The IRS stood down on a controversial issue, and it’s a good thing for retirement savers.
Details can be found in: Clarifying Notice 2014-54.
Before I explain, let’s cover some important basics.
You are currently allowed to tuck up to $53,000 into your employer-sponsored tax-deferred accounts. However, only $18K (and another $6K if you’re over 50) of that can come from pre-tax money.
So where does the other $35K come from? Unless your company offers a generous profit-sharing plan, it’s coming from your own after tax contributions. Not all 401(k) plans offer this, but many people are able to put after tax contributions into their employer-sponsored plans. Those funds then grow tax-deferred alongside your pre-tax invested dollars. This is a really attractive feature for high-earning employees with an interest in saving more for retirement.
After employing this strategy for a few years, your balance could end up being fairly significant. Prior to issuing this Clarifying Notice, rolling your 401k over to your IRA meant losing the tax-deferred status on your after tax money held in the plan. Now you are able to take that balance and roll it into a Roth IRA, giving it a whole new status – Tax FREE.