1. After-Tax and Roth Opportunities in 401(k) or 403(b) Plans
Robert M. Kaplan, CFP, CPC, QPA, APA
Director of Technical Education
American Retirement Association

2. Agenda Rothification Why Roth? After-Tax Overview
Conversion Opportunities

3. Rothification $2,400 proposal
Deferrals over $2,400 would have to be Roth
2018 limit is $18,500
First $2,400 could be either Roth or pre-tax
$2,401 and above would be Roth
Some have suggested 100 percent of deferrals as Roth
Camp proposal suggested anything above 50 percent of §402 limit as Roth

4. Rothification
Did you notice that many of the state Auto IRA proposals have Roth either as the only option or the default option?
There is a reason for this – current tax revenue

5. Why Roth? Taxable in year contributed
Qualified distributions tax free (including earnings) in year distributed
Age 59 ½
Five years (or death, disability)
Limit in plans is much higher than IRA world (and income restrictions)
IRS website:

6. Roth IRAs 2017 and 2018 IRA limit - $5,500
2017 and 2018 IRA Catch-up limit - $1,000
2017 Single filers phase out $118,000 to $133,000
2017 Joint filers phase out $186,000 to $196,000

7. Who Should Consider Roth?
Low tax bracket currently – so deduction is not as valuable
This may include younger participants or those re-entering workforce
Gig economy workers
Those phasing into retirement (leave full-time job but work part time) – some live off savings before pre-tax
Higher tax brackets in future than currently
Tax diversification

8. Who Should Consider Roth?
Estate planning (paying tax currently so beneficiaries can get tax-free distributions)
No RMD?? Yes and No
No during owner’s lifetime
Death benefit RMD rules apply

9. Concerns Will Congress ever change rules on tax-free distributions?
Will I contribute less now because I have to pay more in current taxes?
Auto enroll – mostly pre-tax
Not all plans have a Roth-deferral provision
Vanguard 2016 Plan Data Survey shows 65 percent of plans offer Roth feature

10. Conversions in Plan Rollovers
Plan provisions must allow
Plan only can do this if it has a Roth deferral provision
Can be all or any sources – see plan document
Current taxation of conversion amount

11. After-Tax Contributions
Allowable but not common
Current taxation but earnings grow tax-deferred
Immediate distribution
Must be included in 401(m) match ACP testing
Conversion opportunity (to be discussed)
Vanguard 2016 Defined Contribution survey shows 18 percent of plans offer after-tax contributions
See next slide for example

12. After-Tax Contributions
Example
Plan allows for deferrals
Match is dollar-for-dollar to six percent
Defer $18,000 and receive $18,000 as match
$36,000 total and plan has NO nonelective source
Annual additions limit is $54,000
Room for $18,000 as after-tax
See next slide

13. After-Tax Contributions
Example
But the $18,000 is used in ACP test
Don’t only HCEs have the ability to afford this extra contribution
This could doom testing even with match
SH plans still have to test for after-tax
Not so fast

14. After-Tax Contributions
Example
How about companies with a lot of NHCEs who make a very good salary?
Think Silicon Valley
Consider using top paid group election
Only top 20 percent are HCEs even if over the prior year HCE $ limit
$120,000 for 2017

15. After-Tax Contributions
Another candidate
Owner-only business
Second job/business
Professors who have consulting jobs
Doctors who have side practices
People who sell real estate on weekends
People who dabble in writing/acting/music/art
Anyone with a second income

16. After-Tax Contributions
If earnings are less than $144,000 may want to consider
$144,000 x 25 percent (deduction limit) = $36,000
$18,000 could go in as deferral = $54,000
Adjust for catch-up
See next slide for example

17. After-Tax Contributions
Earnings $100,000
Deduction (25 percent) = $25,000
$18,000 deferral = $43,000
Room for $11,000 after-tax
I have assumed they want to maximize plan contributions while retaining flexibility (so no DB plan)

18. After-Tax Conversion Opportunity in Plan Rollover
If maxed out on deferral limit and I can contribute after-tax
If plan allows for Roth deferrals AND
Has a Roth conversion provision
Why not convert and have earnings tax-free instead of tax-deferred?
A no-brainer
Example – next slide

19. After-Tax Conversion Opportunity
Example
$18,000 deferral
$18,000 match
$18,000 after-tax Roth conversion
Could have $36,000 Roth in this case
Too good to be true for some?
Works unless Congress closes this “loophole”

20. After-Tax Conversion Opportunity
Do I have this opportunity for an IRA?
Yes
No conversion limit
Taxes paid
No ten-percent penalty if within 60-day window
Re-characterization (IRA only not plans)
By October 15th of following year

21. Questions?

22. Winter Virtual Conference Friday, December 8 9:00 am to 5:00 pm
2017 ASPPA
Winter Virtual Conference
Friday, December 8
9:00 am to 5:00 pm
Five Sessions Including:
Washington Update and Late-Breaking Regulatory Developments
Ask the Experts Panel
Visit: