Retirement planning may be critical at older ages, but it is just as important at younger ages as well. CPAs have the opportunity to review individuals’ tax situations at least once a year when the annual return is prepared. This distinct advantage allows CPAs to pinpoint specific planning opportunities that other advisors may be missing. While investment advisors may manage the investments within a retirement account, CPAs should be monitoring the tax implications and opportunities every year.

Young Taxpayers (Millennials and Generation Z)

Financial planners should not overlook the younger generations. The baby boomers’ transfer of wealth to these younger taxpayers substantiates their need for professional advice. Working with these individuals early on allows CPAs to display the advantages of their skills and knowledge. While younger taxpayers may be going through various employment positions, it is quite possible that a qualified plan is not available to them at each of these positions held.

While Roth IRA contributions have always been touted for younger taxpayers because they allow many years of future tax-free growth and potential tax-free distributions, Roths may be even more effective after the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). While traditional IRAs can provide a deduction to arrive at adjusted gross income (AGI), the tax benefit is marginal when one’s compensation is low. With the 2018 increase in the standard deduction to $12,000 (for a single filer), a Roth IRA contribution may make even more sense for a younger taxpayer.

What individuals may not be aware of, however, is the potential income tax credit for a Roth IRA contribution. While Roth contributions are not deductible as an adjustment for AGI, Roth contributions do qualify for the retirement savings contribution credit, also known as the “saver’s credit.” This credit can often be overlooked for Roth IRA contributions made.

The saver’s credit, under Internal Revenue Code (IRC) section 25B, allows lower-income taxpayers who are neither dependents nor full-time students a nonrefundable credit for contributions made to elective deferral plans and to IRAs, even Roth IRAs. The credit is equal to the taxpayer’s applicable percentage (which is based on AGI and filing status), multiplied by the retirement contribution (not to exceed $2,000 for the tax year).

For 2018, this credit phases out completely when a single taxpayer reaches $31,500 ($63,000 married filing jointly) of AGI. This credit can be as much as $1,000 and is often overlooked when taxpayers prepare their own returns.

High-income Wage Earners

High-income wage earners should consider after-tax contributions to their qualified plan if their employer plan allows for it. These are after-tax contributions made after taking into account employee elective deferrals (2018: $18,500 or $24,500, if over age 50) and employer contributions made for the year. Many individuals confuse their after-tax contributions with the attributes of a designated Roth 401(k) account. After-tax contribution earnings are taxable when distributed, whereas earnings in a Roth 401(k) can be distributed tax-free. While direct Roth IRA contributions are limited to $5,500 per year ($6,500, if over age 50) and considering modified adjustable gross income (MAGI) limits that apply, after-tax contributions can be much more than $5,500 per year.


In 2018, Judith contributes $18,500 to her 401(k), her employer contributes $2,000 for the tax year, and there is no limit imposed on her after-tax contributions. The maximum amount that can be contributed to her account is $55,000; Judith could therefore consider contributing $34,500 after-tax to the plan ($55,000 − $18,500 − $2,000 = $34,500).

If the taxpayer is enticed by the idea of contributing to a Roth IRA but is curbed by MAGI limits, or feels a $5,500 contribution is not substantial, then after-tax contributions may be worth considering.

The Pension Protection Act of 2006 allowed for direct Roth conversions from 401(k) plans to Roth IRAs. This was beneficial for taxpayers because the amounts transferred from a 401(k) to an IRA, and later to a Roth IRA, would face the “prorata rule” of all IRAs once they were moved to the traditional IRA, as opposed to the pro-rata rule only applying to the initial 401(k) distribution. Generally, 401(k) distributions are distributed pro-rata, and under IRC section 402(c)(2), partial rollovers are permitted. Partial rollovers allow taxpayers to roll over the pre-tax portion of their 401(k) to an IRA and keep the after-tax portion for personal use (e.g., buying a car).

The intent of IRC section 402(c)(2) was to address partial rollovers. Taxpayers in the past sought to capitalize on this by rolling over the pre-tax portion of their contributions to a traditional IRA and the after-tax portion to a Roth IRA. The IRS tried to combat this treatment with IRS Notice 2009-68, which required taxpayers to use the pro-rata rule for all distributions made to multiple accounts, both pre-tax (IRA) and after-tax (Roth IRA). This would create a tax liability when doing a direct rollover. The IRS finally acquiesced with IRS Notice 2014-54, which allows taxpayers to proactively allocate pre-tax amounts to a traditional IRA and after-tax amounts to a Roth IRA.

