PLANADVISER - March/April 2021 - 37

tions-to sidestep taxes in retirement, he says.
Who Can Benefit?
Less than 10% of Coffman's clients offer this
option, typically due to its complexity.
" [These accounts] are complex mainly due to
the tax ramifications, " says Rafael Rubio, president
of Stable Retirement Planners, in Huntington
Woods, Michigan. " Because you're commingling
after-tax contributions with the rest of your
retirement funds, you have to pay more attention
to how each [type] is taxed. "
Additionally, says Coffman, if the company
has relatively few highly compensated employees
(HCEs), their greater savings will make the plan
fail its nondiscrimination testing, and it will need
to return the excess contributions.
Stable Retirement Planners has clients that
offer after-tax retirement savings accounts-
mostly these are doctors' offices and law firms,
which have a preponderance of HCEs and want
to attract talent, Rubio says. But he stresses the
need for well-qualified financial advisers to help
with this type of account.
Other employees who would benefit might be
a company salesforce paid by commission, whose
income varies greatly from year to year, says
David Swallow, managing director, consulting
relations and retention, with TIAA in Tampa
Bay, Florida. " These kinds of accounts make
people's money more available for withdrawals,
depending on the plan document, " he says. " Such
an account would give the employees a great opportunity to
contribute on an after-tax basis when they're making more. "
Savings Limits, 2021
Based on a $180,000 per year salary, an employee
50+ could defer $64,000 to an after-tax account. An
employee under age 50 could defer $58,000.
All employees
Employees
50+ years
Employers
$19,500
$6,500
$14,400
$40,400
the 401(k) pre-tax
or Roth contribution
limit
the catch-up
pre-tax or Roth
contribution limit
6% match, plus 2%
profit sharing
employee
and employer
contributions for
those 50+, e.g.
+ $24,100
$64,500 maximum
Note: For illustrative purposes only; your client's match may be different; your client
may not offer an after-tax savings opportunity or profit sharing.
Source: Fidelity Investments
Back Door Roth
Another attractive feature of after-tax retirement savings
accounts is the back-door Roth option, and " it has gotten
much attention in the retirement savings industry, " says
Jason Grantz, institutional retirement consultant at American
Trust in Lexington, Kentucky. " It's potentially a way
for high earners to be able to take advantage of a Roth-type
deferral strategy beyond the Roth deferral limit. " The idea, he
explains, is to contribute one's first $19,500 into a Roth; any
amount above that would be a voluntary after-tax contribution.
The back-door Roth then lets the investor convert those
monies into a Roth, thereby changing the status of the earnings
from tax deferred to tax free.
" Of course, any earnings that have already accrued would
be taxable in the tax year of the conversion, " he notes. " If this
is done quickly after the contributions are made, the earnings
may be so small as to be de minimis or negative from a
current tax perspective. Due to income limitations on Roth
IRAs[-i.e., modified adjusted gross income of $140,000 for
single filers and $206,000 for married couples filing jointly-]
the retirement plan may be the only place an individual has
to invest in a Roth. "
Lay the Foundation
If the plan document does not already allow for adding aftertax
savings accounts, the sponsor may amend it and other
corresponding documents, Swallow says.
" The sponsor would then work with its payroll provider
to set up a separate type of contribution where it can track
after-tax separately from pre-tax and Roth, " he says. Further,
the sponsor, with its recordkeeper, should set up a separate
money bucket to hold after-tax contributions for tax purposes
and keep track of which funds are contributions and which
are earnings, he says. " Then, it would need to ensure that its
payroll provider and recordkeeper share information. "
Finally, should a sponsor offer after-tax accounts, it needs
to make certain that its employees fully understand them,
particularly the tax ramifications, says Stan Milovancev,
executive vice president with CBIZ Retirement Plan Services
in Cleveland. " They need to understand that after-tax contributions
are not treated the same as a qualified Roth account,
and that they have the ability to access these contributions
more easily and without the penalties that would be associated
with withdrawing funds from a Roth account early. "
Provisions for saving nearly three times more than in a
regular 401(k) or Roth 401(k) can appeal to some clients and
it's an option advisers serving professionals should consider
suggesting. -Lee Barney
potentially saved
as after-tax
contributions
planadviser.com March-April 2021 | 37
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