Method to get more money into a Roth IRA than the contribution limit?

chimeer, I think it depends on the 401k provider if they will let you do an in-service rollover and under what circumstances. Also, 16.5k is only the limit for pre-tax contributions.

Edit: http://www.forbes.com/forbes/2008/0225/046.html
"Employers and 401(k) plan administrators don't advertise this fact, but most workers 59 and a half and older, and even some younger ones, can roll over 401(k) funds while they're still working and contributing to the plan."

I've seen people with multi-million-dollar IRAs at age 50.

Apparently it was some type of roll-over from a business retirement plan and the business was folded up. It was explained very clearly to me, but I have actually seen them.

cashistrash said: However, the total limit in after-tax contributions to a 401k in 2009 is $49,000 - "pre-tax contributions".

If my plan allows in-service rollovers of after-tax dollars can I just load it full of after-tax contributions and then roll it over to a Roth?Yes, you can do that. There are no restrictions on withdrawals of after-tax contributions, as long as your plan allows them. In 2009, you need to meet the income limit for Roth conversions; in 2010 that limit will be repealed.

I did this at my last job (to a traditional IRA, planning to convert in 2010); my current job doesn't allow after-tax contributions. But does your job's plan allow unlimited contributions other than the $49,000 limit? After-tax contributions are subject to the discrimination tests that apply to elective deferrals, and non-highly-compensated employees usually make very little after-tax contributions.

cashistrash said: LH, thanks for your response. I'm not sure if the plan allows unlimited contributions other than the 49k limit. I have Vanguard and it appears I have the option on their site of after-tax contributions up to 75% of my paycheck. I am not a HCE so I guess that isn't a problem. (I'm also under the Roth conversion income limit)

But I read on another site that rollovers from a 401k with both after-tax and pre-tax contributions are treated as being in proportion to the total ratio of after-tax/pre-tax contributions in the account. So if I had 50k pre-tax and 50k after-tax and tried to just rollover the after-tax 50k, it would be treated for tax purposes as 25k pre-tax and 25k after-tax. Have you heard anything like that?

Edit: Here is the site I was just reading http://www.fairmark.com/rothira/09030801-401k-basis.htmYou know, Fairmark usually knows what it's talking about on these questions that should be simple for professionals, but sometimes they say weird things. The method they describe kinda-sorta looks like it works, but I have some doubts about it.

What definitely works is for your employer's plan to elect to account for after-tax contributions as a "separate contract," as is explicitly, specifically permitted under sec. 72(d)(2). (The rules for calculating the taxable amount of an IRA or qualified plan withdrawal are in sec. 72, which originally covered annuities, so everything has to use annuity terminology like that.) Every plan I have personally seen that allows after-tax contributions does account for them as a separate contract, since things could be very complicated otherwise.

That means that you can't technically withdraw just after-tax contributions, but you can withdraw just after-tax contributions plus earnings on after-tax contributions. If the rollover happens quickly after the contribution, earnings will be minimal.

Yes, I have been doing this.

My company 401k plan allows me to contribute max 25% of my gross pay to 401K. I contribute all 25% to post tax 401k and my company also allows in-service withdrawal only for post tax 401k, so every month i rollover the money to ROTH IRA without any tax obligation (well some times i earn a few cents of interest before i actually move the money to ROTH.)

You have to be careful on the 1099 form you get at the end of year to ensure that it says a not taxable transfer.

I had issues where fidelity initially made it a taxable transfer, but finally corrected it. SO just be sure to be on top of what the agents do for the 1099 form at the end of the year.

Can you really do this (contrib beyond the 16.5k as a post-tax contrib)?

I am very interested, if yes.

I did a very cursory search and found this:

How much can I contribute annually?
For 2008 workers are able to contribute the smaller of:
1. the elective deferral limit of $15,500 (which is unchanged from 2007), or
2. up to 100% of includable compensation (must be less than the elective deferral limit), or
3. for those with employer matches or other employer contributions, limits are $46,000 or 100% of compensation (whichever is less). The employee is still limited to the employee elective deferral limit ($15,500 for 2008). An employer can add up to another $30,500.

