[Contributing to] 401k, Roth 401k, Roth IRA

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[Contributing to] 401k, Roth 401k, Roth IRA

Postby an_asker » Thu Jun 27, 2013 3:40 pm

My wife recently got a new job where the company offers the 401k and the Roth 401k. This is the first time either of us have had the ability to save into a Roth 401k.

An employee can save up to the maximum permissible amount (pre-tax) in the 401k, then add more (after-tax) in the Roth 401k. I am assuming that this Roth 401k will be tax-free at withdrawal (though I don't remember if the paperwork states that or not). Either way, it is obvious that the 401k and the Roth 401k can be funded concurrently.

Besides, from previous experience, I know that the 401k and the Roth IRA can be funded concurrently and I am aware of the rules.

My question is --> Is it permissible to contribute to all three of them concurrently?

For the record, we are below the upper income limits for contributing to all of the above. In other words, our income does not restrict us from making contributions (though it definitely will restrict us from maxing out all avenues :oops: ).
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby Default User BR » Thu Jun 27, 2013 5:46 pm

an_asker wrote:My wife recently got a new job where the company offers the 401k and the Roth 401k. This is the first time either of us have had the ability to save into a Roth 401k.

An employee can save up to the maximum permissible amount (pre-tax) in the 401k, then add more (after-tax) in the Roth 401k. I am assuming that this Roth 401k will be tax-free at withdrawal (though I don't remember if the paperwork states that or not). Either way, it is obvious that the 401k and the Roth 401k can be funded concurrently.

While the law allows contributing to both, the maximum total per participant of employee elective deferrals and designated Roth contributions is 17.5k this year (plus catch-up if of age). Roth 401(k) contributions are instead of pre-tax contributions, not in addition to. Your statement makes it seem like you are saying that she could put in 17.5k pre-tax, THEN contribute to Roth 401(k). This is not the case. If you meant something else by "maximum permissible amount" then you should clarify that.
My question is --> Is it permissible to contribute to all three of them concurrently?

By law, sure. Generally Roth IRAs have little to do with qualified plans.


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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby retiredjg » Thu Jun 27, 2013 10:34 pm

Welcome to the forum!

I think you may be confused. You can contribute to both traditional 401k and Roth 401k, but the total for both together is $17,500k this year (more if age 50 or older). You can't do $17.5k to each.

If she is allowed to contribute $17.5k to traditional 401k and also contribute to something else "after-tax", it is probably "after-tax employee contributions". This is not the same thing as Roth 401k. This option is available in many plans but is generally unknown and often misunderstood.

After tax employee contributions can be a very good thing if she is allowed to roll that money out to Roth IRA periodically. After tax employee contributions are not a particularly good thing if she cannot roll that money out to Roth IRA periodically. Before deciding whether to contribute, she needs to learn more about what her options actually are.

Yes, you can contribute to traditional 401k, after tax contributions in 401k, and Roth IRA all at the same time. It might or might not be a good idea. This depends on the quality of funds she has to choose from, the quality of funds you have to choose from (if you have a plan at work), how much money can be saved each year, and some other things like tax brackets.
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby an_asker » Fri Jun 28, 2013 9:49 am

retiredjg wrote:Welcome to the forum!

I think you may be confused. You can contribute to both traditional 401k and Roth 401k, but the total for both together is $17,500k this year (more if age 50 or older). You can't do $17.5k to each.

If she is allowed to contribute $17.5k to traditional 401k and also contribute to something else "after-tax", it is probably "after-tax employee contributions". This is not the same thing as Roth 401k. This option is available in many plans but is generally unknown and often misunderstood.

After tax employee contributions can be a very good thing if she is allowed to roll that money out to Roth IRA periodically. After tax employee contributions are not a particularly good thing if she cannot roll that money out to Roth IRA periodically. Before deciding whether to contribute, she needs to learn more about what her options actually are.

Yes, you can contribute to traditional 401k, after tax contributions in 401k, and Roth IRA all at the same time. It might or might not be a good idea. This depends on the quality of funds she has to choose from, the quality of funds you have to choose from (if you have a plan at work), how much money can be saved each year, and some other things like tax brackets.

That is exactly my confusion about. I'll go home tonight and read the literature once more. It specifically talks of after-tax contributions to a Roth 401(k). Let's see.
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby retiredjg » Fri Jun 28, 2013 10:31 am

an_asker wrote:That is exactly my confusion about. I'll go home tonight and read the literature once more. It specifically talks of after-tax contributions to a Roth 401(k). Let's see.

The terminology is extremely confusing.

Contributions to Roth 401k are indeed "after tax". But Roth 401k is not the same thing as after-tax employee contributions, which are also after tax.

