Extra $32,500 in Roth IRA - too good to be true?

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wellmoneyed
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Post by wellmoneyed » Wed Jan 26, 2011 11:31 pm

Ok, I have read this several times and I think I am missing something.

You get $1000 tax rate is 50%

Step 1: Take the $1000, make NON-DEDUCTIBLE 401k Contribution, pay taxes, then you have $500 in your regular 401k

Step 2:Roll this into a Roth IRA and pay taxes again: $250 in your roth IRA

So basically I was taxed at 75%. Isn't that bad? Is that not the process? Please help ;-)

EDIT:Read more: I guess the hope/point is Step2 DOES NOT incur additional taxes.

cliffedelgado
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Post by cliffedelgado » Thu Jan 27, 2011 2:26 am

wellmoneyed wrote: EDIT:Read more: I guess the hope/point is Step2 DOES NOT incur additional taxes.
Step 2 DOES NOT incur taxes on money that has already been taxed.

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ThePrune
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Post by ThePrune » Mon Jan 31, 2011 7:33 pm

I'm still waiting for an official IRS opinion on the legality of this "$32,500 extra contribution" strategy.

I was originally told on Jan. 5 that an opinion would require 15 business days. But today I was told by the IRS office professional with the Employee Plans unit that for "more complicated" questions 30 days would be required. It didn't think this was all that complicated a situation, but then maybe it is :roll:

bdpb
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Post by bdpb » Mon Jan 31, 2011 11:26 pm

ThePrune wrote:I'm still waiting for an official IRS opinion on the legality of this "$32,500 extra contribution" strategy.

I was originally told on Jan. 5 that an opinion would require 15 business days. But today I was told by the IRS office professional with the Employee Plans unit that for "more complicated" questions 30 days would be required. It didn't think this was all that complicated a situation, but then maybe it is :roll:
I'd be interested in hearing how complicated your request was. Did you
ask about rolling only the after-tax contributions to a Roth. Did you ask
about rolling after-tax contributions and earnings to a Roth and the tax
consequences? How about after-tax contributions to a Roth and earnings
to a tIRA? Or was your request only with regards to your original thoughts?
Or was your request more generic in some way.

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ThePrune
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Post by ThePrune » Tue Feb 01, 2011 10:36 am

bdpb wrote:
ThePrune wrote:I'm still waiting for an official IRS opinion on the legality of this "$32,500 extra contribution" strategy.
I'd be interested in hearing how complicated your request was. Did you
ask about rolling only the after-tax contributions to a Roth. Did you ask
about rolling after-tax contributions and earnings to a Roth and the tax
consequences? How about after-tax contributions to a Roth and earnings
to a tIRA? Or was your request only with regards to your original thoughts?
Or was your request more generic in some way.
I described for the IRS Retirement Plans division agent all details starting with the 401(k) contributions [up to $32,500 of after-tax deferrals on top of the $16,500 normal contribution] through the Roth rollover conversion of the after-tax $32,500 in the same year. I also provided links to this posting sequence so that they could read more if they so desired.

As some readers may remember, I posted last December my doubts about the legality of this strategy. Some companies are certainly allowing it, but that doesn't make it legal/correct.

The Employee Plans division of the IRS has created a large number of Internet-based tools to help companies catch and correct their plan errors. There is even a web-based tool specifically created to help sort out 401(k) plan errors: http://www.irs.gov/pub/irs-tege/401k_mi ... pdf#page=2 Allowing excessive deferrals is one of the "12 biggies" that this tool focuses on.

Regardless of my personal opinion, I'm as interested as everyone else to see what the IRS Employee Plans division has to say about this strategy!

quarterstock
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Post by quarterstock » Wed Feb 02, 2011 10:14 pm

ThePrune wrote:I'm still waiting for an official IRS opinion on the legality of this "$32,500 extra contribution" strategy.
I'm still waiting to hear back from you once the IRS responds.

