MONEY IRAs

The Extreme IRA Mistake You May Be Making

A new study reveals that many savers have crazy retirement portfolios. This four-step plan will keep you from going to extremes with your IRA.

When did you last pay attention to how your IRA is invested? It’s time to take a close look. Nearly two out of three IRA owners have extreme stock and bond allocations, a new study by the Employee Benefit Research Institute (EBRI) found. In 2010 and 2012, 33% of IRA savers had no money in stocks, while 23% were 100% in equities.

Many young savers and pre-retirees have portfolios that are either too cautious or too risky: 41% of 25- to 44-year-olds have 0% of their IRAs in stocks, while 21% of 55- to 65-year-olds are 100% in stocks.

An all-bond or all-stock IRA may be just what you want, of course. Perhaps you can’t tolerate the ups and downs of the stock market or you think you can handle 100% equities (more on that later). Or maybe your IRA is part of a larger portfolio.

But chances are, you ended up with an out-of-whack allocation because you left your IRA alone. “It seems likely many investors aren’t investing the right way for their goals, whether out of inertia or procrastination,” says EBRI senior research associate Craig Copeland. An earlier study by the Investment Company Institute found that less than 11% of traditional IRA investors moved money in their accounts in any of the five years ending in 2012.

To keep a closer tab on how your retirement funds are invested, take these four steps.

See where you stand. Looking at everything you have stashed in your IRA, 401(k), and taxable accounts (don’t forget your spouse’s plans), tally up your holdings by asset class—large-company stocks, short-term bonds, and the like. You’ll probably find that the bull market of the past five years has shifted your allocation dramatically. If you held 60% stocks and 40% bonds in 2009 and let your money ride, your current mix may be closer to 75% stocks and 25% bonds.

Get a grip on your risks. An extreme allocation—or a more extreme one than you planned—can put your retirement at risk. Hunkering down in fixed income means missing out on years of growth. Putting 100% in stocks could backfire if equities plunge just as you retire—what happened to many older 401(k) investors during the 2008–09 market crash.

Reset your target. If you also have a 401(k), your plan likely has an asset-allocation tool that can help you settle on a new mix, and you may find that you need to make big changes. That’s especially true for pre-retirees, who should be gradually reducing stocks, says George Papadopoulos, a financial planner in Novi, Mich.  A typical allocation for that age group is 60% stocks and 40% bonds. As you actually move into retirement, it could be 50/50.

Make the shift now. If moving a large amount of money in or out of stocks or bonds leaves you nervous, you may be tempted to do it gradually. But especially in tax-sheltered accounts, it’s best to fix your mistake quickly. (In taxable accounts you may want to add new money instead to avoid incurring taxable gains.) “If you’re someone who’s a procrastinator, you may never get around to rebalancing,” says Boca Raton, Fla., financial planner Mari Adam. And you don’t want a market downturn to do your rebalancing for you.

Get more IRA answers in the Ultimate Retirement Guide:
What’s the Difference Between a Traditional and a Roth IRA?
How Should I Invest My IRA Money?
How Will My IRA Withdrawals Be Taxed in Retirement?

MONEY bonds

Why Skimpy Bond Yields Are a Retirement Game Changer

farmer in field of bad crop
Adrian Sherratt—Alamy Is a long season of slow growth and low returns ahead?

A 10-year Treasury bond now pays less than 2%. That may make it harder to earn the returns you expect in your 401(k).

Yields on the benchmark 10-year Treasury slipped below 2% on Tuesday as bonds rallied. (Bond prices rise when yields, or interest rates, fall, and prices fall as rates rise.) Since the aftermath of the 2008 financial crisis, bond yields have bounced around near historic lows. That’s had many investors worried about what would happen to their fixed-income investments when the seemingly inevitable rise in bond interest rates finally arrives.

Screen Shot 2015-01-05 at 3.44.58 PM

But in fact, today’s low yields could present a long-term challenge to retirement-oriented savers, even if interest rates stay low, and even if bonds today aren’t overpriced. And investing mostly or entirely in equities won’t immunize you from the problems of investing during a low-return era.

What happens if bond yields rise. First, let’s consider what happens if the conventional wisdom is right, and bond yields do start to rise again. If you hold bonds in a mutual fund as part of, say, a 401(k) plan, the most important thing you can do is understand your risk when bond prices fall. A plain-vanilla, intermediate-term bond fund these days has a “duration” of about 5.5. That measure of interest-rate risk roughly means that if rates rose by one percentage point, the fund would fall 5.5% in value. (Your actual loss would be lower, since you’d still be getting paid interest on the bonds in the fund.)

