Intel has changed its retirement plan to allow participants to make after-tax contributions to the 401(k) and make an in-plan conversion of those dollars to a Roth account.
Employee contributions to qualified retirement plans like Intel’s 401(k) are limited by IRS regulations. For 2020, the employee contribution is limited to $19,500, plus an additional $6,500 “catch up” contribution for those age 50 or older ($26,000 total). Employee contributions are made via salary deferrals.
Additional contributions to an employee’s retirement account – such as employer matching or profit-sharing contributions – are possible, up to the IRS’s overall contribution limit. For 2020, the annual additions limit is $57,000, or $63,500 for those age 50 or older ($57,000 plus the $6,500 catch up contribution).
The After-Tax Contribution with In-Plan Roth Conversion offers employees the opportunity to make additional after-tax contributions to their account, so that they can take advantage of the annual additions limit.
Susan is age 55 and earns $150,000. She plans to contribute the maximum to her Intel 401(k) account next year. She defers a total of $26,000 of her pay into the plan.
Her deferral of $26,000 equates to 17.3% of her $150,000 pay. Intel will match (dollar-for-dollar) 5% of her contribution, providing an additional $7,500. So, Susan’s account additions are now $33,500 (her $26,000 plus Intel’s 5% match of $7,500).
The annual contribution limit is $63,500, so there is “room” for an additional $30,000 to be contributed to Susan’s account. ($63,500 – $26,000 – 7,500 = $30,000)
Susan can make after-tax contributions of $30,000 to her account. This $30,000 can then immediately be converted to a Roth IRA.
Retirement Distribution Planning
You’re best-positioned for retirement when you have three savings buckets, each with a different tax profile:
- A brokerage account for investments that are subject to traditional taxation
- A traditional IRA for income tax-deferred savings
- A Roth IRA for after-tax savings
Having three buckets to draw from gives you and your tax/financial advisor the greatest flexibility when doing tax-smart distribution planning in retirement.
PLEASE SEE important disclosure information at www.springwaterwealth.com/blog-disclosure/.