IRS 2014-54 After-tax 401k contribution and conversion

Submitted by Deborah Gdisis on Tue, 2014-12-09 01:03

Individual (age 60 and a few months from retirement) has option to contribute an unlimited amount of money to the after-tax portion of his government retirement plan. He’s considering $250,000. He plans to make the contribution shortly before he retires and convert the entire amount to a Roth IRA. He has a traditional IRA.

1. Does the 5-year withdrawal rule apply?
2. Does the existence of the traditional IRA play into the pro-rata rule?
3. If the answers to 1 and 2 are no, are there any other problems with this plan?



Submitted by Alan - IRA critic on Tue, 2014-12-09 01:34

  • How can he contribute that much? Is this the CSRS VCP option?
  • The 5 year holding requirement to avoid the 10% penalty on conversion distributions does NOT apply after 59.5 And it would not apply to the non taxable portion of conversion anyway.
  • The TIRA does not affect this option.
  • No other problems. If this is CSRS, this is a fantastic opportunity. But he needs to be sure the amount of the contribution is correct.

Submitted by Bruce Steiner on Tue, 2014-12-09 03:20

  • If it’s CSRS, can he contribute 10% of his cumulative salary?
  • If I recall correctly, he can choose between transferring his contribution to a Roth IRA or using it to buy an annuity equal to 7% of the principal, increased by 0.2% for each year over age 55 (so if he’s 60 he would get an 8% annuity).  Has anyone compared these choices?  It would seem that the annuity should be approximately a fair deal, but that the Roth would add substantial value.

Submitted by Deborah Gdisis on Tue, 2014-12-09 19:02

To BSteiner and Alan,It is a CSRS VC, with a 10% cumulative salary “limit.”  I didn’t see anything about an annuity in my reading, and he didn’t mention it as an option. Thanks very much for your replies.   

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