A decline in the value of a fund that’s the safe part of your retirement portfolio could come as a shock, and for money you may need soon, a shorter-duration bond fund makes sense. But keep short-run bond fund losses in perspective: Over the longer run, a shift up in rates can also help make up for what you lost, and the current yield on bonds gives you a strong clue about what to expect.

Say you own a diversified bond fund. Assume the yield is about 2% when you buy it, and the fund’s average bond matures in seven years. According to numbers from Vanguard, a sudden two-point jump in rates—a huge spike—would cause the fund to lose about 8% in total. As its bonds paid out higher yields, however, your annualized return after seven years would still be likely to level off to just about 2%.

What happens if yields stay low. The real risk with bonds today, however, may not be losses in the short run. It’s that the returns will stay frustratingly low for a long time.

Ben Inker, co-head of asset allocation at GMO, a Boston fund manager, lays out two scenarios, one he calls “purgatory” and the other “hell.” In purgatory, rates are headed for a spike. Bond prices will fall, and stocks might too. But after that you pick up better yield and better returns.

In hell, interest rates stay low. Part of the reason it’s hell is why interest rates stay low: The economy never gets back to its pre-2008 strength. With low growth prospects, there’s less demand for capital, and many investors around the world are content to accept relatively low returns on cash and bonds.

Part of the reason yields have recently fallen below 2% is that bond investors still see some risk of this “secular stagnation” scenario.

Ironically, in hell, your bond investments don’t lose money, since there’s no big rate spike. And today’s stock prices, oddly, might make sense too. Here’s why: When the price of stocks is high relative to long-run past earnings, future returns tend to be lower. Today the P/E ratio for stocks is expensive at 27. (The average is 17.) So stock returns may be on the low side. You still may be willing to take that deal, however, if you are earning only 2% on your bonds.

That may help explain why stocks have recently shot up. But if so, that’s a one-time adjustment. Hell is not just a low-bond-yield world. It’s a low-total-return world.

That would be bad news for savers, especially younger ones who will be putting much of their money into the market in the future. In the hell scenario, a typical portfolio earns 3.4% after inflation instead of the 4.7% Inker assumes you’d have gotten in the past. “Let’s say you turned 25 in 2009 and started saving,” he says. “You end up accumulating 25% less by retirement.”

Inker stresses he doesn’t know which scenario we’re headed for. The one constant is that in neither are there lots of opportunities to make money with low risk. “This is a frustrating environment for us as investors,” admits Inker. “It is less clear what the right thing to do is than throughout almost the rest of history.” The trouble with bonds, it turns out, is bigger than unpalatable yields. And it’s the trouble with an economy that is taking a long time to find its true normal.

 

This story is adapted from “How 2% Explains the World,” in the 2015 Investor’s Guide in the January-Feburary issue of MONEY.

MONEY retirement planning

You’ll Never Guess Who’s Saving the Most For Retirement

rhinestone studded piggy bank
Robert George Young—Getty Images

As Americans delay retirement, they are saving more for their later years.

Americans with investment accounts grew a lot richer last year thanks to the booming stock market—but the 65-plus crowd enjoyed the biggest increase in savings for retirement of any age group.

Total U.S. household investable assets (liquid net worth, not including housing wealth) surged 16% to $41.2 trillion in 2013, according to a report published Wednesday by financial research firm Hearts & Wallets. That far exceeded annual gains that ranged from 5% to 12% in the post-Recession years of 2009 to 2012.

But when it came to retirement savings, older investors saw the biggest gains in IRA and 401(k) assets: Retirement assets for people age 65-74 rose from $2.3 trillion to $3.5 trillion in 2014, a new high.

What’s fueling the growth? Well, a lot of people 65 and older aren’t retiring. So they’re still socking away money for their nonworking years. Meanwhile, others who have quit work are finding they don’t need as much as they thought, so they continue to save, according to Lynn Walters from Hearts & Wallets.

As attitudes about working later in life change, so does the terminology of what people are saving for, Walters says. Rather than retirement, Americans are saving for a “lifestyle choice” in their later years. According to the study, most households ages 55-64 do not consider retirement a near-term option. Four out of five have not stopped full-time work. Says Walters: “The goal is to have enough money for the lifestyle you want when you’re older, not just quitting work.”

