Tax-Free Retirement Savings with a Roth IRA

One of the best retirement tools available today is the Roth IRA. The Roth IRA allows you to make contributions in after-tax dollars with no income tax on growth or distributions in the future. However, like most qualified retirement vehicles, there are income limits that prohibit high income earners from contributing. The income limits on contributions range from $116,000 to $131,000 for single filers and $183,000 to $193,000 for people who are married filing jointly (for 2015). If you are above these amounts you are not eligible to make a contribution.

In 2014 the IRS provided an opportunity for individuals who would otherwise be ineligible for a Roth IRA contribution, to utilize after-tax contributions to their 401(k) plans as a way to contribute to a Roth IRA. The IRS clarified how pre-tax and after-tax balances in an employer’s 401(k) or other retirement plan can be allocated to traditional and Roth IRAs. The benefit, is that a taxpayer can roll just his or her after-tax plan assets to a Roth IRA tax free, and roll the pre-tax assets, including the earnings on the after-tax monies to a traditional IRA. This became effective on January 1, 2015.

Each 401(k) plan is different and must allow for after-tax contributions. For 2015, the maximum contribution to a 401(k) plan is $53,000 plus the $6,000 catch up. This includes all contributions from the employee, matching contributions from your employer and any after-tax contributions. Assuming an employee contributes the maximum on a pre-tax or Roth basis of $18,000 and then receives an employer match of $7,200, there is an additional $27,800 that can be contributed to the plan on an after-tax basis. You can immediately rollover this amount to a Roth IRA using an in service distribution.

We reached out to our 401(k) plan administrator and although plan sponsors have called about this option not many have implemented it. At Heller Wealth, we have revised our 401(k) plan to allow for after-tax contributions because we see this as a significant opportunity. We recommend that you reach out to your HR department or 401(k) provider to see if this option is available. If the option is part of your plan, we recommend you consider utilizing this strategy to boost your retirement savings. 

Don Hertling is the Vice President of Financial Planning for Heller Wealth Advisors. If you would like to discuss Roth IRA opportunities, please contact Don at  This email address is being protected from spambots. You need JavaScript enabled to view it. .


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