Hot Off Presses: New Tax Ruling Allows Rolling After Tax Funds into a Roth … Yes You Can …

One of our favorite things to do on this site is to break new interesting financial planning techniques. Even more fun is breaking tax savings techniques, especially when they occurred from researching a client related question.

Rolling After Tax Funds From Qualified Plan to Roth

We read all the industry rags and after saying I am 99% sure we cannot easily do this, I happily came back biting my tongue to a long time client.

In this September 18, 2014 IRS letter ruling, clarification for the following was established (IRS Notice 2014-54):

• Regarding post/after tax contributions at a company retirement plan
• Rolling over pre and post tax separately is now approved by the IRS
• Pre-Tax can be rolled into a regular IRA
• Post-Tax can go into a Roth IRA (possible huge tax savings)
• If by chance you have done this earlier in the year, you MAY go back and reclassify, based on this letter ruling

Words of caution:

1. This ruling is so new, company plans may not be prepared, feel free to show them the letter ruling from above for assistance
2. Both rollovers (pre and post tax) must be done at the same time
3. September 18, 2014 is the line in sand date commencement date with some flexibility

Here is a great example from the IRS Notice 2014-54:

Employee C participates in a qualified plan that does not contain a designated Roth account. Employee C’s $250,000 account balance consists of $200,000 of pretax amounts and $50,000 of after-tax amounts. Employee C separates from service and is entitled to, and requests to make a direct rollover of $80,000 to a traditional IRA and $20,000 to a Roth IRA. Employee C is permitted to allocate the $80,000 that consists entirely of pretax amounts to the traditional IRA so that the $20,000 rolled over to the Roth IRA consists entirely of after-tax amounts.     ….. From IRS Notice 2014-54

Lastly, we are not CPA’s, and this is a unique, new technique. Check with your tax advisor before making ANY adjustments as this is not a recommendation for all situations and expect some push back from corporate plans due to the newness of this ruling.

There you have it … cutting edge tax savings ideas, hot off the presses!

Have a Happy Roth Possible Rollover Weekend ! yaya … Nerds …

We know .. Shoe fits !

John A. Kvale CFA, CFP