The $17.5k that can be contributed is called an "elective deferral". You may think of this as an employee contribution, but the term "employee contribution" actually means something else.

Elective deferral contributions can go into a traditional account or into a Roth account, but the total of your elective deferrals is $17.5k this year. Many people think that is all you can contribute, but that is not correct. The law allows more contributions (up to a total of $51k this year I believe) but the law does not allow more contributions to be stashed away without tax. That is where "employee contributions" come in.

An employee can contribute more to the 401k, separately from the 17.5k elective deferral, and that employee contribution must go in after tax. Technically, the name is "employee contributions" but it is frequently called "after tax contributions". To avoid confusion, I usually call it "after tax employee contributions". Yes, I know that sounds like Roth 401k, but it is something different.

Remember that $51k limit I mentioned? If you put in the $17.5k elective deferral and the employer match is $2,500, that leaves space for $31,000 in after tax employee contributions that can also go into the plan. (This is not totally true - there are a couple of other things that could take up part of that space but they are unusual so I've left them out for simplicity in the example.)

Take these terms mentioned above and compare them to the literature and see if that helps you make sense of it.

Note that what the law allows is not necessarily what the law requires. The plan can be more restrictive than what the law allows. A plan can allow after tax employee contributions or a plan can choose not to allow after tax employee contributions. So you have to check the specific plan to see what that plan allows.

Good luck! Let us know what you find out.
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby nimo956 » Fri Jun 28, 2013 10:33 am

I just wanted to add that the max 401k limit for 2013 is $51k. This means that $17.5k in elective deferrals (traditional or Roth) + employer match + after-tax employee contributions cannot exceed $51k. This can be very beneficial if you are allowed to roll out the after-tax contributions to a Roth IRA (you only pay tax on any gains when you do this). If for example your employer match is $3.5k, then you can contribute an additional $30k after-tax and roll that into a Roth IRA each year. This, in addition to the regular $5.5k limit, allows you to contribute $35.5k to a Roth IRA each year. If you both have this option available to you, you could contribute well over $100k each year to tax-advantaged savings before having to invest in a taxable account. Throw in an HSA, 529, $20k I-Bonds, $20k EE-Bonds, and you're talking like $170k per year!
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby an_asker » Fri Jun 28, 2013 12:22 pm

retiredjg wrote:
an_asker wrote:That is exactly my confusion about. I'll go home tonight and read the literature once more. It specifically talks of after-tax contributions to a Roth 401(k). Let's see.

The terminology is extremely confusing.

Contributions to Roth 401k are indeed "after tax". But Roth 401k is not the same thing as after-tax employee contributions, which are also after tax.

The $17.5k that can be contributed is called an "elective deferral". You may think of this as an employee contribution, but the term "employee contribution" actually means something else.

Elective deferral contributions can go into a traditional account or into a Roth account, but the total of your elective deferrals is $17.5k this year. Many people think that is all you can contribute, but that is not correct. The law allows more contributions (up to a total of $51k this year I believe) but the law does not allow more contributions to be stashed away without tax. That is where "employee contributions" come in.

An employee can contribute more to the 401k, separately from the 17.5k elective deferral, and that employee contribution must go in after tax. Technically, the name is "employee contributions" but it is frequently called "after tax contributions". To avoid confusion, I usually call it "after tax employee contributions". Yes, I know that sounds like Roth 401k, but it is something different.[...]

Good luck! Let us know what you find out.

I will ... tonight.

But in response to what you say:

It appears that if an employee has a Roth 401k but no 401k and - assuming I read your response right - the employee can contribute up to $51k, how is the tax treatment (upon withdrawal) of the amount up to the first 17.5k different from the tax treatment to the 'after tax contributions?' In other words, though it sounds like Roth 401k, what is different about it?

[Edited to add]: I think I found what I was looking for, though I still need to go over the plan paperwork to see if I missed something there. Here is a link that explains what I was not understanding.

[Edit #2]: It appears that the third point below (excerpted from here) is what is provided at my wife's new workplace.

Additional considerations
Roth 401(k) contributions are irrevocable, such that once money is invested into a Roth 401(k) account; it cannot be moved to a regular 401(k) account.
Employees can roll their Roth 401(k) contributions over to a Roth IRA account upon termination of employment.
It is the employer's decision whether to provide access to the Roth 401(k) in addition to the traditional 401(k). Many employers find that the added administrative burden outweighs the benefits of the Roth 401(k).
The Roth 401(k) program was originally set up to sunset, or no longer be in place, after 2010 along with the rest of EGTRRA 2001. The Pension Protection Act of 2006 extended it.
Unlike Roth IRAs, owners of Roth 401(k) accounts (designated Roth accounts) must begin distributions at age 70 and a half, as with IRA and other retirement plans. (Pub 4530)
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby Default User BR » Fri Jun 28, 2013 1:31 pm

That table seems to lay it out for you pretty well. As it says, after-tax contributions will owe tax on any gains. Roth 401(k) contributions will not. Tax-deferred will owe tax on the principal and the gains.