As it turns out, I'm also now seeking a more authoritative opinion -- from H&R Block. I have some family connections there and managed to get my 2010 tax return submitted to one of their back offices to some of the more senior accountants and attorneys who assist the front lines with complex returns. I'll be sure to report back after they render an opinion and complete my taxes.

While not as authoritative as an IRS response, it will be a useful data point.

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Post by LadyGeek » Wed Feb 09, 2011 8:03 pm

(moved post to different thread)
Last edited by LadyGeek on Wed Feb 09, 2011 9:07 pm, edited 1 time in total.
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Post by windscorpion » Wed Feb 09, 2011 8:17 pm

My employer allows in-plan roth conversion starting this year. Based on my understanding, it will allow me to convert my after-tax 401k (limited to 5k/yr) to a roth 401k (and pay tax on the earnings portion) twice a year. Any disadvantage using this approach instead of the withdrawal/rollover approach mentioned?

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by ThePrune » Wed Feb 09, 2011 10:32 pm

gvernon wrote:So after reading this thread:

http://www.bogleheads.org/forum/viewtopic.php?t=65836

And then following it up with my 401k provider via phone call, it seems as if I can use the after-tax option in my 401k plan to contribute an extra $32,500 into a Roth IRA this year (and every year).

The process goes like this:

1. Max out pre-tax (or Roth) 401k - $16,500
2. Contribute on an after-tax basis (my company plan allows up to 80% of salary to be contributed after-tax) up to the IRS combined limit of $49,000
3. Request an in-service withdrawal of after-tax funds - $32,500, rollover to a Roth IRA, and then pay taxes on any earnings as ordinary income
Bonus - Rollovers have no effect on the regular $5000 Roth IRA contribution limit, so I can do that too!

Am I missing anything? This seems too good to be true?
EDIT - AS LONG AS EMPLOYER PLAN INCLUDED A EXTRA QUALIFIED PLAN OPTION THAT SUPPLEMENTED THEIR 401(k) OPTION, I NOW AGREE THAT THIS WORKS FINE. BUT NOT ALL EMPLOYERS HAVE SUCH AN EXTRA PLAN OPTION AVAILABLE. SEE MY POSTINGS BELOW.
Last edited by ThePrune on Thu Feb 10, 2011 4:31 pm, edited 1 time in total.
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xerty24
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Post by xerty24 » Wed Feb 09, 2011 11:34 pm

Prune - you're wrong about interpreting the above passages. When they specify that elective deferrals are capped at $16500 between traditional pretax 401k contributions and Roth 401k contributions that's true but that's not what this thread is about. We're talking about after-tax employee contributions, which are not elective deferrals, and these are limited by the $49k cap on total plan contributions rather than the lower elective deferral limit. If you made no elective deferrals of either kind and got no employer match or contribution, you would be eligible to make $49k of after tax contributions if your plan was sufficiently enlightened in their choice of policies.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by tfb » Thu Feb 10, 2011 12:04 am

ThePrune wrote:He wanted to max out his pre-tax (or Roth) deferral of $16,500 [2010 section 402(g) limit], and then contribute on an after-tax basis an additional amount up to the 2010 section 415 limit of $49,000. Can he do it?
Yes he can and the law allows it. Roth is after tax but not all after-tax is Roth. After-tax contributions were allowed into 401k plans long before Roth existed. They were used for HCEs when their contributions are limited by the nondiscrimination tests. They were also used for employees who want to contribute more than the elective deferral limit.

After Roth 401k is introduced and safe harbor rules are used to satisfy tests, new plans don't see the need for after-tax contributions any more. But for existing plans that had allowed after-tax contributions all along, they are still allowed, and legal.
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ThePrune
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Post by ThePrune » Thu Feb 10, 2011 4:02 pm

xerty24 wrote:Prune - you're wrong about interpreting the above passages. When they specify that elective deferrals are capped at $16500 between traditional pretax 401k contributions and Roth 401k contributions that's true but that's not what this thread is about. We're talking about after-tax employee contributions, which are not elective deferrals, and these are limited by the $49k cap on total plan contributions rather than the lower elective deferral limit. If you made no elective deferrals of either kind and got no employer match or contribution, you would be eligible to make $49k of after tax contributions if your plan was sufficiently enlightened in their choice of policies.
xerty, you're right. If the employer chose to write their retirement savings plan so that it offered an after-tax Qualified Plan option in addition to the 401(k) option, then the $49k limit for combined contributions would apply.

