IRS now allows post-tax 401k contribution rollovers to Roth IRAs

One of the benefits of a 401(k) plan is the ability to contribute pre-tax dollars, thereby reducing your taxable income and the amount of tax you ultimately pay. IRS rules currently allow you to contribute $18,000 on a pre-tax basis to your 401(k) plan. However, if your plan allows, you can also contribute up to an additional $35,000 on an after-tax basis. That means if you take full advantage of pre- and post-tax contributions, you can maximize the amount you are saving for retirement with a total annual contribution as high as $53,000, and more if you are over the age of 50.

Note that any post-tax contributions you make should be tracked by your plan administrator as such. Also, there are annual tests that most 401(k) plans must meet that may limit the amount of after-tax contributions you can make.

Rolling over post-tax 401(k) contributions to a Roth IRA is a great way to allow your earnings to grow tax-free. Historically, the IRS has challenged individuals who attempted to do this. However, IRS Notice 2014-54 now allows taxpayers to conduct these rollovers. Note that you may only roll over post-tax contributions to a Roth, not any appreciation that has occurred from those contributions.

Since you are not required to take a minimum distribution from your Roth IRA, it can be a very good investment to leave to next generation. The investment will grow tax-free during your lifetime. Your beneficiary will then only need to take required minimum distributions over their lifetime; the earnings will continue to grow tax-free. I think this is the greatest benefit of a Roth IRA and one that is often overlooked by investors.

If your 401(K) plan allows for in-service distributions, you may be able to roll these amounts over to a Roth IRA on an annual basis and get tax-free earnings sooner. If your plan does not allow in-service distributions, or you don’t qualify, you can convert after-tax contributions to a Roth when you are no longer a participant in the plan.

These rules are fairly complex so it is important to consult an advisor who understands them and can provide guidance on how to maximize the benefits.

Interested in potentially taking advantage of this benefit? We recommend the following steps:

  • Research whether your plan allows after-tax contributions and in-service distributions. If not, request that the trustees consider amending the plan.
  • Determine how much you can afford to contribute on a per-payroll basis and request your employer to start withholding the revised amounts at the next opportunity to change.
  • Prior to getting a distribution, establish Roth IRA and traditional IRA accounts.
  • Move after-tax contributions to a Roth IRA as quickly as possible and enjoy the tax-free build-up of the account.

David Shaffer, Kreischer MillerDavid E. Shaffer is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email


 Subscribe to the blog

You may also like: