After tax $ contrib to 401(k), rolling OUT of Plan to Roth IRA
I read an article this morning that was about an Advisor who recommended to a high net worth client who had a 401(k) in place, that after making tax deferred contributions up to maximum annual level, to make an AFTER- tax, salary contribution into the 401(k) account to bridge the gap between ER contributions, EE contributions, (excluding ER match) and the $55,000 (2018) limit. The advisor recommended for the client, shortly thereafter, to roll over the AFTER-tax salary contribution, out of the 401(k) Plan, into a ROTH IRA. The advisor did not mention the client’s age. There is an age requirement for After-tax contributions (59 1/2).
Is there NO age requirement for AFTER-tax salary contributions being rolled out of a 401(k) Plan? (of course, the Plan has to allow for this)
Permalink Submitted by Alan - IRA critic on Fri, 2018-10-26 18:14
All of these things are allowed by the IRS, but the plan may not provide for all of them. Many plans will not accept after tax contributions and some of those that do will put a cap on the amount to keep total annual additions which include company matching and forfeitures well under 55k. Since after tax contributions are also subject to the ACP discrimination test, some plans will limit after tax contributions to reduce ACP failures. Some plans will also limit distributions to a certain number per year, and depending how often the after tax contributions are made, there may be some earnings generated in the after tax sub account before a rollover is allowed. The earnings would either be taxable if converted, or taxes could be avoided by doing a Notice 2014-54 split rollover with the earnings going to a TIRA instead of to the Roth. If the earnings go to a TIRA, that will have an impact on back door Roth IRA contributions taxable amount (contribute to non deductible TIRA, then convert right afterward. Therefore, clients will need to determine which, if any, of these restrictions apply to their specific plan.
Permalink Submitted by Catherine Turner on Mon, 2018-10-29 15:03
Understanding that there IS an age requirement for before tax contributions to a 401(k) plan (59 1/2) …..my question was IS there an AGE requirement for AFTER-tax salary contributions being rolled out of a 401(k) Plan?
Permalink Submitted by Alan - IRA critic on Mon, 2018-10-29 15:44
No, the IRS has no restriction such as exists for elective deferrals, and most plans with an after tax sub account allow distributions, although they may restrict the number of distributions per year. Another possible restriction for plans that offer in plan Roth rollovers (IRRs) is that the funds must go to the designated Roth in the plan rather than out of the plan to a Roth IRA. You need to get clarification from your plan administrator if clear guidance on these questions have not been issued by the plan.