For years, employees who earned too much income to contribute to a Roth IRA in the standard way, but still made after-tax contributions to a traditional 401(k) plan, missed an opportunity to have tax-free qualified withdrawals once they retired.
Now with a new ruling from the IRS, employees may have the option to rollover after-tax contributions from a traditional 401(k) to a Roth IRA without additional fees, once they retire or separate from the company.
The way we see it, this is good news not only for high-income earners but also for:
- Workers whose companies do not offer a Roth 401(k) plan (The Roth 401(k) already allows rollover to Roth IRA.).
- Workers who made after-tax contributions to traditional 401(k) accounts before Roth 401(k) or Roth IRA plans were available.
- Employees who have reached the maximum contributions for 401(k) or Roth 401(k) and want to save more for retirement.
- People who are behind in saving for retirement, and therefore want to save more than is allowed by traditional or Roth 401(k) limits.
Additionally, this ruling may make it possible to rollover after-tax contributions from a traditional 401(k) plan to a Roth IRA with possibly no out-of-pocket costs.
If you wanted to build up a Roth IRA for the sole purpose of passing it on to your heirs, then this provision could be helpful in allowing you to do just that. Not only can your Roth IRA funds have the potential to grow tax-free, but you also may not have to take the required minimum distributions.
Whether or not you want to save more money for your own retirement or for your family, the ability to rollover after-tax contributions to a Roth IRA is a new option that could be a good fit for your financial plan. Be sure to speak with a qualified financial advisor before making any changes to contribution amounts or retirement plans.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change