After TAX 403b contributions should I do it?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

After TAX 403b contributions should I do it?

Post by ArthurO »

Hi,

My 403b plan just recently added 403b after tax contributions to the arsenal so I can invest over 17500 limit. Unfortunately in service roll overs to the ROTH option or rollovers to ROTH IRA is NOT allowed.

My question is, under these circumstances does it make sense to contribute to the after tax portion of 403b? or should I just contribute to my 17500 max and forget the after tax contribution until they allow in service roll overs (if ever).

It is big university employer with over 20K employees, so approaching human resources is useless. Any thoughts???

thanks in advance
User avatar
cheese_breath
Posts: 11786
Joined: Wed Sep 14, 2011 7:08 pm

Re: After TAX 403b contributions should I do it?

Post by cheese_breath »

Question, not a recommendation. If you do the after tax contributions, at least their earnings will be tax deferred. Do you have better options for investing this money?
The surest way to know the future is when it becomes the past.
gabriel1970
Posts: 98
Joined: Sat Jan 04, 2014 4:13 pm
Location: Boston, MA

Re: After TAX 403b contributions should I do it?

Post by gabriel1970 »

I am doing after tax contribution to my 401k.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

cheese_breath wrote:Question, not a recommendation. If you do the after tax contributions, at least their earnings will be tax deferred. Do you have better options for investing this money?
well the better option I think is taxable... with taxable the tax on earning is also tax deferred, the cap gains are paid when the return is realized and they are taxed at 15% tax rate
with 403b/401k after tax contributions the tax on earnings is also deferred however tax on capital gains is paid at marginal rate so unless you are poor in retirement and you are in 15^% tax bracket, you will pay more tax investing in 403b then taxable...

Unless you invest in bonds in 403b after tax and keep stocks in before tax or roth, (since bond interest in taxable is taxed at marginal rates) however since no roll overs are allowed between plans rebalancing by withdrawal is impossible...

So plan is, 403b after tax contributions or taxable investing... 403b ROTH is maxed to 17500 already, ROTH IRA is also maxed at 5500, bonds I-bonds annual contribution of 15K + EE bonds annual contribution 10K

Is my thinking logical? Or am I missing something?
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

Any help on this??

Is after tax 403b contribution better than taxable? If the plan allows for in service conversions the answer is clearly yes, but my palm allows for after tax contribution but conversion is not allowed
NorCalDad
Posts: 774
Joined: Sun Mar 25, 2012 11:14 pm
Location: Northern California

Re: After TAX 403b contributions should I do it?

Post by NorCalDad »

Does your employer offer a 457(b)?
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

No he doesn't only 403b
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: After TAX 403b contributions should I do it?

Post by livesoft »

The better option is to invest tax-efficiently in a taxable account. I tell folks to never invest after-tax in a 401(k) or 403(b) unless that money can be converted to a Roth very quickly. Otherwise your gains will get taxed at your marginal income tax rate upon withdrawal instead of the more favorable long-term capital gains tax rate.

In some sense, it is a disservice to employees to even offer after-tax contributions because most people would not understand that it costs them extra taxes in the long term.
Wiki This signature message sponsored by sscritic: Learn to fish.
SicEm
Posts: 18
Joined: Mon Jun 02, 2014 4:46 pm

Re: After TAX 403b contributions should I do it?

Post by SicEm »

livesoft wrote:The better option is to invest tax-efficiently in a taxable account. I tell folks to never invest after-tax in a 401(k) or 403(b) unless that money can be converted to a Roth very quickly. Otherwise your gains will get taxed at your marginal income tax rate upon withdrawal instead of the more favorable long-term capital gains tax rate.
Could you clarify this? I JUST submitted the paperwork yesterday to switch some of my 403(b) pre-tax contributions to being post tax. I assumed that a 403(b) Roth was very similar to a normal Roth, other than increased difficulty in getting the money out early.

Yikes!

Edit: As in, gains on 403 B shouldn't be taxed at all, right?
Last edited by SicEm on Sat Jun 21, 2014 11:48 am, edited 1 time in total.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

SicEm wrote:
livesoft wrote:The better option is to invest tax-efficiently in a taxable account. I tell folks to never invest after-tax in a 401(k) or 403(b) unless that money can be converted to a Roth very quickly. Otherwise your gains will get taxed at your marginal income tax rate upon withdrawal instead of the more favorable long-term capital gains tax rate.
Yes I agree but what about investing bond portion in after tax contribution and stocks in Roth? Is taxable equivalent to after tax 403b? For bond investing?
NorCalDad
Posts: 774
Joined: Sun Mar 25, 2012 11:14 pm
Location: Northern California

Re: After TAX 403b contributions should I do it?

