Discretionary 401k Contributions
The last paragraph of this article has been raising some questions: http://www.advisorperspectives.com/newsletters15/Why_2015_Will_Be_the_Year_of_the_Roth.php
To quote:
“What truly is Earth-shattering is that, per the combined application of IRS Notice 2014-54 and Section 902 of the American Taxpayer Relief Act of 2012, plan participants who have already contributed the maximum salary deferral limit to a 401(k) account ($18,000 for participants under age 50; $24,000 for participants age 50+) could theoretically make an additional discretionary contribution from personal savings of up to $35,000 (assuming no employer contributions) to reach the total $53,000 ($59,000 for participants age 50+) permitted in a single year to a defined-contribution plan. The participant could then immediately elect to process an in-plan Roth 401(k) conversion of the after-tax contributions to his/her Roth 401(k) with no income tax due.”
When does the possibility of a discretionary contribution from personal sources actually exist? I have perused the Retirement Topics section on IRS.gov regarding contribution limits (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Contributions) but cannot seem to formulate a specific answer.
Thank you,
-Robert
Permalink Submitted by Alan - IRA critic on Mon, 2015-04-13 22:12
The after tax contributions are made into separate sub accounts in qualified plans that offer them. The larger the company and the higher the average pay per employee, the more likely they would have an after tax sub account included in the plan. But the better plans also offer the option to roll out the contributions frequently to a Roth IRA, which I think is generally a better option than rolling the contributions into the Roth 401k by doing an in plan Roth rollover (IRR). If frequent rollovers are allowed, the employee does not even need to use Notice 2014-54 to isolate the basis because earnings on the contributions will be minimal. However, if the rollover was only allowed once a year, and the employee had 10% earnings on the contributions, Notice 2014-54 could be used to send the earnings to a TIRA and only the contributions to the Roth, and no tax would be due.