Actually the limit could be higher: $54,500 for employees at least age 50. But never more than 100% of compensation regardless of age.

Your comment about the plan being "sufficiently enlightened in their choice of policies" turned on a light bulb for me. I really was thinking that people were talking about "plain vanilla" 401(k) plans rather than custom plans that offered several options. You and others were saying one thing, I was thinking something different, and we talked past each other. :oops:

Just as long as everyone agrees that this strategy won't work for a plain 401(k) plan!
Investment skill is often just luck in sheep's clothing.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by ThePrune » Thu Feb 10, 2011 4:13 pm

tfb wrote:Yes he can and the law allows it. Roth is after tax but not all after-tax is Roth. After-tax contributions were allowed into 401k plans long before Roth existed. They were used for HCEs when their contributions are limited by the nondiscrimination tests. They were also used for employees who want to contribute more than the elective deferral limit.
tfb, I also want to thank your for your comment. Your reference to after-tax contributions for HCE's also helped to "turn on my light bulb" that folks were not talking about plain 401(k) plans but custom plans with multiple components.

Your example of after-tax contributions for Highly Compensated Individuals reminded me of Thrift Plans, a custom type of Qualified Plan that were popular before the more recent 401(k) plans were introduced. To remain "qualified" they had to obey the section 415(c) limit, but were not restricted by the 402(g) limit. And there are still so-called 401(k) Wrap Plans- which combine a plain vanilla 401(k) with a non-qualifed deferred compensation plan - being set up for HCE's who really want to shield a lot of investment growth from taxation.
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Post by coinflip » Wed Apr 27, 2011 10:45 am

Any updates from the IRS?

My company's 401(k) plan seems to meet the requirements. It allows up to 15% of each paycheck to go to after-tax contributions (within an annual limit of $49k for all contributions). It also allows in-service withdrawals with no suspension of matching benefits.

The plan has an additional wrinkle: company matching contributions are eligible for in-service withdrawals. Not sure how this would affect the pro-rating of any after-tax distributions.

My tentative plan is to start contributing 15% to after-tax now and decide later in the year whether to pull the trigger and roll the after-tax contributions into my Roth IRA. The downside to this seems very low, at worst I just leave the funds sitting in the 401(k).

I'm less clear on the downside of converting the funds to a Roth and receiving an adverse ruling from the IRS at a later date.

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Post by quarterstock » Wed Apr 27, 2011 12:24 pm

coinflip wrote:Any updates from the IRS?
Yes. See my post dated Apr 18, 2011 5:44 pm in this thread: http://www.bogleheads.org/forum/viewtopic.php?t=65836


In short, my tax adviser received correspondence from the IRS that allowed the after-tax contributions to a traditional 401k plan and the subsequent rollover to a Roth IRA. No pro-rata rules apply.

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Post by coinflip » Wed Apr 27, 2011 12:42 pm

Thanks for your response. Hard to keep track of all the threads on this issue.

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Post by airahcaz » Tue Jul 05, 2011 9:37 am

please search threads with my username, I've been doing after-tax rollover to Roth IRA for a few months now, with a simple phone call to Fidelity
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Post by Alan S. » Tue Jul 05, 2011 2:57 pm

I would guess that your 401k is set up in various tax sub accounts, and this is critical to avoiding the IRS pro rate rules for plan distributions. The IRS has still not issued clear 1099R instructions to plan administrators and to my knowledge have never commented about in service distributions from tax sub accounts in the plan. I expect that when they do, they will clarify that the pro rate rules ONLY apply to the portions of the plan (ie sub accounts) that can be distributed while still employed. Pro rating amounts not eligible for distribution would place difficult accounting demands on the plan in tracking remaining basis in the various sub accounts.

