Plan adds Roth Contributions
A large employer recently announced their 401k plan is adding the ability to make Roth Contributions effective January 2015. As of now, employees can make after-tax contributions. Are you aware of how prior after-tax contributions are treated when Roth Contributions are introduced? Will after-tax contributions be transferred to the Roth 401k and thus future earnings would growth tax-free? Would it be advised that participants take advantage of the recent IRS Notice 2014-54 by converting the after-tax contributions to a Roth IRA prior to the implementation of the Roth 401k on January 5, 2015?
Thank you!!
Permalink Submitted by Alan - IRA critic on Fri, 2014-10-24 00:22
The Roth 401k does not directly affect the after tax contributions that already exist or the ability to make future after tax contributions in addition to the designated Roth contributions. However, if the plan also offers IRRs (in plan Roth rollovers), you could roll the after tax contributions and their earnings (after tax sub account) into the designated Roth and pay taxes only on the earnings. You would have to confirm that you could roll over only the after tax sub account without pro rating with the rest of the pre tax account balance. Most employees with broad plan options would periodically roll the after tax sub account balance to their Roth IRA. Notice 2014-54 allows the employee to specify the account destination and therefore the after tax contributions would go to the Roth IRA and the earnings on those contributions go to a TIRA and the entire transaction would then be non taxable. Of course, plan design could add restrictions regarding the options allowable by the IRS.
Permalink Submitted by Glen Bogdon on Fri, 2014-10-24 19:08
14Can the money in a 403b plan also be rolled over into a Roth IRA? Further information to aid your answer: All the money in the 403b plan cited was contributed before taxes and no new contributions will be made since the person is now retired, Manditory withdrawals are being made from the current 403b plan.
Permalink Submitted by Alan - IRA critic on Sat, 2014-10-25 01:15
Yes, a 403b balance or any part of it for a retired employee can be rolled to a Roth IRA. However, in an RMD year the RMD must be completed before the rollover to a Roth of any additional amounts. If the 403b balance is considerable, it is not beneficial to convert a large amount all at once because a large rollover can increase the marginal tax rate. If the plan is rolled instead to a rollover TIRA, then incremental conversions can be done over several years in order to keep the taxes under control.
Permalink Submitted by Glen Bogdon on Sun, 2014-10-26 18:27
My corrected question should read as follows:Can the money in a 403b plan also be rolled over into a Roth IRA tax free? This question is in connection with the IRS ruling which allows big savers to use their 401k accounts to fund Roth IRAs-without paying income taxes in the process? The same original qualifiers apply: All the money in the 403b plan cited was contributed before taxes and no new contributions will be made since the person is now retired, Manditory withdrawals are being made from the current 403b plan
Permalink Submitted by Alan - IRA critic on Mon, 2014-10-27 02:20
The only plan amounts that can be rolled to a Roth tax free is post tax amounts in the plan called after tax contributions. Since this particular 403b was funded solely by pre tax contributions, the plan holds no after tax contributions. Therefore, any amount rolled to the Roth IRA will be taxable.