Read next: Woulda, Coulda, Shoulda: What You Can Learn From the Top 3 Pre-Retirement Mistakes

MONEY year-end moves

3 Smart Year-End Moves for Retirement Savers of All Ages

golden eggs of ascending size
Getty Images

To give your long-term financial security a boost, take one of these steps before December 31.

It’s year-end, and retirement savers of all ages need to check their to-do lists. Here are some suggestions for current retirees, near-retirees, and younger savers just getting started.

Already Retired: Take Your Distribution

Unfortunately, the “deferred” part of tax-deferred retirement accounts doesn’t last forever. Required minimum distributions (RMDs) must be taken from individual retirement accounts (IRAs) starting in the year you turn 70 1/2 and from 401(k)s at the same age, unless you’re still working for the employer that sponsors the plan.

Fidelity Investments reports that nearly 68% of the company’s IRA account holders who needed to take RMDs for tax year 2014 hadn’t done it as of late October.

It’s important to get this right: Failure to take the correct distribution results in an onerous 50% tax—plus interest—on any required withdrawals you fail to take.

RMDs must be calculated for each account you own by dividing the prior Dec. 31 balance with a life expectancy factor (found in IRS Publication 590). Your account provider may calculate RMDs for you, but the final responsibility is yours. FINRA, the financial services self-regulatory agency, offers a calculator, and the IRS has worksheets to help calculate RMDs.

Take care of RMDs ahead of the year-end rush, advises Joshua Kadish, partner in planning firm RPG Life Transition Specialists in Riverwoods, Ill. “We try to do it by Dec. 1 for all of our clients—if you push it beyond that, the financial institutions are all overwhelmed with year-end paperwork and they’re getting backed up.”

Near-Retired: Consider a Roth

Vanguard reports that 20% of its investors who take an RMD reinvest the funds in a taxable account—in other words, they didn’t need the money. If you fall into this category, consider converting some of your tax-deferred assets to a Roth IRA. No RMDs are required on Roth accounts, which can be beneficial in managing your tax liability in retirement.

You’ll owe income tax on converted funds in the year of conversion. That runs against conventional planning wisdom, which calls for deferring taxes as long as possible. But it’s a strategy that can make sense in certain situations, says Maria Bruno, senior investment analyst in Vanguard’s Investment Counseling & Research group.

“Many retirees find that their income may be lower in the early years of retirement—either because they haven’t filed yet for Social Security, or perhaps one spouse has retired and the other is still working. Doing a conversion that goes to the top of your current tax bracket is something worth considering.”

Bruno suggests a series of partial conversions over time that don’t bump you into a higher marginal bracket. Also, if you’re not retired, check to see if your workplace 401(k) plan offers a Roth option, and consider moving part of your annual contribution there.

Young Savers: Start Early, Bump It Up Annually

“Time is on my side,” sang the Rolling Stones, and it’s true for young savers. Getting an early start is the single best thing you can do for yourself, even if you can’t contribute much right now.

Let the magic of compound returns help you over the years. A study done by Vanguard a couple years ago found that an investor who starts at age 25 with a moderate investment allocation and contributes 6% of salary will finish with 34% more in her account than the same investor who starts at 35—and 64% more than an investor who starts at 45.

Try to increase the amount every year. A recent Charles Schwab survey found that 43% of plan participants haven’t increased their 401(k) contributions in the past two years. Kadish suggests a year-end tally of what you spent during the year and how much you saved. “It’s not what people like to do—but you have a full year under your belt, so it’s a good opportunity to look at where your money went. Could you get more efficient in some area, and save more?”

If you’re a mega-saver already, note that the limit on employee contributions for 401(k) accounts rises to $18,000 next year from $17,500; the catch-up contribution for people age 50 and over rises to $6,000 from $5,500. The IRA limit is unchanged at $5,500, and catch-up contributions stay at $1,000.

MONEY Investing

The Easy Fix for an Incredibly Common and Costly Retirement Mistake

New proof that just showing up is half the investing game.

Writing about retirement inevitably turns you into the bearer of bad news. But last week brought a positive development: The downward trend in the percentage of workers participating in an employment-based retirement plan reversed course in 2013. The number of workers participating is now at the highest level since 2007, according to the Employee Benefit Research Institute (ERBI).

Which means, unfortunately, that from a wealth-building perspective, the timing of the nation’s workforce is actually pretty terrible.