The most common type sub account is one that contains after tax contributions made directly or from recharacterized pre tax contributions that fail plan discrimination testing. The earnings from these after tax contributions usually remains in this sub account. Therefore, when an in service distribution is made from this sub account it is either totally or mostly tax free. I suspect this mostly reflects your situation in making these on going after tax transfers to a Roth IRA.

Now, after you leave the company, the entire 401k is eligible for distribution, so the sub accounts other than pre 1987 after tax contributions no longer matter. Pro rating must then take place on all distributions and due to pre tax deferral and co matching contributions, distributions will then be mostly taxable.

For the last two years, I think that the way that 1099R forms have been issued, many prior employees will escape pro rating when they directed the pre tax to a TIRA and the after tax to a Roth IRA because it would be very difficult to go back and re construct these rollovers to direct the basis to both the TIRA and the Roth IRA. To enforce their pro rating requirements in Notice 2009-67 and 75, the IRS is going to have to issue new instructions to plan administrators for 2011 and later. After October it is probably too late to change employer processing systems, so if the IRS does not act in the next 3 months, 2011 rollovers will also skate through with their basis isolated to the different IRA types.

Finally, the Employee Benefits Council has been pleading with the IRS to clarify these matters for almost two years now without a response from the IRS...........

http://www.americanbenefitscouncil.org/ ... _402c2.pdf

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Post by airahcaz » Tue Jul 05, 2011 3:10 pm

Alan S. wrote:I would guess that your 401k is set up in various tax sub accounts, and this is critical to avoiding the IRS pro rate rules for plan distributions. The IRS has still not issued clear 1099R instructions to plan administrators and to my knowledge have never commented about in service distributions from tax sub accounts in the plan. I expect that when they do, they will clarify that the pro rate rules ONLY apply to the portions of the plan (ie sub accounts) that can be distributed while still employed. Pro rating amounts not eligible for distribution would place difficult accounting demands on the plan in tracking remaining basis in the various sub accounts.

The most common type sub account is one that contains after tax contributions made directly or from recharacterized pre tax contributions that fail plan discrimination testing. The earnings from these after tax contributions usually remains in this sub account. Therefore, when an in service distribution is made from this sub account it is either totally or mostly tax free. I suspect this mostly reflects your situation in making these on going after tax transfers to a Roth IRA.

Now, after you leave the company, the entire 401k is eligible for distribution, so the sub accounts other than pre 1987 after tax contributions no longer matter. Pro rating must then take place on all distributions and due to pre tax deferral and co matching contributions, distributions will then be mostly taxable.

For the last two years, I think that the way that 1099R forms have been issued, many prior employees will escape pro rating when they directed the pre tax to a TIRA and the after tax to a Roth IRA because it would be very difficult to go back and re construct these rollovers to direct the basis to both the TIRA and the Roth IRA. To enforce their pro rating requirements in Notice 2009-67 and 75, the IRS is going to have to issue new instructions to plan administrators for 2011 and later. After October it is probably too late to change employer processing systems, so if the IRS does not act in the next 3 months, 2011 rollovers will also skate through with their basis isolated to the different IRA types.

Finally, the Employee Benefits Council has been pleading with the IRS to clarify these matters for almost two years now without a response from the IRS...........

http://www.americanbenefitscouncil.org/ ... _402c2.pdf
Yes, Fidelity has it separately accounted for in a bucket labeled after-tax, and also by pre or post 1987. All my contributions are post 1987 anyway.
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Gustie13
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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Gustie13 » Tue Oct 02, 2012 4:25 pm

Has anyone heard yet what the IRS's opinion on this is? I've tried checking the Wiki, other threads, and the Google to no avail.

My employer 401k plan allows for pre-tax and post-tax contributions and I already have a Roth IRA set up with Fidelity so if I understand this correctly I just need to see if my company does in-service distributions?

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Alan S. » Tue Oct 02, 2012 6:04 pm

FInd out about the in service distributions and which sub accounts are eligible. That should determine how they prorate your basis.

