IRS green lights new Roth IRA rollovers regulations


IRS green lights new Roth IRA rollovers regulations

Last week, the Internal Revenue Service provided guidance that permits employees to roll over their after-tax contributions directly into a Roth IRA, tax-free. This ruling applies to rollovers from 401(k), 403(b) or 457 plans. 

You can read Notice 2014-54 “Guidance on Allocation of After-Tax Amounts to Rollovers” at http://www.irs.gov/pub/irs-drop/n-14-54.pdf.

The notice states: “The applicability date of the regulations is proposed to be Jan. 1, 2015. However, in accordance with § 7805(b)(7), taxpayers are permitted to apply the proposed regulations to distributions made before the applicability date, so long as such earlier distributions are made on or after Sept. 18, 2014."

Here’s an example of how it would work:

Retirement Plan Account Value: $200,000

  • Pre-tax Amount $150,000
  • After-Tax Amount $50,000

Total Distribution: $200,000

  • Tax-free rollover to traditional IRA: $150,000 
  • Convert tax-free to Roth IRA: $50,000

Opportunities

  1. Check in with clients to determine if they have after-tax money in their retirement plans, and if not, see if they can make such contributions. Not all plans are created equal – you will need to check the plan document for rules on after-tax contributions.

    Your clients can benefit from tax-deferred savings on money that's already been subject to income taxes and then convert it to a Roth IRA upon distribution. This will generally apply to higher income clients who can afford the larger contributions, but because of their income they are likely ineligible to make annual contributions to a Roth.

  2. Clients over 59 ½ with after-tax contributions in their retirement plans can take advantage of non-hardship in-service withdrawals and roll both pre- and post-tax contributions into traditional and Roth IRAs.

  3. Last but not least …. What’s better than tax-free retirement income? Tax-free retirement income guaranteed for life! If your client or prospect’s Roth IRA will be a source of retirement income (as opposed to a way to pass this wealth tax-free to children or grandchildren), doesn’t it make sense that this income should last as long as the client and their spouse live? An annuity may be the answer

    No one product is the best fit for all situations. At Ash Brokerage, we can offer a wide variety of lifetime income solutions from top-rated carriers to meet your clients’ unique needs. Contact your RVP or internal wholesalers to learn more about this opportunity.