The ERBI has only been tracking participation rates since 1987, a relatively short window, but still a bad pattern has clearly emerged: Workers are less likely to participate after the stock market drops, so they lose out when the market recovers.

The participation of wage and salary workers peaked in 2000 at 51.6%, right before a 3-year bear market that saw the compound annual growth rate (the CAGR, which includes dividends) of the S & P 500 declining 9.11% in 2000, 11.98% in 2001, and 22.27% in 2002. In 2003 however, the S & P rebounded up 28.72%, but retirement plan participation rates continued to decline, hitting a low of 45.5% in 2006 before finally beginning to rise.

Then the same thing happened again after the financial crisis. Participation rates had peaked at 47.7% in 2007, before declining in 2008 when the S & P 500 dropped a whopping 37.22%. Even though the market began to bounce back immediately in 2009, participation rates continued to decline down to 44.2% until that trend finally reversed in 2013 according to the EBRI data released last week. With each stock market shock, the participation rate fell but never fully reached its previous high, so that the 2013 rate of 45.8% is still lower than the 46.1% participation rate seen in 1987.

This bears repeating: The participation rate in an employment-based retirement plan in 2013 was lower than it was in 1987. I don’t think I need to tell you what has happened to the S&P 500 from 1987 to 2013.

Now of course one could argue that it’s harder to save for retirement if your salary has been frozen, or your bonus was cut, or especially if you were forced to take a lower-paying job, as many who were able to stay employed throughout the recession experienced. Employers have also been scaling back or eliminating entirely company matches, which further disincentives workers from participating. But waiting until you start making more money to save for retirement is a losing game, especially if you subscribe to the new theory put forth by Thomas Piketty in his much-discussed but I suspect less-widely read book Capital in the Twenty-First Century.

Piketty’s thesis is that the return on capital in the twenty-first century will be significantly higher than the growth rate of the economy and more specifically the growth of wages (4% to 5% for return, barely 1.5% for wage growth.) Furthermore, the return on capital has always been greater than economic (and wage) growth, except for an anomalous period during the second half of the twentieth century when there was an exceptionally high rate of growth worldwide. It is the inequality of capital ownership that drives wealth inequality, a phenomenon that cannot be reversed as long as the rate of return continues to exceed the rate of growth, or as Piketty helpfully provides, R>G. (Full disclosure: I only read the introduction and then used the index to find sections that most interested me.)

If you apply R>G to retirement planning, it follows that it’s more important to be in the market than to wait for a raise or to reach the next step on the career ladder to start participating in a plan. The usual caveats apply: First you must get rid of any high-interest debt and create a three-month cushion for emergencies. But once you’re in a plan, if the economy—and your income along with it—hits some major bumps, it’s even more important to continue to contribute lest you miss out on the upside. Just remember: R>G.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

More on retirement investing:

Should I invest in bonds or bond mutual funds?

What is the right mix of stocks and bonds for me?

How often should I check my retirement investments?

Read next: Why Americans Can’t Answer the Most Basic Retirement Question

MONEY Retirement

The Surprising Reason Employers Want You to Save for Retirement

man fails to make a putt
PM Images—Getty Images

Companies have stepped up their game with better options and features. Still, savings lag.

Employers have come a long way in terms of helping workers save for retirement. They have beefed up financial education efforts, embraced automatic savings features, and moved toward relatively safe one-decision investment options like target-date mutual funds. Yet our retirement savings crisis persists and may be taking a toll on the economy.

Three in four large or mid-sized employers with a 401(k) plan say that insufficient personal savings is a top concern for their workforce, according to a report from Towers Watson. Four in five say poor savings will become an even bigger issue for their employees in the next three years, the report concludes.

Personal money problems are a big and growing distraction at the office. The Society for Human Resources Management found that 83% of HR professionals report that workers’ money issues are having a negative impact on productivity, showing up in absenteeism rates, stress, and diminished ability to focus.

This fallout is one reason more employers are stepping up their game and making it easier to save smart. Today, 25% of 401(k) plans have an automatic enrollment feature, up from 17% five years ago, Fidelity found. And about a third of annual employee contribution hikes come from auto increase. Meanwhile, Fidelity clients with all their savings in a target-date mutual fund have soared to 35% of plan participants from just 3% a decade ago.

