Time-Sensitive Tax Strategy for 401(k) After-Tax Accounts
Changes In Legislation That Affect Savings Plans
The House of Representatives Ways and Means Committee’s September proposal for tax changes includes many sweeping modifications across the income, capital gains, and estate tax systems in our country. If enacted as proposed, there will be several potential pitfalls to navigate for mid-to high-income households.
For employees of companies that provide a 401(k) plan for retirement savings, there is a particularly time-sensitive potential change regarding after-tax contributions if your plan allows them.
Nearly 50% of all 401(k) plans offer the option to make After-Tax contributions! You are affected if any of the following applies to you:
- You have any balance at all within the After-Tax portion of your 401(k)
- You are currently or have previously made after-tax contributions (also indicated as pre-87/post-86 contributions)
- Your household income is over $400k as an individual or $450k filing jointly
As you may be aware, individuals may generally contribute $19,500 to their 401(k) plan via Pre-Tax or Roth, with an additional catch-up contribution of $6,500 available if you’re over the age of 50. The company match, if your company makes one, is made on up to $290k of eligible income for 2021.
If the sum of the above contributions is less than $58,000 ($64,500 if you’re >50), you’re likely eligible to make or have made After-Tax contributions to your Savings Plan. Historically, these contributions (but not the growth) can be rolled over to a Roth IRA tax-free, or converted to Roth inside the plan partially tax-free. Once in a Roth, the money grows tax-free in perpetuity. This is significantly better than letting it grow in the After-Tax account, where growth is ultimately subject to ordinary income tax down the line.
The proposed changes would eliminate this Roth conversion/Rollover strategy on January 1, 2022!
This means that if you want to get tax-free growth on your After-Tax contributions, the necessary modifications may need to be done by the end of the year if the proposed law passes.
Need Some Help?
If you’d like some help from one of our CPAs or CERTIFIED FINANCIAL PLANNER (CFP®) advisors regarding this strategy and how it applies to you, the Rhame & Gorrell Wealth Management team is here to help.
Our experienced Wealth Managers facilitate our entire suite of services including financial planning, investment management, tax optimization, estate planning, and more to our valued clients.
Feel free to contact us at (832) 789-1100, [email protected], or click the button below to schedule your complimentary consultation today.
IMPORTANT DISCLOSURES:
Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein.Rhame & Gorrell Wealth Management, LLC (“RGWM”) is an SEC registered investment adviser with its principal place of business in the State of Texas. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that RGWM has attained a certain level of skill, training, or ability. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction. The effectiveness of any of the strategies described will depend on your individual situation and should not be construed as personalized investment advice. Past performance may not be indicative of future results and does not guarantee future positive returns.
For additional information about RGWM, including fees and services, send for our Firm Disclosure Brochures as set forth on Form ADV Part 2A and Part 3 by contacting the Firm directly. You can also access our Firm Brochures at www.adviserinfo.sec.gov. Please read the disclosure brochures carefully before you invest or send money.