There is nothing new from the IRS on this entire isolation of basis issue. As posted earlier in this thread, the American Benefits Council has petitioned the IRS for guidance on various inconsistent IRS Notices, but as far as I know the inconsistencies have been too difficult for the IRS to unwind. That's what continued IRS silence means to me when they know there are problems.

You can still isolate basis by varying methods, but only one of them is protected by a tax code provision (Fairmark Strategy 3).

Earlier, I recommended that those whose employers would do tandem direct rollovers (pre tax to TIRA, after tax to Roth IRA) and reflect no taxable income on the 1099R wait until November if they wanted to reduce the chance of being blindsided by a late notice from the IRS to employers on how they must complete the 1099R. By November, reporting programming is already underway in most companies meaning that the IRS would not attempt to retroactively change reporting for 2012. Another month and you will be safer than doing it now if you choose this method.

But be sure to understand how your employer will issue the 1099R if you want to avoid withholding by doing a direct rollover, either while in service or post separation.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by icedtea » Tue Oct 02, 2012 6:25 pm

I figured I'd add here that I have a generous 401k plan that allows in-service withdrawals of post-tax contributions. I tested this out earlier this year after getting some help on the forum, and had ING, my 401k provider, cut me a check of my post-tax contributions and gains at the time. That check went to Vanguard and the amount was added to my Roth without any problems. I was told by ING that I'd be responsible to pay taxes on the gains only, which were nominal. The money is now in the Roth, growing tax free.

I have continued to contribute to my post tax 401k since then. At the end of this year, I'm going to have ING cut another check and roll the money into my Roth. I expect to have more gains but still not an unbearable amount, which I'll be reporting and pay tax on, on top of the aforementioned gains. In my case, my plan allows up to 3 in-service withdrawals per calendar year.

The only caveat I'm aware of is that you can't go over the 50k annual limit, which covers your pre tax 401k, employee match, Roth contribution and post tax 401k. I've been watching my contributions, and should end up at around 49k come Dec 31st when all is said and done.

Thanks,
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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Gustie13 » Thu Oct 04, 2012 11:42 am

Alan and Ice-T-

After reading through my companies Summary Plan Description it appears I am able to do this - they allow In-Service Withdrawals limited to my after-tax contributions and earnings (plus rollover contributions and vested company match).

So if I understand things correctly:
1) It states in my Plan's explanation of Withdrawals that pre-tax contributions cannot be removed, so I don't need to worry about basis or pro-rating, correct?
2) I will have to pay taxes on the earnings of the after-tax contributions, correct?
3) I have a pre-existing Roth IRA with Fidelity and have verified that they'll accept the check from my plan as a Rollover and not a Contribution (see my conversation with Fidelity below for a laugh), so I'm good to go there, right?

Anything else I need to be aware of?


IM conversation with Fidelity about how this rollover would be counted - wanted to make sure it wouldn't be mistaken for a contribution :happy
Fidelity Rep: Are the funds coming from a pretax retirement account?
Me: after tax
Me: I will have already hit the $17k pre-tax contribution limit on my 401K
Fidelity Rep: Are you still actively employed with the employer?
Me: Yes, and they do In-Service Distributions
*5 minute pause*
Fidelity Rep: There is not any specific IRS guidance on moving after tax 401(k) funds directly to a Roth IRA. You would want to consult with a tax advisor before you initiate this process.
Fidelity Rep: If allowed then it would be considered a rollover rather than a contribution

tioga
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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by tioga » Sun Dec 16, 2012 9:24 pm

Alan S, and others: I have gotten myself very confused on this topic. On the one hand, it looks like several Bogleheads are performing rollovers of their after-tax 401k dollars into ROTH IRAs. On the other hand, the Fairmark article (http://www.fairmark.com/rothira/09030801-401k-basis.htm) points out several issues involved in doing such rollovers pertaining to the isolation of basis.

My question is the following. Consider a 401k plan that FORBIDS in-service distributions of pre-tax amounts and only permits in-service distributions of after-tax amounts. Furthermore, for simplicity, lets assume that the after-tax contributions have generated zero earnings. Are these the key nuggets that let one rollover the after-tax in-service distributions into a ROTH IRA with no tax due? In other words, is it the fact that the plan only permits the after-tax amount to be distributed that lets one perform this rollover with no basis isolation worries?