Yet companies know they must do more. Only 12% in the Towers report said their employees know how much they need for a secure retirement; only 20% said employees are comfortable making investment decisions. In addition, 53% of employers are concerned that older workers will have to delay retirement. That presents its own set of workplace challenges as employers are left with fewer slots to reward and retain their best younger workers.

Further innovation in investment options may help. The big missing piece today is a plan choice that converts into simple and cost-efficient guaranteed lifetime income. For a lot of reasons, annuities and other potential solutions have been slow to catch on inside of defined-contribution plans. But the push is on.

Another approach may be educational efforts that reach employees where they want to be found. The vast majority of employers continue to lean on traditional and passive methods of education, including sending out confusing account statements and newsletters, holding boring group meetings, and hosting webcasts. Less than 10% of employers incorporate mobile technology or have tried games designed to motivate employees to save.

These approaches have proved especially useful among young workers, who as a group have begun to save far earlier than previous generations. Still, some important lessons are not getting through. About half of all employers offer tax-free growth through a Roth savings option in their plan, yet only 11% of workers take advantage of the feature, Towers found. This is where better financial education could help.

 

 

MONEY retirement planning

Why Detroit’s Pension Deal Is a Warning to Retirement Savers

The Renaissance Center city skyline and the Detroit River viewed from Milliken State Park, Detroit, Michigan.
Ian Dagnall—Alamy In Detroit retirees face steep pension cuts, which raises big questions about the financial security of workers elsewhere.

The Motor City is counting on the market to keep its pension promises—a lot like under-saved 401(k) plan participants.

Guaranteed lifetime income has become the obsession of retirees, policymakers and the financial industry. Yet as the public pension debacle in bankrupt Detroit shows, we may never find a solution that completely eliminates the risk of your money running out.

The judge in Detroit’s closely watched proceedings said the recent deal the city cut with its retirees bordered on “miraculous,” as reported in The New York Times. That may be. But the deal still left the city’s 32,000 current and future retirees with diminished benefits and no certainty that they won’t be asked to give up more down the road. Their fate is largely in the hands of the markets—as is the case for millions of workers saving in 401(k) plans, and even many of those still covered by a private pension.

The problem is that there is only so much money we are willing to throw at the retirement savings crisis, an issue that has been exacerbated by an economy that until recently was growing far below potential. Every leg of the retirement stool is underfunded, including private pensions, though they are in the best shape. Many public pensions are in deep trouble. Social Security is on course for a funding shortfall. Personal savings are abysmal.

When government revenue or corporate profits or personal income are too low to allow for setting aside enough money for the future, we can only hope that the markets bail us out. In Detroit’s case, pension managers are counting on average annual returns of 6.75% for the next 10 years. That might happen, and it’s a lower expected rate of return than many public pensions are counting on. But given that stocks have already had a nice run, and that the bond portion of any portfolio will almost certainly come up far short of that mark, it’s probably an optimistic target. That means the city will likely have to raise taxes or cut pension benefits at some later date.

Private pensions face similar math, which is why many companies have frozen their plans or dropped them. Still, those that remain are generally on more solid footing. Profits have been strong and regulators hold companies to a higher funding standard. But by some estimates such stalwarts as IBM, Caterpillar and Dow Chemical will need to pay extra attention to their pension funding in coming years. The equation became more difficult recently, now that the Society of Actuaries has updated its mortality tables, which added a couple years to the life expectancy of both men and women at age 65.

Individuals in self-directed savings plans, such as 401(k)s, face their own funding problems. Workers may not have done the retirement income math but, like many pension managers, they haven’t been putting away the money they’ll need, while hoping for strong market returns to make it all work out. If they stay invested, and stocks keep chugging higher, they may be fine. Otherwise they will have to save more going forward or plan on spending less later—the do-it-yourself equivalent of raising taxes or having their benefits cut.

The good news for individuals is that you can act now on your own—you don’t have to stand by while a committee of actuaries and accountants blows smoke around the issue and kicks the problem further down the road. Steps you can take immediately include saving at least 10% of everything you make. Aim for 15% if your kids are gone and the mortgage is paid. Make sure you get the full company match in your 401(k) and automatically escalate contributions each year.

Young workers, especially, need to act now. Those just starting out are far less likely to have a private pension and more likely to suffer from future Social Security cuts. Many seem to have got the message. Millennials expect employment income and personal savings to account for 58% of their retirement income, Bank of America Merrill Lynch found. That compares to just 35% for boomers.

