Roth IRAs can be an excellent source of retirement income.

After the account has been in place for five years and the owner is at least age 59 1/2, all distributions avoid income tax. That is true regardless of the client's income or what future tax laws might bring.

Thus, tax-efficient ways to build up Roth IRAs may appeal to many clients. Two such paths to a Roth IRA buildup received support from IRS last year.


"In Notice 2014-54, the IRS reversed its previous IRS stance," says Natalie Choate, an attorney with the Boston law firm Nutter McClennen & Fish.
"This notice explained how participants in an employer's qualified retirement plan can distribute after-tax money to a Roth IRA, without owing any income tax," she says. "It's a great new opportunity."

To see how this could work, suppose that a client has $500,000 in his company's 401(k) plan, including $80,000 of after-tax contributions.
When he retires, he can send his $80,000 of after-tax money to a Roth IRA, tax-free. At the same time, he can roll his $420,000 of pre-tax dollars from his 401(k) to a traditional IRA, maintaining the tax deferral.

"My partners and I have seen such situations where clients have after-tax money in their 401(k)s and similar plans," says Rich Moran, senior financial advisor at Moran Heising & McElravey, an investment management and financial planning firm in Torrance, Calif. "However, we've only had one case where the amount involved has warranted setting up a Roth IRA."
If a client has a very small amount of after-tax dollars in the plan and wants income, it can be simpler to take those dollars for spending money and thus delay starting traditional IRA distributions, Moran says.


Besides Notice 2014-54, the IRS also issued Revenue Ruling 2014-9 last year. Here the money was flowing the other way, from an IRA to a company retirement plan.
"We have recommended that a client roll the deductible portion of their IRA into their 401(k), leaving the non-deductible dollars in their traditional IRA," says Mark Wilson, chief investment officer at the Tarbox Group, a wealth management firm in Newport Beach, Calif.

He provides the example of a client with $50,000 in a traditional IRA, including $30,000 from non-deductible IRA contributions.
"She works for an employer that allows IRA dollars to be rolled into the company's 401(k) plan, so our client rolled $20,000 into the 401(k) and later converted the remaining $30,000 to a Roth IRA," Wilson says.

"The conversion involved non-deductible funds so there were no taxes due on the conversion. [She had no other IRAs to mess things up]. Everyone was happy," Wilson says.

Not everyone in this situation had such a pleasant experience, though, because many qualified plans didn't accept IRA rollovers. Revenue Ruling 2014-9 spelled out how plan administrators can accept these rollovers, thus making implementation more likely.

Essentially, the individual should have the IRA custodian send a check for the pre-tax amount in the IRA to the qualified plan, and the IRA owner should certify to the plan administrator that the rollover involves only pre-tax dollars. Once the traditional IRA holds only after-tax dollars, the owner can convert to a Roth IRA and owe no income tax.

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

This story is part of a 30-day series on Social Security and retirement income strategies

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