Post by NorCalDad »

SicEm wrote:
livesoft wrote:The better option is to invest tax-efficiently in a taxable account. I tell folks to never invest after-tax in a 401(k) or 403(b) unless that money can be converted to a Roth very quickly. Otherwise your gains will get taxed at your marginal income tax rate upon withdrawal instead of the more favorable long-term capital gains tax rate.
Could you clarify this? I JUST submitted the paperwork yesterday to switch some of my 403(b) pre-tax contributions to being post tax. I assumed that a 403(b) Roth was very similar to a normal Roth, other than increased difficulty in getting the money out early.

Yikes!
After-tax 403(b) and Roth 403(b) are two different things.

Roth 403(b) works like a Roth IRA: after-tax contributions, gains are tax-free upon withdrawal.

After-tax 403(b): after-tax contributions, gains are taxable upon withdrawal. In plans that allow in-service rollovers, people can move funds into a Roth IRA, which is the only use Livesoft is suggesting for after-tax 403(b) accounts.

Make sure you are choosing the right one for your situation.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

Just to clarify I am talking about after tax contribution in the thread and not Roth contributions there is huge difference
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: After TAX 403b contributions should I do it?

Post by livesoft »

ArthurO wrote:Yes I agree but what about investing bond portion in after tax contribution and stocks in Roth? Is taxable equivalent to after tax 403b? For bond investing?
I would not even do that. One can still invest stocks in Roth if one wants to. One can use tax-exempt munis in taxable if one's 403(b) is already full of fixed income and one needs more fixed income for their overall asset allocation. Why bother to have the restriction of a 403(b) (penalties for early withdrawal, etc) if one doesn't have to unless one gets a big tax break for that?

@NorCalDad, thanks for clarifying the 403(b), after-tax, and Roth 403(b) issue.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

The ONLY reason I see that would be worthwhile doing 403b after tax contributions are:

1. It increases annual contribution limit to 52000 for 403b

2. The plan may allow in the future to do in service conversion and then the principle and interest accumulated by that time could be converted.

But maybe the in service conversion option will never take place, and in that case investing in Bond in after tax option is almost equivalent on tax efficiency side to taxable, however the penalties and restrictions on 403b side and no restrictions on taxable makes taxable adventageous.

Do I understand this right?

thanks again
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: After TAX 403b contributions should I do it?

Post by livesoft »

That's the way I understand it.

A nuance about the in-service conversion to Roth: Would that only be the after-tax contributions? Or would it be pro-rated among the after-tax, pre-tax, and gains? If the latter, then one had better have a big taxable account from which to pay the taxes. One would not want to pay the taxes from the assets in the plan because that would increase the withdrawal/conversion amount and the taxes.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

that's a good point, I don't know how the contributions from different types in the account are pro rated. I know people do convert to ROTH only portions in the after tax parts, but I could be wrong, never dealt with this before... but it is worth investigating, hence this thread. The nick name for this sort of thing is "Mega backdoor ROTH", but exact intricacies of this type of manouver are unknown to me...
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

ArthurO wrote:My 403b plan just recently added 403b after tax contributions to the arsenal so I can invest over 17500 limit. Unfortunately in service roll overs to the ROTH option or rollovers to ROTH IRA is NOT allowed.

My question is, under these circumstances does it make sense to contribute to the after tax portion of 403b?
No. Do not contribute unless you can roll that money out to Roth IRA or into Roth 403b on a regular basis. Use taxable instead.

Don't hope to put just bonds there - all the plans I've heard of do not allow that. Maybe yours does, but it seems unlikely.
ArthurO wrote:The plan may allow in the future to do in service conversion and then the principle and interest accumulated by that time could be converted.
Get familiar with the different kinds of earnings that money can have. Interest is only one kind of earning. It usually applies to CDs and savings accounts.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

My plan does not limit contributions, I can contribute bonds, stocks whatever I want.