But even with greater savings, guaranteed lifetime income can remain elusive. As life expectancies have stretched, and interest rates have remained low for nearly a generation, fixed-income annuities have become relatively expensive. Even the so-called safe withdrawal rate of 4% per year now strikes some experts as too high for peace of mind. The push is on to make 401(k) savings more easily convertible into lifetime income. That would help because the big insurers that stand behind the promise of lifetime income are a lot more reliable than a city like Detroit.

Read Next: Retirees Risk Blowing IRA Deadline and Paying Huge Penalties

MONEY fix my mix

Get Free Help with Your Investing Challenges

Pile of money
B.A.E. Inc.—Alamy

MONEY is looking for people who are willing to share the details of their portfolio in exchange for a free workup with a financial planner.

Has the volatile market caused you to flee stocks for the security of cash and bonds?

Are you close to 100% in stocks but thinking now it might be time to dial back?

Would you like to rework your investments to generate more income from dividends and bonds?

If so, we’d like to help.

For an upcoming issue, MONEY is looking for people who’d be willing to share their portfolio and financial situation in the magazine, in exchange for having a top-shelf financial planner examine their investments from top to bottom and come up with a full and personalized financial plan.

You must be comfortable sharing details of your personal and financial life (including your real names) and being photographed for the story.

If interested, please fill out the form below. Please tell us a little about your investment challenges, and also include a few details about your family’s finances, including income, approximate savings, and debts. All of this information will be kept confidential until we talk and you agree to appear in the story.

Everybody has an investment challenge, so let’s hear yours!

MONEY Ask the Expert

Here’s a Smart Way To Boost Your Tax-Free Retirement Savings

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: I am maxing out my 401(k). I understand there’s a new way to make after-tax contributions to a Roth IRA. How does that work?

A: You can thank the IRS for what is essentially a huge tax break for higher-income retirement savers, especially folks like yourself who are already maxing out contributions to tax-sheltered retirement plans.

A recent ruling by the IRS allows eligible workers to easily move after-tax contributions from their 401(k) or 403(b) plan to Roth IRAs when they exit their company plan. “With this new ruling, retirement savers are getting a huge increase in their ability contribute to a Roth IRA,” says Brian Holmes, president and CEO of investment advisory firm Signature Estate and Investment Advisors.

The Roth is a valuable income stream in retirement because contributions are after-tax, which means you don’t owe Uncle Sam anything on the money you withdraw. Unlike traditional IRAs which require you to start withdrawing money once you turn 70 ½, Roths have no mandatory distribution requirements, so your investments can continue to grow tax-free. And if you need to take a chunk out for a sudden big expense, such as medical bills, the withdrawal won’t bump you up into a higher tax bracket.

For high-income earners, the IRS ruling is especially good news. Singles with an adjusted gross income of $129,000 or more can’t directly contribute to a Roth IRA; for married couples, the income cap is $191,000. If you are are eligible to contribute to a Roth IRA, you can’t contribute more than $5,500 this year or next ($6,500 for people over 50). The IRS does allow people to convert traditional IRAs to Roth IRAs but you must pay income tax on your gains.

Now, with this new IRS ruling, you can put a lot more into a Roth by diverting your 401(k) assets into one. The annual limit on pre-tax contributions to 401(k) plans is $17,500 and $23,000 for people over 50; those limits rise to $18,000 and $24,000 next year. Including your pre-tax and post-tax contributions, as well as pre-tax employer matches, the total amount a worker can save in 401(k) and 403(b) plans is $52,000 and $57,500 for those 50 and older. (That amount will rise to $53,000 and $59,000 respectively in 2015.) When you leave your employer, you can separate the after-tax money and send it directly to a Roth, which can boost your tax-free savings by tens of thousands of dollars.

To take advantage of the new rule, your employer plan must allow after-tax contributions to your 401(k). About 53% of 401(k) plans allow both pre-tax and after- tax contributions, according to Rick Meigs, president of the 401(k) Help Center. You must also first max out your pre-tax contributions. The transfer to a Roth must be done at the same time you roll your existing 401(k)’s pre-tax savings into a traditional IRA.

The ability to put away more in a Roth is also good for people who want to leave money to heirs. Inherited Roth IRAs are free of tax, and because they don’t have taxable minimum required distributions, they can give your heirs decades of tax-free growth. “It’s absolutely the best asset to die with if you want to leave money behind,” says Holmes.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: 4 Disastrous Retirement Mistakes and How to Avoid Them

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