Creating a large ROTH before you retire
Can someone verify if this is right. My assumptions are the client is over age 50 and the company doesn’t match for the 401k and the company would allow this. It is my understanding that the IRS says it’s legal, just not sure if the company will do it.
After my client maxes out her $24,000 into her 401k she would like to contribute $35,000 (for the max of $59k in 2015) as a discretionary contribution from personal savings. She would then perform an in-plan Roth 401k conversion of the after-tax contributions. This way, when she retires, she can roll the 401k into an IRA and the Roth 401k into a Roth.
Doable?
Permalink Submitted by Alan - IRA critic on Tue, 2015-06-02 03:59
This procedure can be followed if the plan includes an after tax sub account to receive the contributions. From there if the plan includes a designated Roth account AND offers in plan Roth rollovers, the after tax contributions can be rolled to the Roth option at various frequencies. Many plans also permit in service rollovers from the after tax account to a Roth IRA, which has some advantages compared to the designated Roth in the plan. Also, many companies that do have the sub account put a cap on the contributions in order to reduce ACP testing failures or the risk of the employee exceeding the 59k max due to company profit sharing, matching, or forfeiture contributions. This effectively means that the 35k limit might be placed at a lower figure such as 25k depending on the plan.
Permalink Submitted by dan casey on Tue, 2015-06-02 15:33
When you say “Can be rolled to the Roth option at various frequencies’…what does this mean? Is there some limit imposed by the IRS or just whatever the company plan offers?
Permalink Submitted by Alan - IRA critic on Tue, 2015-06-02 17:35
Whatever the plan offers. For example, when making after tax contributions every paycheck the employee would be wise to roll those contributions to a Roth immediately before earnings are generated which would be taxable in a Roth rollover. But the plan may wish to avoid the expense of processing 26 or more distributions every year. Some plans may restrict rollovers to quarterly or annually.