IRS “Throws in the Towel” on 401(k) Roth Conversions

For years the IRS held strong: When rolling over 401(k) funds, after-tax and pre-tax funds are distributed pro-rata. However, with the recent issuance of IRS Notice 2014-54, the rules have changed.

Historically, for those who maxed out their tax-deferred growth options, saving money in an after-tax 401(k) plan was not a great strategy. The IRS’ stance on pro-rata distributions made it impossible to convert after-tax funds in a 401(k) to a Roth IRA and pre-tax funds to a traditional IRA in tax-free transactions. Now, the IRS has reversed its prior position and taxpayers who wish to roll over their 401(k) funds may allocate the after-tax portion to a Roth IRA.


Legal Double Dipping

For the most part, there is a reason as to why a Bank or Brokerage firm puts a mutual fund in your account – FEES. Whether it’s through being paid directly by offering up a propriety product or through revenue sharing by allowing another fund family to participate on their platform, Brokerage firms have found a way to legally double dip on your account. The adviser makes his commission or asset management fee for managing the account, and then the institution makes its fee from the mutual fund.  This is a very lucrative, but far from objective practice endeavored upon by most large brokerage firms. Most clients have no idea what is going on. This is because the conflict of interest is only revealed to them in tiny print on the back page of a prospectus, which is rarely read. If the firm does have proprietary funds, many hide the affiliation by naming the fund family something that is hard to trace back to the parent company.


Saving ≥ Investing

It’s always a version of the same question:  “How much do I need to have saved in order to retire?”  As planners, we are able to run calculations ad nauseam of amounts currently saved, future savings and annual return assumptions to project retirement needs.