A second partially-related question. Whose responsibility is it to ensure that the pre-tax and after-tax basis is appropriately considered during a distribution? Is it the 401k custodian's responsibility? If this is the case, can someone who has rolled over such 401k after-tax in-service distributions into a ROTH IRA discuss what their 2011 Fidelity 1099-R looked like?

Many thanks for your answers!

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Alan S. » Sun Dec 16, 2012 9:43 pm

Yes, you have it.

Pro rating is only done for amounts that are eligible for rollover. After you separate, the entire plan is eligible and that creates issues in isolating the basis safely. But for in service distributions in your example, there is nothing to pro rate. The Roth rollover will be tax free.

Second question. It is the plan's responsibility to track basis and correctly indicate taxable amounts on the 1099R. The issues outlined at Fairmark regarding basis isolation remain undetermined partially because the IRS has not issued appropriate guidance to the employer plans on what rules to follow when completing the 1099R. The existing 1099R Instructions don't support what the IRS wanted to do when it issued Notice 2009-68. For a 2011 rollover, you should not have anything in Box 2a, except perhaps some earnings that were generated in the after tax sub account. Usually, if there are earnings on those after tax contributions, the earnings must accompany the distribution or be pro rated in the event of a partial distribution of the after tax sub account.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by tioga » Sun Dec 16, 2012 10:00 pm

Alan - thank you! I think I get it now.

In the eventuality that there are earnings in box 2a, the taxpayer would have to pay the regular income taxes and the 10% penalty for early withdrawal on them - right?

Your point on what happens post separation is very interesting. My plan (is this true for most plans?) permits two other forms of withdrawals: hardship withdrawals (provided several IRS-stipulated conditions are met) and in-service withdrawals for people over age 59 1/2. The fact that a hardship withdrawal is permitted should not cause any basis isolation issues - do you concur? What happens when a taxpayer reaches age 59 1/2 though? Would the pre-tax and after-tax bases then get polluted?

-Tioga.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Default User BR » Mon Dec 17, 2012 1:57 am

tioga wrote:In the eventuality that there are earnings in box 2a, the taxpayer would have to pay the regular income taxes and the 10% penalty for early withdrawal on them - right?
If they went into a Roth, then only tax is due, no penalty.

For people under 59-1/2, it's not plan discretion on employee elective deferrals. In-service rollover is not allowed. In-service distribution would only be allowed at all for approved hardship cases.


Brian

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Alan S. » Mon Dec 17, 2012 3:36 pm

tioga wrote:Alan - thank you! I think I get it now.

In the eventuality that there are earnings in box 2a, the taxpayer would have to pay the regular income taxes and the 10% penalty for early withdrawal on them - right?

Your point on what happens post separation is very interesting. My plan (is this true for most plans?) permits two other forms of withdrawals: hardship withdrawals (provided several IRS-stipulated conditions are met) and in-service withdrawals for people over age 59 1/2. The fact that a hardship withdrawal is permitted should not cause any basis isolation issues - do you concur? What happens when a taxpayer reaches age 59 1/2 though? Would the pre-tax and after-tax bases then get polluted?

-Tioga.
As default user indicated, no penalty on rollovers to an IRA of any type.

A hardship withdrawal is never eligible for rollover, and if you have an after tax sub account available for in service distribution, you will have to drain that account before applying for a hardship distribution. The hardship distribution itself would therefore be fully taxable in most cases, but if there is any other basis in the plan left, the distributions would be pro rated with other amounts available for distribution including elective deferrals. Plan hardship provisions are quite flexible and therefore your individual plan would have to provide conclusive details.

Once the taxpayer reaches 59.5, the plan MAY allow in service distribution of elective deferrals (non hardship). In that case any other in service distributions subject to pro rating would have a higher taxable % if elective deferrals were distributable. Again, specific plan provisions should be consulted.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by gloomydog » Wed Jan 16, 2013 10:31 pm

Hi all

I have a related question from the other side.

