somehow?

 

[travelover]

Oh great tax gurus out there: My 401K has a Roth component, which I fully fund. (I am in my 50s, and so for 2014, I put in $17,500, plus the $5,500 catch-up contribution.) Is there any way I can use these new IRS rules to my advantage? Could I contribute additional money into the 401K - beyond the $23,000 above, as an after-tax contribution, and then convert that additional money to a Roth somehow?

Whether you can contribute more (after tax) depends on your plan rules. So, ya gotta start there.

 

[NgineER]

Did my first after tax contribution and conversion today. Maxing out my 401k, found out from this thread about the after tax --> Roth conversion
Had my first after tax contribution hit today and I immediately converted the 9% from my pay check to the Roth 401k.

Very pleased to see that there was no tax hit (of course) and that I now have another way to grow my Roth accounts over the next 15 years.

Thanks again Dave!

 

[gauss]

Did my first after tax contribution and conversion today. Maxing out my 401k, found out from this thread about the after tax --> Roth conversion
Had my first after tax contribution hit today and I immediately converted the 9% from my pay check to the Roth 401k.

Very pleased to see that there was no tax hit (of course) and that I now have another way to grow my Roth accounts over the next 15 years.

Thanks again Dave!

Congratulations on executing this wonderful strategy. One thing I will mention to you - The IRS is more restrictive on access to your money before age 59 1/2 when it is in a Roth 401k vs a Roth IRA. The Roth 401k distributions observe pro-rata rules which implies that earnings will be distributed along with the growth. Any earnings will be taxed and 10% penalty will apply if you are under age 59 1/2. It is for this reason that my after tax contributions are rolled over to my Vanguard Roth IRA. The Roth IRA rules allow you to withdrawal all of your contributions and conversions before a single dollar of earnings is withdrawn.

In both cases a 5 year holding period applies.

A second limitation may be in your company's plan documents. In my case, in-service withdrawals were allowed before age 59 1/2 for traditional 401k but not for Roth 401ks. I am not sure how common this type of difference is but in my case it was a deal breaker for the Roth 401k.

If you are planning to ER before 59 1/2 and may possibly need access to this potentially large bucket of money in the interim, you may wish to jump through the extra hoops to get the money to the Roth IRA. This is especially true now that the rules have made it easier as described above (ie direct rollovers are now allowed which implies that you do not have to front the 20% of the taxable amount anymore)

ref: Roth 401(k) Withdrawal Rules

-gauss

 

[NgineER]

It is for this reason that my after tax contributions are rolled over to my Vanguard Roth IRA.

I cannot find any information saying that I can do in-service roll-overs to an IRA. Or did you do the roll over after you separated?

 

[gauss]

I cannot find any information saying that I can do in-service roll-overs to an IRA. Or did you do the roll over after you separated?

The plan doesn't necessarily know what you are doing with the money if it is not a direct transfer.

Can you find any "in-service" term in the plan documents or via a telephone call to the service center?

My plan allowed "in service" withdrawals from the traditional IRA (which I then rolled over to trad IRA). I had to come up with 20% of the taxable amount since I have always done indirect (ie 60-day) rollovers. They did not allow the "in service" withdrawals from the Roth 401ks.

I started doing these while I was still working there and have not changed my strategy (except no more contributions) since leaving.

-gauss