I know the difference between intrerest, capital gains, dividends, and only capital gains get preferential tax treatment in taxable, so if I invest in bonds I have to take taxes at marginal rates no matter if I invest them in taxable or 403b after tax.

The only difference I see investing in bonds is the fact that withdrawals are limited in 403b but there are no restrictions on withdrawals in taxable,
the advantage of 403b is that if ROTH roll over becomes available my tax free withdrawals would be huge in retirement if i pump money into this 403b.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

If you are allowed to hold just bonds in the aftertax sub-account, that seems to overcome the problems associated with not being able to roll to Roth. However, it appears you will need at least a small slice of bonds outside of that sub-account as well - in order to rebalance.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

retiredjg wrote:If you are allowed to hold just bonds in the aftertax sub-account, that seems to overcome the problems associated with not being able to roll to Roth. However, it appears you will need at least a small slice of bonds outside of that sub-account as well - in order to rebalance.
Agree completely, the question is, should I do after tax 403b contribution to just bonds, or is it still advantageous to do it in taxable, or is there a difference???
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: After TAX 403b contributions should I do it?

Post by livesoft »

Here is an advanced reason not to do it:

When retired, one may wish to convert tax-deferred to Roth. One will need some money to pay the taxes on the conversion. A good place to get that money is from a taxable account and from assets taxed at a lower rate. Some of the money withdrawn from a taxable account is return of capital and tax-free. That's the same from an after-tax retirement account. But the cap gains will be taxed lower. This means that one can convert more of the tax-deferred account for the same amount of taxes. Net result is more Roth for less taxes.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

livesoft wrote:Here is an advanced reason not to do it:

When retired, one may wish to convert tax-deferred to Roth. One will need some money to pay the taxes on the conversion. A good place to get that money is from a taxable account and from assets taxed at a lower rate. Some of the money withdrawn from a taxable account is return of capital and tax-free. That's the same from an after-tax retirement account. But the cap gains will be taxed lower. This means that one can convert more of the tax-deferred account for the same amount of taxes. Net result is more Roth for less taxes.
Looks like contributing after tax money to 403b to bonds only without possibility of roll over to ROTH IRA via mega roth conversion gets complicated very quickly. People have multiple opinions and convoluted explanations, I haven't made my decision if I will use my new after tax contribution feature or not.
I know I will not use it for stocks, for bonds maybe... but still unsure....
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

ArthurO wrote:
retiredjg wrote:If you are allowed to hold just bonds in the aftertax sub-account, that seems to overcome the problems associated with not being able to roll to Roth. However, it appears you will need at least a small slice of bonds outside of that sub-account as well - in order to rebalance.
Agree completely, the question is, should I do after tax 403b contribution to just bonds, or is it still advantageous to do it in taxable, or is there a difference???
My opinion, for what it is worth, is the contributing after tax to the 403b is only worth doing (in your case) if you can put only bonds in that sub-account. This will be essentially the same as an IRA full of non-deductible contributions. Eventually tax will be paid on the growth and earnings - at your ordinary tax rate. The advantage to doing it this way (in the 403b) is that you could still also contribute to Roth IRA.
or is it still advantageous to do it in taxable,
If you mean" is it still advantageous to invest the money in taxable instead" I don't know which is best. Either is a good option. Obviously, taxable is the better option if you invest in stocks but if you invest only in bonds, I'm not sure which is the better choice.

Let's see. In taxable the capital gain of bonds would get capital gains treatment, but the interest and dividends would not. If the 403b is used, the bonds would eventually roll to Roth (with taxes paid to get it there) and then not taxed again. Which is best? I'm having a brain block or I just don't know.

Why not invest in the 403b after tax to the extent you need bonds and put the rest into taxable?
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

ArthurO wrote:...I haven't made my decision if I will use my new after tax contribution feature or not.
Sometimes it is impossible to know ahead of time. Sometimes it does not matter much. Sometimes it is unknowable and does not matter much.

If you are able to save enough money to get to this choice (after-tax 430b vs taxable) it may not matter much.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

retiredjg wrote:
ArthurO wrote:...I haven't made my decision if I will use my new after tax contribution feature or not.
Sometimes it is impossible to know ahead of time. Sometimes it does not matter much. Sometimes it is unknowable and does not matter much.

