IRS Creates “Mega-Sale” on Employer Retirement Plan Taxes

By:  Mark Stinson, CPA , CFP ®, MBA | Director of Planning

I am putting all my money in taxes—the only thing sure to go up. – Henny Youngman

The IRS has proved Henny Youngman wrong—at least in one case. If you have made “after-tax contributions” to your employer-sponsored retirement plan (401(k), 403(b), TSP), the IRS has given you a holiday gift: you can transfer these contributions to a Roth IRA or, given the right circumstances, substantially increase after-tax contributions to your employer’s plan.

On September 18, the IRS released Notice 2014-54, “Guidance  on Allocation  of After-Tax Amounts to Rollovers.” In this notice, the IRS confirmed that employees who have made both pre-tax and after-tax contributions to employer-sponsored plans can transfer the pre-tax contributions to a traditional IRA and the after-tax contribu- tions to a tax-free Roth IRA. Under current law, contributions to a Roth IRA will grow tax-free and will not be taxed when with- drawn. It is this tax-free treatment of asset growth that makes Roth IRAs so attractive.

However, as with anything IRA- or Roth IRA-related, the details become a bit complicated. For example, which contribu- tions count as after-tax contributions and which count as pre-tax contributions?

Let’s begin by looking at the three ways you can contribute to an employer-sponsored retirement plan:

  1. Pre-tax contributions:  An employee’s taxable income is reduced by these contributions.
  2. After-tax Roth contributions:  An employee contributes after-tax dollars to a Roth plan and is not taxed on the growth of these funds when they are withdrawn.
  3. After-tax regular contributions:  An employee contributes after-tax dollars to the employer-sponsored plan, and the growth is taxed when the funds are withdrawn.

Some plan participants might have after-tax contributions in their plan if, for example, they are a long-time employee and after-tax funds from an old plan were transferred to a new plan. Other employees might have chosen to contribute after-tax funds. As noted above, these after-tax contributions can be transferred to a Roth IRA so as to benefit from tax-free investment growth. However, plans have restrictions as to when you can transfer funds out of a plan (and into a Roth IRA). Some plans do allow limited transfers while you are an employee (called “in-service distributions”)—but usually only after age 59½. In addition, plans may allow transfers only annually or semi-annually.

Now for the fine print:

  • Not all plans allow after-tax contributions (so you wouldn’t be able to benefit from the IRS “holiday gift”).
  • IRS Notice 2014-54 does not apply to after-tax contributions to IRAs (only to employer-sponsored retirement plans).

Check with your human resources department to determine if you currently have after-tax contributions in your plan and might be able to benefit by transfer- ring them to a Roth IRA. Also, ask for a “Summary Plan” document to determine what your plan allows. If your plan allows after-tax contributions, keep reading…


For those in the right circumstances, the IRA notice opens the door to a tremendous way to save money tax free. In fact, this strategy has a name—“Mega Back-Door Roth”— and it is available only if the following circumstances apply:

  1. The employer plan must allow after-tax
  2. The employee must have enough disposable income to make after-tax contributions to their
  3. The plan must allow for periodic in-service distributions of the employee’s after-tax contributions and their
  4. The employer plan must pass the non-discrimination After-tax contributions are subject to non- discrimination tests that require plans be designed so that they do not unlawfully favor highly compensated employees.

The Mega Back-Door Roth benefit can  be  substantial. Employer-sponsored  plans have an “overall limit” of $53,000.  Employees who are age 50 or more are permitted  an  additional  $6,000 “catch-up” contribution in 2015. If all the pieces fall  in place, an employee could transfer, for example, $28,000 in after-tax contributions to a Roth IRA.


Description Without age 50 Catch-up. With age 50 Catch-up
Employee’s pre-tax or Roth contributions: $18,0001 $24,0001
Employer’s matching pre-tax contributions: $7,0002 $7,0002
Employee’s after-tax contributions (which will transfer to a “Mega” Roth IRA): $28,0003 $28,0003
Total Contributions: $53,000 $59,000

1 IRS 2015 contribution limit

2 Employer pre-tax match amount varies by employer

3 Plug in amount to reach “overall limit”

If you have any questions about after-tax contributions to your employer-sponsored  plan, contact BWFA at 410-461-3900 or emailus@bwfa.comAnd if you have employer company stock in your plan, you might have additional  benefits.