Broker Check

Last Chance to Convert After Tax IRA / 401k Money

October 13, 2021

If You Have After Tax Money in Your IRA or 401k Don't Miss This Opportunity

It looks as if this will be the end of a loophole that has let owners of IRAs or 401ks with after tax money convert those funds to more attractive Roth IRAs. Regardless of what final form the Democratic spending and tax bill coming out of Washington looks like, the conversion of after tax money is almost certain to meet its death.  See this article from Morningstar:

This also means the likely end of popular "Backdoor Roth IRAs" which intentionally targeted this loophole.  

If you have an IRA which is funded mostly with after tax dollars, or if you have after tax money in your employer account, you will need to act on this before the end of the year by converting those dollars to a Roth IRA.  

Why is this important?  In both cases, the after tax money itself can be withdrawn from the account tax free.  The difference is what happens to the earnings, and how long the money can remain in the account.  When after tax funds are in an IRA, any return on the investments will be taxed when withdrawn.  With a Roth, both the original contribution AND the earnings are tax free for life (and even to your heirs!!!).  Furthermore, both pre and post tax funds are subject to Required Minimum Distributions at age 72 - and such distributions must be taken pro-rata (so you can't pick and choose which dollars to take out!).  Once converted to a Roth, you NEVER have to take the money out if you don't need it.  

Even if you are still working, you can likely take advantage of this strategy before year end as long as your employer plan permits In Service rollovers.   

Give Financial Pathways a call if we can help you with this!