IRS Allows Tax Free Conversions of After Tax Contributions from Retirement Plans

There are now new rules for taking after tax money from qualified retirement plans (such as a 401K, 403b, or 457b accounts.) If you have any after tax contributions within your plan, they can now be rolled directly into a Roth IRA upon separation from service. In the past, most people either rolled all of their funds into an IRA and paid taxes pro-rata, based on the ratio of pretax to post tax contributions, or they had the option to take a separate check for the after tax funds and roll the balance of the funds into an IRA. Now the IRS has ruled that the after tax funds can be transferred into a Roth IRA where they can grow tax free (think of this like a tax free Roth conversion).

There are specific procedures to follow to ensure compliance, but ultimately this ruling will enhance the attractiveness of saving additional after tax amounts in retirement plans, assuming that your workplace allows this. The ruling goes into effect January 1st, 2015.  For more information see IRS notice 2014-54.

Note that these after tax contributions are different from Roth 401Ks, which, by definition, are already tax free in nature.  Plan participants may want to make tax free contributions over and above their salary deferral maximum amounts to take advantage of future tax free conversion opportunities.  The maximum amount that can be contributed to a qualified plan per year is $52K for 2014.

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