Does anyone happen to know how payroll should account for this post tax contribution portion? We use ADP and I can see options for t401K or r401K but not an elective post tax contribution. Should I elect r401K for these portions?

I've set up the 401K plan to be extremely flexible (a dream 401K plan!) but the nitty gritty is getting to me. :)

Thank you

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Default User BR » Thu Jan 17, 2013 2:05 am

gloomydog wrote:Does anyone happen to know how payroll should account for this post tax contribution portion? We use ADP and I can see options for t401K or r401K but not an elective post tax contribution. Should I elect r401K for these portions?
It's definitely not Roth. It's traditional, but not employee elective deferrals. The custodian needs to do separate accounting. You'll need to discuss it with them.


Brian

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Bacchus01 » Wed Apr 24, 2013 9:09 pm

I'm bumping this to the top and hoping for some simplicity.

Assuming you can max the $17K pre-tax and have a 50% company match. And you do a $5.5K backdoor Roth, how much more could you do after-tax through your 401K after tax and then roll out to a Roth, assuming you can do in-service withdrawals?

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by airahcaz » Wed Apr 24, 2013 9:19 pm

Bacchus01 wrote:I'm bumping this to the top and hoping for some simplicity.

Assuming you can max the $17K pre-tax and have a 50% company match. And you do a $5.5K backdoor Roth, how much more could you do after-tax through your 401K after tax and then roll out to a Roth, assuming you can do in-service withdrawals?

$49K - 17K - 8.5K = 23.5
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Alan S. » Wed Apr 24, 2013 9:32 pm

The 49k annual additions limit was for 2011. The limit moved to 50k for 2012 and 51k for this year. Any age 50 catchup contribution can be added in the amount of 5.5k.

Therefore, for under age 50 in 2013, the numbers are 51k less 17.5k less 8.5k = 25k.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by dianna » Wed Apr 24, 2013 9:33 pm

airahcaz wrote:
Bacchus01 wrote:I'm bumping this to the top and hoping for some simplicity.

Assuming you can max the $17K pre-tax and have a 50% company match. And you do a $5.5K backdoor Roth, how much more could you do after-tax through your 401K after tax and then roll out to a Roth, assuming you can do in-service withdrawals?

$49K - 17K - 8.5K = 23.5
... except my understanding is that the max this year (2013) is $51,000 and the 401k is $17,500, thus the arithmetic is: $51K - 17.5K - 8.75K = $24,750.

The backdoor Roth does not count toward this.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by airahcaz » Wed Apr 24, 2013 9:36 pm

dianna wrote:
airahcaz wrote:
Bacchus01 wrote:I'm bumping this to the top and hoping for some simplicity.

Assuming you can max the $17K pre-tax and have a 50% company match. And you do a $5.5K backdoor Roth, how much more could you do after-tax through your 401K after tax and then roll out to a Roth, assuming you can do in-service withdrawals?

$49K - 17K - 8.5K = 23.5
... except my understanding is that the max this year (2013) is $51,000 and the 401k is $17,500, thus the arithmetic is: $51K - 17K.5 - 8.25K = $25,250.

The backdoor Roth does not count toward this.
Sorry, yes agreed
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by dianna » Wed Apr 24, 2013 9:50 pm

airahcaz wrote:
dianna wrote:
airahcaz wrote:
Bacchus01 wrote:I'm bumping this to the top and hoping for some simplicity.

Assuming you can max the $17K pre-tax and have a 50% company match. And you do a $5.5K backdoor Roth, how much more could you do after-tax through your 401K after tax and then roll out to a Roth, assuming you can do in-service withdrawals?

$49K - 17K - 8.5K = 23.5
... except my understanding is that the max this year (2013) is $51,000 and the 401k is $17,500, thus the arithmetic is: $51K - 17K.5 - 8.25K = $25,250.