Based on #3 it seems that you (assuming you don't own the company) can only contribute 16.5k of your money, regardless of pre- or post-tax classification. The remainder of the $49k is from employers.

Am I wrong or missing something?

cashistrash said: My company does not offer a Roth 401k, but does offer a regular 401k to which I can make after-tax contributions. The limit on contributing directly to a Roth IRA for 2009 is $5000. However, the total limit in after-tax contributions to a 401k in 2009 is $49,000 - "pre-tax contributions".

If my plan allows in-service rollovers of after-tax dollars can I just load it full of after-tax contributions and then roll it over to a Roth? Or if they don't just wait until I leave my job and rollover the after-tax money to a Roth? In that way I am not limited to $5000. Is anyone doing this?

Wow, you are helpful.
LH2004 said: Yes.

lray said: Can you really do this (contrib beyond the 16.5k as a post-tax contrib)?

I am very interested, if yes.

I did a very cursory search and found this:

How much can I contribute annually?
For 2008 workers are able to contribute the smaller of:
1. the elective deferral limit of $15,500 (which is unchanged from 2007), or
2. up to 100% of includable compensation (must be less than the elective deferral limit), or
3. for those with employer matches or other employer contributions, limits are $46,000 or 100% of compensation (whichever is less). The employee is still limited to the employee elective deferral limit ($15,500 for 2008). An employer can add up to another $30,500.

Based on #3 it seems that you (assuming you don't own the company) can only contribute 16.5k of your money, regardless of pre- or post-tax classification. The remainder of the $49k is from employers.

Am I wrong or missing something?I'm contributing 50% of my annual base-pay to my 401-k. The first $16,500 is pre-tax, and then everything beyond that the rest of the year is "after-tax" contributions. I think the total pre-tax + post-tax contributions can not exceed the $49K which you referenced.

lray said: Info from: http://www.403bwise.com/faqs/index.html

My employer's HR dept. is particularly inept, so I often have to tell them about things they should already know. I am looking for some very solid background docs on it. I have the choice of Vanguard or TIA-CREF for my 403(b), if that matters....Unfortunately, most 403(b) plans do not allow after-tax contributions. I think that they're allowed to basically the same extent as in qualified plans (like 401(k)'s), but that doesn't help you if your plan doesn't want them.

So you're actually able to contribute more than $5000 per year to a Roth, assuming the funds are rolled in from another source? Can anyone point to an IRS document on this?

Is this true for the whole 2010 Traditional to Roth IRA conversion deal, too? I know that the interesting thing about 2010 is that the income limitations are removed for the transition, but is it also the case that more can be placed into a Roth this way?

My situation: My wife an I earn under the limit for contributing to the Roth, so we both put in the $5000 each year. Next year, as I understand it from this thread, we'll each be able to put $5000 directly into the Roth account and put $5000 into an after tax non-deductible IRA account and then immediately recharacterize it as a Roth account. Is this correct? Additionally, I'm able to contribute to my 401(k) after tax and transfer that to a Roth as well (assuming my 401(k) custodian allows this)?

schwab said: So you're actually able to contribute more than $5000 per year to a Roth, assuming the funds are rolled in from another source?Yes, if you call that "contributing."
Can anyone point to an IRS document on this?It's Internal Revenue Code sec. 408(d)(3)(A) for rollovers from IRA's and sec. 402(c)(5) for rollovers from qualified plans.
Is this true for the whole 2010 Traditional to Roth IRA conversion deal, too? I know that the interesting thing about 2010 is that the income limitations are removed for the transition, but is it also the case that more can be placed into a Roth this way?Yes. The only change in 2010 is the removal of the income limit and the special deal for 2-year deferral/spread-out of the income.
My situation: My wife an I earn under the limit for contributing to the Roth, so we both put in the $5000 each year. Next year, as I understand it from this thread, we'll each be able to put $5000 directly into the Roth account and put $5000 into an after tax non-deductible IRA account and then immediately recharacterize it as a Roth account. Is this correct?No. The combined limit is $5000 to all IRA's (per person). If $5000 goes into a Roth IRA, you can't contribute to a traditional IRA.
Additionally, I'm able to contribute to my 401(k) after tax and transfer that to a Roth as well (assuming my 401(k) custodian allows this)?Yes.

