By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
Earlier this month, the IRS simplified some 401K rules that might make the way you save for retirement a little easier. Specifically, they clarified and simplified the rules around after-tax contributions to a 401K and they explicitly made these amounts eligible to be rolled over into a Roth IRA. These rules will take effect in 2015.
Now we are recommending that clients save for their retirement in the following ways:
- If you can only afford to make basic contributions to your 401K retirement plan, make sure that you contribute enough to receive any match that your employer might make.
- If you can afford to fully fund your 401K every year and your employer does not allow excess contributions into the 401K plan, then fund it fully. For 2014, this is a contribution limit of $17,500 plus $5,500 if you are over age 50.
- If your employer allows employee plan participants to make excess contributions each year, and you can afford to make these, then do so. This year the maximum amount you can save is $52,000 or 100% of income. This amount is higher than contributing to a 401K and then an IRA, so it allows you to more fully fund your retirement.
With this recent ruling, when you leave your employer, you will be able to take the amount of the after-tax contributions (but not any of the gains on this investment which are tax-deferred) and roll these over into a Roth. Make sure that when you leave your employer that you get two checks—one for the tax deferred portion of your 401K account which will go into a rollover IRA—and one for the after-tax amount to fund your Roth.
~ Brooks, Hughes & Jones Wealth Advisors – Tacoma, WA