The backdoor Roth does not count toward this.
Sorry, yes agreed
Of note is that I edited my post once due to poor arithmetic on my part (not dividing 17.5K correctly), so I believe the accurate computation is as follows:
$51K - 17.5K - 8.75K = $24,750.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Bacchus01 » Thu Apr 25, 2013 11:18 am

Wow. This is one great reason I read here!

I had no idea I could get that much funneled into our Roth accounts each year. That will really help down the line!

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by ThePrune » Thu Apr 25, 2013 11:31 am

Bacchus01 wrote:I had no idea I could get that much funneled into our Roth accounts each year. That will really help down the line!
Just remember that not all company Employee Savings Plans allow additional after-tax contributions once you've maxed out your traditional 401(k) pre-tax contributions. But more and more company plans have been amended to allow this. Even my old employer changed their plan to allow this - after I had retired and would have loved to have taken advantage of it :annoyed .
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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Bacchus01 » Thu Apr 25, 2013 12:26 pm

My plan does allow this.

With matching provisions, my company 401K matches nearly dollar for dollar. This means I can put another $16K after-tax and roll to a Roth. Combined with the backdoor conversion for my wife and I, that's $27K a year I can roll to a Roth. For a very long time I couldn't convert to a Roth at all and thought that had continued until I came here.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by BrandonBogle » Thu Apr 25, 2013 2:26 pm

My previous employer's plan allowed this and I took advantage of it. Sadly, my current employer's plan does not. Hopefully some day that will change!

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Bacchus01 » Thu Apr 25, 2013 8:19 pm

How did you do the rollover exactly? Did you have the check made out to Vanguard?

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by BrandonBogle » Thu Apr 25, 2013 11:15 pm

Bacchus01 wrote:How did you do the rollover exactly? Did you have the check made out to Vanguard?
My Roth isn't with Vanguard. But basically yes. My 401k required the name of the custodian and they mailed a check to my house made out to the Custodian FBO BrandonBogle. I then sent that check in with rollover paperwork. Worked without any hassle.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by Gustie13 » Thu Nov 14, 2013 6:17 pm

Didn't get around to trying it last year, but reading through my company's Plan Summary this year I noticed two parts that make me pause before trying this year:

'If you withdraw earnings on your after-tax contributions, you will have taxable income that will be subject to federal and state income taxes and a possible additional tax that currently is 10%.'
'The portion of any distribution made from earnings on after-tax dollars is taxable at distribution.If you receive an early distribution, an additional tax will be due. The additional tax, which is in addition to any other federal or state income tax, is currently equal to 10% of the taxable portion of the distribution.'

So I'd pay taxes on the earnings of my after-tax, plus 10%? Is that standard?

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by placeholder » Thu Nov 14, 2013 6:21 pm

Not if you roll them into an IRA of sort. If you go to a Roth you'd owe just tax. If you just take the money and spend it then you would owe penalty.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by BrandonBogle » Thu Nov 14, 2013 10:32 pm

When I did mine, I request a rollover with my plan sponsor, so they did not even withhold any taxes or penalties (though the check arrived at my house with the name of my Roth IRA custodian on it).

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by placeholder » Fri Nov 15, 2013 1:49 am

If the check is made out to you then they have to withhold. Some recommend that for splitting earnings and contributions.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by teammjs » Sat Jan 18, 2014 11:24 am

Great info.

I've read a several threads on this, and think I've "got it" except for one thing I think that doesn't seem to be consistent.

If I make an after-tax contribution into my 401(k) and (if my plan administer allows it) I "move" this money into a Roth IRA-- is this a rollover or a conversion?

I seem to see these terms used interchangeably on some threads and want to make sure I use the right semantics with my administrator, since they could have different tax implications.

Thanks.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by hansp » Sun Jan 19, 2014 12:43 am

It's a rollover for the post-tax contribution amount and a conversion for the gains (if any). Conversion implies taxes have never been paid on the amount.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by placeholder » Sun Jan 19, 2014 12:54 am

It's a rollover as are conversions from traditional IRA to Roth see IRS publication 590.

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by LadyGeek » Sun Jan 19, 2014 10:03 am

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