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.
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.
Over the past week, I have had several clients mention the recent PBS Frontline special, “The Retirement Gamble” (Retirement Gamble). I have also read several negative comments from my industry regarding the piece. After finally finding the time to watch it this morning, I believe it was honest and well done. It is refreshing to see PBS do a piece that includes two of the three messages we try to relay to investors every day.
A Fiduciary places investors interest before their own
Fees steal returns and are one of the most important determinants in investment outcomes
