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Think your salary is too high to contribute to a Roth IRA? need to think after-tax 401(k)

If you are reading this you probably understand some of the benefits of a having a Roth IRA and would probably like to contribute but cannot due to your income level. As you may know, there are income phase-out limits with eligibility to contribute to a Roth IRA. For the year 2017, the phase out range is $184,000 – 194,000 for couples filing jointly and $117,000 – 132,000 for singles. Given this, most high earners might immediately assume a Roth IRA is off the table… but there is a way for you to get money into a Roth IRA regardless of your income level.

In 2017, the overall limit on contributions to a participant’s 401(k) plan account is $54,000. Of this, the limit on an employee’s elective pre-tax deferral is $18,000, which leaves a difference of $36,000 that is essentially being underutilized.

So wouldn’t it be great if there was a way to capture the $36,000 difference??

The after-tax 401(k) is a good place to start. Even though you cannot deduct the contributions beyond $18,000, making them on an after-tax basis could make a lot of sense. The after-tax portion grows tax deferred and is eligible to be rolled over to a Roth IRA when you separate from service at your employer. If executed correctly, this effectively allows one to use the after-tax 401(k) as a quasi-Roth IRA.

The after-tax 401(k) is retirement dollars and should be treated as such. The funds typically do not become eligible for rollover until you are no longer employed. One also needs to execute the rollover properly. The pre-tax money needs to be rolled to a rollover IRA, the after-tax money to a Roth IRA.

Roth IRA’s can be beneficial for numerous reasons.

  1. They provide tax deferred growth and tax free distributions to you in retirement

  2. You are not required to take distributions at age 70 ½ like a traditional IRA

  3. You name beneficiaries of your choosing (helps avoid probate)

  4. You can leave a Roth IRA to your beneficiaries tax free, as long as you have owned the account for more than five years

  5. Your beneficiaries have the choice to continue the Roth in their name or if the beneficiary is someone other than your spouse, they can elect to stretch the distributions over their lifetime

  6. If used correctly, the Roth IRA can be a strong component of one’s estate plan

What you can do

Ask your employer or HR department if your plan offers an after-tax 401(k). If they do not, I can certainly assist them in setting one up. Please email me with questions. Plan sponsors can visit and individuals can visit learn more. For more information on rollovers see the LPL Financial IRA Rollover Guide

Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 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 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.


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