If you are able to save enough money to get to this choice (after-tax 430b vs taxable) it may not matter much.
yes for a while it may not matter much, but when/if my portfolio grows to be millions, even small advantages in the investment style/taxes can have significant impact of my total after tax income...
gabriel1970
Posts: 98
Joined: Sat Jan 04, 2014 4:13 pm
Location: Boston, MA

Re: After TAX 403b contributions should I do it?

Post by gabriel1970 »

Even if you invest your after tax 403b money in stock only, you still get the advantage that the stock dividend is tax deferred. So if you do so, you still get some of the benefit you get investing solely in bond in this account.

Tax deferment has advantage. Paying 35% tax on dividend now is worse than paying 35% on earnings 30 years later. You lose on compounding. You invest amount A, get return of B and pay tax of C, in taxable account you are left with A+B-C to grow on next year. In a tax deferred account, you have A+B to grow on next year. So on and so forth compounded the next 29 years. You will rather have C to earn you D next year, otherwise you have no D at all.

In taxable account if you want to "defer" capital gain, you are stuck with the single original pick no matter what happens. That is more of a restriction than the money being stuck in after tax 403b still retirement, where you have a bunch of choices to move money among.

So the after tax traditional IRA, and the after tax 403b are not totally useless.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

gabriel1970 wrote:Even if you invest your after tax 403b money in stock only, you still get the advantage that the stock dividend is tax deferred. So if you do so, you still get some of the benefit you get investing solely in bond in this account.

Tax deferment has advantage. Paying 35% tax on dividend now is worse than paying 35% on earnings 30 years later. You lose on compounding. You invest amount A, get return of B and pay tax of C, in taxable account you are left with A+B-C to grow on next year. In a tax deferred account, you have A+B to grow on next year. So on and so forth compounded the next 29 years. You will rather have C to earn you D next year, otherwise you have no D at all.

In taxable account if you want to "defer" capital gain, you are stuck with the single original pick no matter what happens. That is more of a restriction than the money being stuck in after tax 403b still retirement, where you have a bunch of choices to move money among.

So the after tax traditional IRA, and the after tax 403b are not totally useless.
I think for stocks it is useless, since for taxable you pay 15% tax rate on growth, but in after tax 403b you would pay your marignal tax rate when you withdraw which is usually 25% not 15%. Also in 403b money is restricted from withdrawals, in taxable you can take it our pay taxes and do what you please...

I think for stocks 403b after tax is pretty much useless, for bonds it is better but still not perfect... the great thing for 403B after tax is that it can be converted to ROTH via MEGA backdoor roth discussed here already to death. However, I don't want to risk Mega backdoor roth just yet, I question gray area and legality of it...
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: After TAX 403b contributions should I do it?

Post by livesoft »

^Don't forget that one's capital gains from after-tax money in a 403(b)/401(k) will be taxed at one's marginal income tax rate later on when they withdraw the money. And one's cap gains will not get a stepped up basis when they die. Those two things obviate any tax savings on dividends. Don't forget that for many folks qualified dividends get a lower tax rate.

So I guess I am writing that I completely disagree with what was written about saving taxes on stock dividends.
Wiki This signature message sponsored by sscritic: Learn to fish.
billfromct
Posts: 2057
Joined: Tue Dec 03, 2013 8:05 am

Re: After TAX 403b contributions should I do it?

Post by billfromct »

Do you really think the 403b adminsrator will keep everything straight?

You have pre-tax contributions, pre-tax gains, after-tax contributions, after-tax gains, etc.

Are there separate accounts for pre-tax vs after-tax?

What about all the paperwork when you do roll everything over to an IRA or another 403b?

It would be interesting to hear from someone that had to go through the "rollover" process with "after tax" contributions in their 403b or 401k.

bill
gabriel1970
Posts: 98
Joined: Sat Jan 04, 2014 4:13 pm
Location: Boston, MA

Re: After TAX 403b contributions should I do it?

Post by gabriel1970 »

Capital gain case is somewhat complicated since I do not know my marginal rate after retirement. As a Boglehead I may very well end up in a low bracket.

Lets take a case of "all dividend" (non-qualified). If I put $1K in taxable account earning 8% a year, and my marginal rate is always 35%, after 30 years I get $4567 after tax. If I put the same money earning the same rate in a after tax traditional IRA earning the same rate, and pay same marginal rate at the end, I have $6891 left.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

billfromct wrote:Do you really think the 403b adminsrator will keep everything straight?

