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People have few opportunities to save for their retirement
on a pre-tax basis, says Steve Feinschreiber, senior
vice president and head of methodology at Fidelity Investments
in Boston. Affluent investors need to save after-tax.
" They may contribute money to a traditional IRA [individual
retirement account], but the amount they may contribute
annually is fairly small: $6,000-or $7,000 if someone is
50 or older, " he says. " Whereas, if they make an after-tax
contribution to their 401(k), the amount of headroom left
for contributions [there] is going to be greater, " he says, also
citing a potential $30,000 additional savings. " So participants
could generally put in a lot more money [in-plan] than
they could in an after-tax account outside their plan. And
often, the fees are better in the 401(k) plan. "
Issues for Advisers to Consider
Why would an adviser suggest a plan sponsor add the aftertax,
non-Roth savings feature? As a means to save more
money for retirement, " it's really attractive to higher-income
workers, " Benz says. " If a plan can offer it, it's a key benefit
that can help entice employees to work at a company. "
There has also been some talk in the industry about
utilizing an after-tax savings feature as a sidecar-savings
account to accumulate emergency savings, Send says. That
might also appeal to non-highly compensated employees
who want to save for emergencies, she says, but the IRS'
rules on withdrawals complicate this.
Send offers an example: Say a participant contributes
$2,000 on an after-tax, non-Roth basis for emergency
savings, and, by the time the person needs to withdraw and
use that money, it has grown to $2,200. He could withdraw
the original $2,000 contribution tax-free but must pay taxes
on the $200 gain. Moreover, if the participant is under 59.5
years old, she says, the IRS considers the $200 account as
gain, taken out as an early withdrawal, and the individual
would additionally be charged 10% on the $200. " The participant
either has to leave the $200 in the plan or pay the
premature-withdrawal penalty, " Send says.
IRS rules also complicate the goal of offering an after-tax,
non-Roth vehicle as a way to turbocharge higher-earners'
retirement saving. Adopting after-tax contribution capabilities
requires a plan amendment, and, once that is implemented,
it triggers a nondiscrimination testing requirement
for both safe harbor and non-safe-harbor plans, says Anton
Brog, a partner in Wagstaff & Crawford, an advisory and
third-party administration firm, in Midvale, Utah.
Brog calls the testing implications " the elephant in the
room " when thinking about allowing after-tax, non-Roth
contributions. " Every plan is going to face that issue: the
need to do testing, " he says. The same senior executives
who read articles about the after-tax savings concept and
advocate for adding it as a plan feature " very often are the
ones who end up getting a refund of their excess contribution
after the plan fails testing, " he says.
When clients have told Wagstaff & Crawford that they
would like to consider adding after-tax, non-Roth savings,
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PLANADVISER - July/August 2022

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