What to Look for in a Client’s Benefits Plan

Oct 27, 2020 / By Debra Taylor, CPA/PFS, JD, CDFA
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Benefits season confronts employees with a myriad of retirement plan options; cut through the confusion for your clients. Understand their options and help them maximize the power of their money in retirement plans as part of their overall financial strategy.

There are a dizzying array of options in many employer retirement plans: traditional 401(k), Roth 401(k), after-tax contributions, Roth in-plan conversions, and deferred compensation, among others. As benefits plans are being discussed at this time (and all year long), it is important to understand all of your client’s options in order to provide them with advice now that will save them more in retirement later.

I. Optimize your client’s plan—traditional 401(k) vs. Roth 401(k)

A. Look for matching opportunities

The best kind of money isn’t old, new or even tax-advantaged—it’s free money! If your client’s employer has a 401(k) (or Health Savings Account), they probably have a matching plan. Know what that is and make sure it is maxed out. They’re essentially giving out free money, which should never be turned down.

B. Discuss Roth 401(k) with all clients

Also consider the 401(k) options out there. Per Morningstar, 70% of employers offer Roth 401(k) plans. Two of the most popular are the traditional pretax 401(k) and Roth 401(k), which are primarily different because of their tax treatment.

In the traditional 401(k), your client will use pretax monies and pay taxes when the money is withdrawn. In the Roth 401(k), your client will pay taxes up front but withdraw money tax free in retirement.

Will your client be in a higher tax bracket now or in retirement? Think about the future tax rates (and public policy risk) when making these decisions, and remember it is often better to pay taxes on the seed and not the harvest. (See our discussions of distribution strategies.)

We are having very lengthy conversations with all clients (whether young or old) regarding the dangers of large traditional retirement balances and the benefits of contributing to a Roth 401(k) in place of the traditional 401(k) due to our belief that the tax structure will change to our client’s detriment (particularly after the sunset of the TCJA after 2025).

II. Additional after-tax contributions can help to supersize the Roth IRA

Consider making after-tax contributions up to $37,500 and enjoy tax-free growth on those contributions. Most investors don’t realize that plan contributions are capped at $57,000 from all sources (plus a $6,500 catch up for those 50 and older, totaling $63,500). This strategy is ideal for those plans that permit additional after-tax contributions, in-service distributions, and allow you to roll over the after-tax amount into a Roth IRA (more on that later).

If your client has maxed out their 401(k) and maxed out their traditional or Roth IRA contributions, this may be an effective strategy for you to eventually get more money into your client’s Roth IRA. By taking advantage of after-tax contributions, your client can potentially contribute an additional $37,000 into their Roth IRA by converting the funds under certain circumstances (discussed below).

In 2021, only the total plan contribution limit is increasing, to $58,000. The plan deferral limit, including the catch-up provision, remains the same.

III. Are there Roth in-plan conversions?

As we mentioned, there are opportunities to build more tax-free retirement savings when your client makes additional after-tax contributions and converts the money to a Roth IRA. However, your client will need to pay tax on the earnings. You can use Roth in-plan conversions to help limit your client’s tax liability by converting additional after-tax contributions to Roth.

When you convert, your client will owe taxes on any related investment earnings from the date that the contribution was made to the date the contribution is converted. Once converted, both the contributions and investment earnings are tax-free for a qualified withdrawal. The beauty of in-plan conversions is that the earnings don’t have time to grow, as they are immediately converted thus creating immense tax savings. Brilliant!


Joe signs up for automatic daily conversions, so his additional after-tax contributions are converted almost as soon as he makes them. With Roth in-plan conversions, Joe’s contributions and earnings are tax-free for a qualified withdrawal. This Roth in-plan conversion strategy is an especially smart move for high-net-worth individuals who want to grow their account so it can become an income-tax-free inheritance for their spouse and/or kids. But a conversion can also work well for someone who is young and in a low tax bracket. See our example below (courtesy of the Gilead benefits brochure) which shows how, as a result of in-plan Roth conversions, the tax savings could be tremendous, totaling a $137,500 tax savings in retirement.

Figure 1: How Much Roth In-Plan Conversions Can Save Joe

Source: Gilead benefits brochure

IV. What does it all look like?

Pulling all of these plans together is like assembling a jigsaw puzzle!

And, by the way, there are times that we are encouraging clients to decrease their contributions to our firm accounts so that they can increase their contributions to the firm retirement accounts, because the truth is that after-tax contributions offer a much better option in most instances than a taxable account.

Figure 2 below shows how your client could contribute up to $56,500 in 2020 ($63,000 if age 50 and older) in various employer retriement plans.

Figure 2: Contributing the Maximum in 2020

Source: Gilead benefits brochure

V. Key features to consider

Here is an example (also from Gilead’s benefits plan) nicely summarizing key features of the plan options.

Figure 3: Key Aspects of Employer Retirement Plan Options

Source: Gilead benefits brochure

Help more people like Joe!

As an advisor, it is important that you and your clients understand the plans their employer offers so that you can choose the best option for their personal situation. There are many more Joe’s out there who are relying on you to help get the most of their retirement plan options!

Debra Taylor, CPA/PFS, JD, CDFA, is the principal and founder of Taylor Financial Group, LLC, a wealth management firm in Franklin Lakes, N.J. Debra has won many industry honors and is the author of My Journey to $1 Million: The Systems and Processes to Get You There, a book about industry best practices. She is also a co-creator of the Savvy Tax Planning program.


Are there any rules or regulation for vesting . i looked at a plan where a part time employee needed over 12 years to be vested or lost all employer contributions and growth?
Debbie...Nice insights! One interesting niche focus for advisors is to specialize in the ins-and-outs of the retirement plans of larger corporations. I coached one advisor who raised $98 million bucks in one year, by being an expert in the retirement plans of a Fortune 500 company. His reputation was such that he had advocates in the HR department who routinely sent him referrals. When the company had a money-in-motion event, he was in the catbird seat...and had a career year.
First 2 pillars of smart investing: (1) save enough and (2) don't lose it. 60/40 stocks/bonds is a prescription for losing it in the Risk Zone transition into retirement
Obviously, the need to increase Roth accounts only grows for HNW individuals if there is a change in the tax code prior to sunset in 2025. But, if the Biden proposals go through as discussed, then Roth accounts could become LESS valuable for taxpayers in lower tax brackets. We will see how this all evolves, but lots of moving parts. Finally, make note of the contribution limits, which sometimes mention 2019, and other times 2020, and of course, 2021 were just released. The concepts remain the same, but some of the precise dollars will change ever so slightly.

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