I glanced through your Summary Plan Description. I believe that after-tax non-Roth contributions can be withdrawn once per quarter while still in-service. Also, when you designate a percentage of salary, contributions will switch automatically to after-tax once the deferred/Roth limit is reached. You can contribute up to 75% of salary.

You should read your SPD thoroughly. Follow up with anything you aren't sure about with the plan administration or your HR.


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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby ray.james » Fri Jun 28, 2013 1:46 pm

For after-tax contributions, do earnings/dividends grow tax free?
What is difference between having a taxable account VS contributing after tax to 401k beyond limit.
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby Default User BR » Fri Jun 28, 2013 2:18 pm

ray.james wrote:For after-tax contributions, do earnings/dividends grow tax free?
What is difference between having a taxable account VS contributing after tax to 401k beyond limit.

Yes, they grow tax-free in the sense that taxes are not due until distribution. A taxable account is partially this way. Dividends and distributed capital gains are taxed yearly, but capital gains due to increase in share value are not taxed until they're sold.

After-tax non-Roth is most useful when immediately (or nearly so) available for rollover to a Roth IRA.


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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby retiredjg » Fri Jun 28, 2013 3:17 pm

an_asker, I think that Brian has answered your questions. If not, ask again. This is a confusing subject.

Once you get straight on what is available (traditional 401k, Roth 401k, and/or after tax employee contributions), you need to give some thought as to what you want to do. We don't know anything about your situation, but your tax-bracket comes into play here.

As a general statement, if you are in a higher tax bracket, you want to defer taxes as much as possible. That generally means $17.5k to traditional 401k and the rest going to Roth IRA (because traditional IRA would probably not be tax-deductible). If you fill both of those, the next attractive container would be after tax contributions to 401k but only if that money can be rolled out periodically to Roth IRA.

In truth, you can just skip the Roth IRA step and go directly to after tax contributions to 401k if you don't have enough savings to do all of them.

Occasionally, a plan will allow after tax contributions, but will not allow the rollover to Roth while still working there. This turns the after tax account into a big old non-deductible traditional IRA - (usually) not as good a choice as just putting the money into taxable instead. There are exceptions (for instance, if you need lots of room for bonds).

Remember that so far we have only discussed your wife's contributions. This all needs to be coordinated with yours. To give you the best help, at some point we'll need to know a lot more information. :happy Tax bracket, the quality (cost) of the funds available in his plan vs her plan, and how much can be saved each year will all be important factors.
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby an_asker » Tue Jul 02, 2013 11:11 am

Sorry for the delay in replying.

I double checked the paperwork and it did say Roth 401k, so I called Vanguard. It appears that on this specific plan, the total that can be put in as the employee contribution is $17,500. The employee has the option of either a) deferring taxes and contributing to the 401k, b) pay taxes and contribute to the Roth 401k, or c) do a mix of a) and b). For some reason, I thought that the limit was the IRS limit; the paperwork did not have anywhere where it specified the $17.5k limit. Oh well - that is that!
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby retiredjg » Tue Jul 02, 2013 11:25 am

The fact that she has a Roth 401k option does not eliminate the possibility of also being eligible for after tax employee contributions up to the $51k limit. She might have all 3 options (traditional 401k and Roth 401k up to the $17.5k limit and after tax employee contributions up to the $51k limit).

Did you and the rep talk about that or were you only talking about the $17.5k part? The fact that you thought her limit was $51k didn't come out of thin air, did it?
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Re: [Contributing to] 401k, Roth 401k, Roth IRA

Postby an_asker » Tue Jul 02, 2013 1:00 pm

retiredjg wrote:The fact that she has a Roth 401k option does not eliminate the possibility of also being eligible for after tax employee contributions up to the $51k limit. She might have all 3 options (traditional 401k and Roth 401k up to the $17.5k limit and after tax employee contributions up to the $51k limit).

Did you and the rep talk about that or were you only talking about the $17.5k part? The fact that you thought her limit was $51k didn't come out of thin air, did it?

To be honest, the first mention of the $51k was in one of your responses! ;-) It was the fact that the Roth 401k was mentioned as an after-tax contribution threw me off a bit (because I've never had one before); now I get it how that can be advantageous for some depending on their situation.

However, I might as well call and talk with another rep just the make sure that I heard right and that the $17.5k is the final limit.
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