How to Turn Your 401(k) Into a "Super Roth IRA"

A few weeks ago, I discussed Roth IRAs and specifically, the Back Door Roth IRA, as a tactic for high earners to take advantage of the tax-free growth afforded to Roth IRAs. With Retirement Season in full swing, hardly a day goes by that I’m not asked about how to save more while minimizing taxes.

For the next few weeks, I will offer several ways investors may take advantage of lesser known tactics to fatten up those retirement account balances and maybe save some tax money in the process. This week, we’ll start with the Super Roth IRA.

The Super Roth IRA

To understand the Super Roth IRA, it first helps to review the rules for contributing to 401(k) accounts. The IRS defines the maximum that can be contributed into a 401(k) in IRC Section 415 . For 2018, the maximum for Defined Contribution[i] (DC) plans, such as 401(k)s, is $55,000 (or $61,000 for age 50+). That total includes $18,500 of salary deferrals plus any company contributions from matching, profit sharing, etc.  If you are like most folks, you probably are putting in a lot less than that limit.

For example, let’s say a married person under age 50 is making $200,000 of salary and is maxing their pre-tax contributions to a 401(k) that receives a 50% company match on the first 6% of their contribution. This person would only be adding $23,000 to their balance this year, as seen in Exhibit 1.

Exhibit 1. Maximized pre-tax 401(k) contribution and company match.

401k Example 1.jpg


If the participant wants to save more, they are ineligible for making Roth IRA contributions due to income limitations ($189,000 for a married couple in 2018), although a Back-Door Roth IRA could be a possibility for contributing up to $5,500. But if their 401(k) plan allows for AFTER-TAX contributions (this is a question for the HR Benefits office), they potentially could add another $32,000 to the 401(k) and still retain the ability to do a Back-Door Roth IRA.

See Exhibit 2 for an example of how that may work.

Exhibit 2. Maximized pre-tax and post-tax 401(k) contributions and company max.

401k Example 2.jpg


The earnings on the after-tax contribution will grow tax deferred along with the salary deferrals and company match until retirement or leaving the plan for some other reason, such as a job change. When the assets are rolled over in to another 401(k) or an IRA, all the pretax money (deferrals, matches, earnings) rolls into the new plan or IRA that you choose. But the after-tax contributions, thanks to a 2014 IRS Notice[ii]  that clarified how those balances are treated, can be rolled over into a Roth IRA (Exhibit 3.)

Exhibit 3. 401(k) Balance Breakdown

Example is hypothetical and is for illustration purposes only.

Example is hypothetical and is for illustration purposes only.


As you can see, for those that can afford the savings, the amounts that can be accumulated can be significantly more than the typical annual contributions to a Back-Door Roth IRA. For high earners looking to put more away and ultimately save on taxes, you might even say it is super!

If you would like to review your retirement situation to see what other opportunities for savings may be out there for you, get in touch for a free review.