Under Notice 2014-54, high-income wage earners who can afford an after-tax contribution can roll over their after-tax contributions every year to a Roth IRA, so long as their employers’ plans allow for an in-service distribution. Although in-service distributions are not that common, once the employee does separate from service, the money can still be proactively allocated to a traditional IRA and a Roth IRA under IRS Notice 2014-54. To make this election, the taxpayer must inform the plan administrator of the allocation prior to the time of the direct rollover. This strategy essentially allows one to fund a Roth IRA with a much higher contribution, as opposed to only $5,500 and considering MAGI limits.

New Business Owners

Many new business owners initially have large start-up expenses, especially if the business is capital intensive. These early years may even create a net operating loss (NOL). For pass-through entities, business owners should consider taking advantage of any NOLs by converting their retirement accounts to Roth IRAs during such years. The conversion may cost very little, depending on the size of the NOL; this should be addressed during the year. If estimated income tax payments are not required due to a business loss, a Roth conversion should be discussed to take advantage of such loss.

Moving a Roth 401(k) to a Roth IRA to Avoid RMDs

A huge advantage for Roth IRAs is that they are not subject to required minimum distributions (RMD) during the owner’s lifetime [IRC section 408A(c)(5)]. Conversely, Roth 401(k)s are subject to RMDs under Treasury Regulations section 1.401(k)-1(f)(4)(i); however, just moving the Roth 401(k) to a Roth IRA is not a panacea. There are some matters to consider beforehand, such as whether the whole account balance will need to be accessed within the next five years.

Qualified distributions from a Roth retirement savings account, which are completely tax-free, can only begin in the first year after the taxpayer has owned such a Roth account for five calendar years. Importantly, a taxpayer will never pay tax on the basis in the Roth account, which is deemed distributed before its earnings. In addition to the five-year requirement, qualified distributions are made after one of the following: the account owner reaches age 59½; the account owner becomes disabled; the account owner passes away; or the account owner distributes $10,000 (maximum) for a first-time home purchase.

The five-year rule for an employer’s Roth 401(k) is counted separately from the five-year rule for Roth IRAs [see Treasury Regulations section 1.402A-1, Q&A 4(b)]. Thus, the time during which funds were held in the Roth 401(k) does not count towards the Roth IRA’s five-year holding period [see Treasury Regulations section 1.408A-10, Q&A #4(a)]. Some of the easiest planning an advisor can do if they see an individual contributing to a Roth 401(k) is to suggest opening up a Roth IRA just to start the five-year holding period.

Managing and Utilizing New York’s Retirement Income Exemption

The required beginning date (RBD) for taking one’s RMD is April 1 following the year in which the account owner reaches age 70½. A taxpayer who waited until April 1 of the second year would have two distributions, one for Year 1 and another for Year 2. Although the account earnings are tax-deferred until distributed, advisors should consider the additional taxable income; the deferral may cause the distribution to be taxed at a higher rate. In addition, aside from higher marginal tax rates, New York residents should consider the $20,000 pension and annuity exclusion that is afforded to them annually after age 59½ under N.Y. Tax Law section 612(c)(3-a).

Baby Boomers Who Are Still Working

While RMDs begin once one reaches age 70½, there is an exception for qualified plans. Under IRC section 401(a)(9)(C), the RMD must be taken by April 1 following the year the account owner reaches age 70½, or when the plan participant retires. This “still working” exception applies only to plan participants who are both still working and who own less than 5% of the company. The plan itself will have to offer this option as well.

If the current employer’s plan allows participants to contribute and roll over funds from another retirement account, the individual should consider moving those funds over to avoid RMDs while in the current employer plan. This strategy will reduce the taxpayer’s AGI and allow the account to continue growing tax-deferred without being reduced by any RMDs. The investment selection may be vastly limited; however, RMD savings may surpass what those alternative investments might have returned.

This strategy has many caveats to consider as well. Under IRC section 401(a)(9)(C)(ii)(I), the 5% ownership test is determined when one is age 70½, so divesting of one’s ownership percentage after this time will not help. The taxpayer will also have to consider the attribution rules under IRC section 416 for the 5% ownership test.

While tax compliance can take up much of a CPA’s time, these financial planning opportunities should not be ignored. Implementing a plan may require little more than a short conversation with the taxpayer or other advisors (e.g., attorneys, investment advisors), or it may warrant running a projection to justify a course of action. Regardless, these efforts can keep individual tax clients returning year after year.

David M. Barral, CPA/PFS, CFP is a 2nd vice president at Northern Trust in New York City and an adjunct professor at Wagner College, Staten Island, N.Y. He can be reached at