Retirement Income Toolbox

May 15, 2018

The following is a summary of an article in Investment News 5/7/18 issue by Greg Iacurci

Roth Accounts, which provide for tax-free withdrawals are incredibly important to retirees- and by extension, their advisors.

There are multiple ways to go about getting a Roth account.  A common one – Roth conversions, where the owner of a traditional, pre-tax account converts it to a Roth – may be challenging for some clients who don’t want, or have the capacity, to pay the associated tax upfront.

But there are more creative ways for clients to gather Roth assets, said Natalie Choate, attorney at Nutter McClennen & Fish, at the Investment News’ Retirement Income Summit in Chicago.  She described them as Roth strategies “for the rest of us.”

After-Tax Money

The first is a direct rollover of after-tax money.

This strategy applies to an individual with after-tax money in an employer-sponsored retirement plan when he or she leaves the company, such as during retirement.  The individual would open both a Roth IRA and traditional IRA and direct the pre- and after=tax 401(k) money to different accounts. (The individual would roll the after-tax money into a Roth IRA, and pre-tax money into a traditional IRA.)

The second strategy is the same general idea, but for a beneficiary.

If a man dies and leaves his retirement plan to his son, the son can open an inherited traditional IRA and an inherited Roth IRA.  The son can then send the pre-tax 401(k) money to the inherited traditional IRA and after-tax money to the inherited Roth IRA.

Another way to gather Roth assets involves Roth 401(k) and individual retirement account contributions, Ms. Choate said.

A growing number of employers sponsoring a retirement plan such as a 401(k) offer the ability for employee contributions to go into a Roth, as well as traditional account.  Income limits don’t apply to Roth 401(k)s; individuals can contribute $18500 to a Roth 401(k) (or $24500 if over age 50).

Roth IRAs are a bit different, Single taxpayers making more than $135,000 (or married couples making more than $199,000) can’t contribute to them.  Individuals can contribute up to $5500 annually to Roth Iras ($6500 if over age 50).

Back Door Roth

Individuals also can make a back-door Roth contribution.

This is useful for taxpayers whose annual income exceeds the limit to contribute to a Roth IRA.  The individual, who must be under age 70 ½, would make a contribution to a traditional IRA, then convert the account to a Roth IRA, Ms. Choate said.

Employers also may allow for additional, nondeductible voluntary contributions, over and above 401(k) contribution limits, into a tax-free account.  This money could then be converted to Roth money inside the retirement plan.

Additionally, an individual with pretax and after-tax money in an IRA can roll the pretax money into an employer-sponsored retirement plan and leave the after-tax money behind to create a Roth account.

One final strategy for building up assets in a Roth is through a solo 401(k) for the self-employed.

This strategy is fitting for the self-employed individual without other employees, who gets a relatively low income from their business (say, $20,000) and who can afford to stash most or all of it in a retirement account.

Such individuals, who are over age 50, can set up a solo 401(k) plan and put the full $20,000 into a Roth account, Ms. Choate said.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual planning.  Situations discussed are for illustrative purposes only, and will be different for each individual’s situation.

This information is not intended to be a substitute for specific individualized retirement planning advice. We suggest that you discuss your specific issues with your financial advisor.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.