The first details of the tax proposal that came out in mid-September appear to sunset a financial planning item common in large utility retirement plans including those of Duke Energy and Pinnacle West Capital Corporation (Arizona Public Service).
A number of utility retirement plans offer a third retirement contribution option beyond the Traditional (pre-tax) 401(k) and Roth 401(k) options—After-Tax 401(k) contributions. This contribution type creates more capacity in one’s 401(k)—increasing the maximum 401(k) contribution to upwards of $58,000 to $64,500 as opposed to $19,500 to $26,000 that many Americans are accustomed to. Those After-Tax 401(k) contributions can then be rolled over each year into a Roth IRA to grow tax free. The alternative is leaving the funds in the plan to grow tax deferred and ultimately paying regular income tax on all earnings.
Some 401(k) recordkeepers also use the After-Tax Account as a ‘spillover’ for those who are contributing more than the normal maximum to their 401(k), which is common for those who elect to defer a percentage of their income as opposed to a flat dollar amount. For this reason, there are likely a number of utility employees who have an After-Tax 401(k) balance and may not even be aware of it.
If the tax proposal passes, the ability to rollover these funds to a Roth IRA will be eliminated. Anyone who desires to intentionally make a ‘Mega Roth’ contribution or has ‘stray’ After-Tax 401(k) contributions must roll them over to a Roth IRA by December 31st or face less than ideal tax consequences. Again—if left in the plan, any earnings will be taxable as income when removed. If rolled over into a Roth IRA, earnings will grow tax free.
The following screenshots are from a sample Pinnacle West Capital Savings Plan statement. You can tell if you have an After-Tax balance here:
…or here:
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Chandler Cole, CFP©
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This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.