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Time-Sensitive Tax Strategy for 401(k) After-Tax accounts

by | Updated: Jan 8, 2024 | Published: Oct 19, 2021 | Insights

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 a CERTIFIED FINANCIAL PLANNER (CFP®) advisor, the Rhame & Gorrell Wealth Management team is here to help.

Our experienced Wealth Managers can help you review your financial and tax situation and come up with a custom tax optimization strategy going forward – all at no cost to you!

Feel free to contact us at (832) 789-1100, [email protected], or click the button below to ask a question or schedule your complimentary strategy session today.

 

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