I love this idea of after-tax 401k rollover to Roth IRA and am surprised I never heard of it before. There doesn't seem to be much info about it on the interwebs.

I've verified that my 401k plan allows after-tax contributions, and that they allow 1 in-service withdrawal of after-tax money every 12 months (even for age < 55.5). I don't have an traditional IRA, so that seems to make it easier.

So right now, I have three questions.

1) Can the rollover contributions to the Roth IRA be taken out anytime without penalty ? I know the regular contributions to the Roth IRA can be taken out anytime without penalty, but it seems that rollover contributions (example was trad ira to roth ira) have a 5 year rule and/or age rule. I'm still in my 20s. This would help me decide on how much to throw into the Roth IRA through this method.

2) As I can only do 1 in-service withdrawal every 12 months, I will probably/maybe have some gains from after-tax contributions. What happens when I do the in-service withdrawal? Am I forced to withdraw the gains from the after-tax contributions (if any) as well and pay taxes on that (presumably through a 1099)?

3. This method seems legit even if AGI is above the Roth IRA income limits. Confirm ?

cliffedelgado said: 1) Can the rollover contributions to the Roth IRA be taken out anytime without penalty ? I know the regular contributions to the Roth IRA can be taken out anytime without penalty, but it seems that rollover contributions (example was trad ira to roth ira) have a 5 year rule and/or age rule. I'm still in my 20s. This would help me decide on how much to throw into the Roth IRA through this method.This is slightly complicated.

A rollover from either a traditional IRA or an employer plan like a 401(k) (other than a Roth 401(k) or Roth 403(b)) is sometimes called a "conversion." When you take a nonqualified withdrawal from a Roth IRA (including any withdrawal before you're 59 1/2, disabled or dead), your withdrawal is deemed to come from regular contributions first; then conversions, in first-in, first-out order; then earnings. Contributions are tax- and penalty-free. Conversions of pretax money come out tax-free, but subject to the 10% penalty if they're within 5 years after the conversion. Withdrawals of conversions of after-tax money are tax- and penalty-free. Within a particular conversion, you are deemed to take out the pre-tax part first. Withdrawals of earnings are subject to tax and the penalty.

Let's do an example. Say that, in 2010, you do a rollover of $10,000 from your 401(k) to a Roth IRA, consisting of $9000 in after-tax contributions and $1000 of earnings on those contributions. In 2011, you roll over $5000, of which $1000 is earnings and the other $4000 is after-tax contributions. In 2010-2014, you make $5000 regular contributions each year. Then, in 2015, you want to make a withdrawal.

At that point, your first $25,000 of withdrawals is considered tax-free return of your contributions. If you take more than that, the next $10,000 is from your 2010 rollover, which has been in there for 5 tax years (2010-2014), so all of that is free also. If you take more than that, your next $1000 is the before-tax money you rolled over in 2011, which is subject to the 10% penalty (because it's only been there for 4 tax years), but still no tax. If you take more than that, the next $4000 is the after-tax money from that rollover, and is free. Anything beyond that is earnings, subject to tax and penalty.

So, the point is, rollovers of after-tax money are free from tax and penalty; the penalty only applies to rollovers of earnings on them.

2) As I can only do 1 in-service withdrawal every 12 months, I will probably/maybe have some gains from after-tax contributions. What happens when I do the in-service withdrawal? Am I forced to withdraw the gains from the after-tax contributions (if any) as well and pay taxes on that (presumably through a 1099)?Yes. But that is a small price to pay. If you contribute $9000 of earnings, and it grows to $10,000, and then you convert it, then you pay tax on $1000 in return for getting $10,000 of tax-free growth. That's not quite as good a deal as being able to contribute to a Roth IRA directly, but it's very close.

3. This method seems legit even if AGI is above the Roth IRA income limits. Confirm ?You must be below the income limit for conversions, but, in 2010, that income limit is repealed.