Ater-Tax 401(k) Contributions for future rollover to a Roth IRA | Ed Slott and Company, LLC

Ater-Tax 401(k) Contributions for future rollover to a Roth IRA

I'll be 57 this year and I’ve been fortunate to maximize each year the 401(k) deferred contributions set by the IRS and also contribute limited after-tax contributions to my 401(k). I understand the IRS limit of contributions, both by the employee and employer, is $56,000 for 2019 (with the $6,000 catch-up contribution, I understand the maximum yearly contribution for 401(k) participants age 50 or older is $62,000).

I am considering this year maximizing the after-tax contributions to my 401(k) to reach the $62,000 threshold, which is permissible under my employers plan, such that when I retire after 59 ½ years old, I would roll-over the after-tax contributions to my existing Roth IRA and all remaining monies, including all before-tax contributions and employer matching contributions, would be rolled over to an existing rollover IRA.

Question: Due to income limitations, I not able to contribute to a Roth IRA each year but is this a viable alternative to increase my Roth IRA contributions in lieu of paying income taxes in retirement for the conversion of IRA funds to my Roth IRA?

Yes, that is correct. But in many 401k plans you are allowed to rollover the after tax sub account balance (including the earnings in that sub account) while still working, perhaps even several times a year. By doing that you get the after tax money into your Roth IRA sooner, so that earnings on those contributions are Roth earnings. The question is how much do you have in gains when you do your first direct rollover?  If the gains are modest, you might roll over the gains to your Roth as well instead of doing a split rollover. If you can do these rollovers often enough, there will be very little in gains. Also, you can do a basic back door Roth in addition to this if you have the money, but if you have a pre tax IRA balance, the back door Roth conversions will be mostly taxable. Some people will do the split rollover from the after tax 401k, and then roll the gains that went to their TIRA account back into the 401k as an IRA rollover. There is alot of flexibility, but it takes some planning to arrive at the best combination of transactions.

Not a total $62K limit. The distinction is important. The maximum employee after-tax contribution = $56K - employee elective contributions (max $19K) - employer contributions. The $6K catch-up limit only applies after the employee elective contribution limit is reached. It can not be used for employee after-tax contributions

Thanks for the feedback.  I checked my 401(k) benefit plan descriptions and discovered that I'm limited to only one withdrawal per year from the after-tax contributions and my after-tax contributions under the plan will be suspended for six months after I receive an after-tax distribution if I receive the distribution before attaining age 59½. Therefore, I've gone ahead and increased my after-tax contributions such that I do not exceed the $56K threshold and will continue to max my deferred contributions each year ($25K in 2019).  I'll decide in three years when I reach age 59½, how I'll proceed to rollover the after-tax portion to the existing Roth IRA.  Thanks again for the insight.

Any chance you could load up the after tax contributions for 6 months, then do your direct rollover to your Roth IRA, wait the required 6 months, then repeat the process?

Thanks for the "load up" suggestion.  I had to a paradigm shift and review how I could pull this off.I checked further and there is a 50% maximum contribution of gross pay threshold each bi-monthly pay period for employees under the 401(k) plan.  In order to stay under the 50% threshold, I will be able to fund the max after-tax contributions in Q2 and Q3 each year (~$30K in 2019) and then fund the max pre-tax contribution in Q1 and Q4 each year ($19K in 2019).  The catch-up contributions ($6K in 2019) will be collected each pay period during the year.  By doing this, I'm able to be in a position to rollover the after-tax contributions (currently ~$74K balance plus the additional $30K in Q2/Q3) in early October to my exisiting Roth IRA (current balance ~$21K).In October when the after-tax distribution occurs, the plan will also be distributing the earnings (~$75K current balance - related to the after-tax contributions) which I'll plan to do a direct rollover to an exisiting rollover IRA (~$420K current balance).  In subsequent years, I'll roll over the earnings directly to the Roth IRA and pay the taxes on any earnings which may or may not have been incurred during the 6-month period (Q2 & Q3) each year.Then repeat the process each year.  

I wanted to follow-up in regards to the previous posts which on 3/22/19 @ 13:49 stated: “Also, you can do a basic back door Roth in addition to this if you have the money, but if you have a pre tax IRA balance, the back door Roth conversions will be mostly taxable. Some people will do the split rollover from the after tax 401k, and then roll the gains that went to their TIRA account back into the 401k as an IRA rollover.”Early in October 2019, I initiated a “ mega back-door Roth” by distributing the after-tax monies (~$186K)  from my employers 401(k) (current balance ~$936K) with the before-tax earnings (~$103K) distributed to my traditional IRA (current balance ~$532K) and my after-tax contributions (~$83K) distributed to my Roth IRA (current balance ~$129K).  I’m now interested in initiating a “back-door Roth” as noted above by rolling over my before-tax traditional IRA balance to my employers 401k.  After this is completed before the end of 2019, I plan to make a $7K (over 50 years old) after-tax contribution to the traditional IRA and then rollover the balance in my traditional IRA to my Roth IRA.  Furthermore, I’m also considering making the after-tax $7K contribution to my traditional IRA in early 2020 and then again rollover such balance in the traditional IRA into my Roth IRA.My question is how long do I need to wait before rolling over the monies in the traditional IRA to the Roth IRA?  Secondly, is there any limit on the number of rollovers done in a calendar year or within a 12-month period?  Thanks! 

You do not have to wait at all to do the Roth conversion. Do it immediately after your 401k plan has actually accepted the IRA pre tax balance. As for the one rollover limitation over a 12 month period, this only applies to TIRA to TIRA or Roth IRA to Roth IRA rollovers. It does not apply to Roth conversions or rollovers between an IRA and an employer non IRA Plan.  If you do any IRA to same type IRA rollovers, best to use non reportable direct trustee transfers instead of 60 day rollovers where you receive a distribution, since these latter types are the ones subject to the one rollover limit.

 

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