The much-cherished Roth IRA is in a strange transition year this taxpaying season. Last fall, the Internal Revenue Service released a notice clarifying that people who can make after-tax contributions to their 401(k) plans would also be able to roll that money over into a Roth.
That little move pretty much blew past existing limits for Roth IRA savers. The regular limits established by the IRS for the 2014 tax year are $5,500 for married couples with income of $181,000 or less. Those couples with income greater than $191,000 were excluded from contributing to a Roth altogether.
But by rolling over money from a 401(k), savers can set aside much more than that. For this year, the IRS has established an individual contribution of $59,000 for taxpayers aged 50 and older.
The IRS had already removed the limits on rollovers from traditional IRAs back in 2010, and taxpayers took advantage in a big way: Traditional-to-Roth IRA conversions increased to $64.8 billion in 2010 from $6.8 billion in assets in 2009. This was the first time conversions exceeded contributions, with 57 percent of the conversions coming from people with six-figure incomes. The newly clarified rules regarding 401(k) rollovers could bring a similar impact.
This obviously has tremendous estate planning implications. Taxpayers who had limited access to the Roth’s tax-planning advantages — remember, the assets can grow tax-free, and provide a tax-free stream of income in retirement — now have much greater ability to make use of them. And even though 2014 has ended, filers have until the tax deadline of April 15, 2015, to make contributions to a Roth that would count against the 2014 taxpaying year.
The bad news: There may be a limit to how long these advantages are available. President Obama’s proposed 2016 budget plan would, as a revenue-enhancing measure, eliminate the ability to roll after-tax money from a 401(k) into a Roth IRA. The plan would also restore limits to rollover from traditional IRAs into Roths.
The chances of Obama’s proposal becoming law are not great, given his relations with the GOP-controlled Senate and House. But the chances are not zero, so anyone who wants to take advantage of the 401(k) rollover provision may want to do so over the next month.