You have pre-tax contributions, pre-tax gains, after-tax contributions, after-tax gains, etc.

Are there separate accounts for pre-tax vs after-tax?

What about all the paperwork when you do roll everything over to an IRA or another 403b?

It would be interesting to hear from someone that had to go through the "rollover" process with "after tax" contributions in their 403b or 401k.

bill
yes, some plans keep pre tax contributions and gains separate from after tax.. it is all plan dependent though.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

gabriel1970 wrote:Capital gain case is somewhat complicated since I do not know my marginal rate after retirement. As a Boglehead I may very well end up in a low bracket.

Lets take a case of "all dividend" (non-qualified). If I put $1K in taxable account earning 8% a year, and my marginal rate is always 35%, after 30 years I get $4567 after tax. If I put the same money earning the same rate in a after tax traditional IRA earning the same rate, and pay same marginal rate at the end, I have $6891 left.
why would you get all your dividends non qualified... invest in taxable in stocks and these are qualified dividends taxed at maximum of 15%. If you want non qualified dividends and interest, then I agree after tax 403b makes sense. An you must be pretty happy to be in 35% tax bracket...
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: After TAX 403b contributions should I do it?

Post by livesoft »

So investing after-tax in a 403(b) is pretty much like buying a variable annuity?
Wiki This signature message sponsored by sscritic: Learn to fish.
gabriel1970
Posts: 98
Joined: Sat Jan 04, 2014 4:13 pm
Location: Boston, MA

Re: After TAX 403b contributions should I do it?

Post by gabriel1970 »

I agree dividends are most likely qualified. And I would be very happy to pay 35% tax if I could, but I do not qualify.

Then let's change the taxable account tax rate to 15% and the tax deferred account end tax rate to 25%, in the taxable accout I will have $7197 left. In the after tax traditional IRA I will have $7797 left.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

gabriel1970 wrote:I agree dividends are most likely qualified. And I would be very happy to pay 35% tax if I could, but I do not qualify.

Then let's change the taxable account tax rate to 15% and the tax deferred account end tax rate to 25%, in the taxable accout I will have $7197 left. In the after tax traditional IRA I will have $7797 left.
I would be curious to see that calculation...
JW-Retired
Posts: 7189
Joined: Sun Dec 16, 2007 11:25 am

Re: After TAX 403b contributions should I do it?

Post by JW-Retired »

billfromct wrote: Do you really think the 403b administrator will keep everything straight?

You have pre-tax contributions, pre-tax gains, after-tax contributions, after-tax gains, etc.

Are there separate accounts for pre-tax vs after-tax?

What about all the paperwork when you do roll everything over to an IRA or another 403b?

It would be interesting to hear from someone that had to go through the "rollover" process with "after tax" contributions in their 403b or 401k.
I can only speak for my own Megacorp 401k. The paperwork is handled by the administrator. They do keep the pre-tax, after-tax (contributions+gains), and company match (Match+gains) as separate accounts and always have. My after-tax account is about a quarter of the 401k. All of my RMD is coming from this after-tax account. This reduces my taxes but only a little since only a small percentage of my after-tax account balance is contributions, most of it is gains. I believe if I rolled over to an IRA all of the funds would be mingled and taking RMDs only from the after-tax account would not be possible.

I hope to live long enough so the after-tax account is used up by RMDs and the need for basis paperwork ceases.
JW
Retired at Last
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

gabriel, something doesn't seem right to me.
gabriel1970 wrote:Even if you invest your after tax 403b money in stock only, you still get the advantage that the stock dividend is tax deferred. So if you do so, you still get some of the benefit you get investing solely in bond in this account.
I guess technically this is correct - you do get the advantage that the dividend is tax-deferred. However, dividends seem to me to be pretty minor compared to increases in net asset value which would be taxed at the capital gains rate if the money were held in taxable. I don't see how deferring tax on dividends could possibly overcome the difference in the tax on capital gains.
Tax deferment has advantage.
Agreed.
Paying 35% tax on dividend now is worse than paying 35% on earnings 30 years later.
This makes no sense to me at all but it might be because I'm not sure what you mean by "earnings". If you mean paying 35% tax on dividend now is worse than paying 35% on capital gains 30 years later....I can't see how that could be correct.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

This too is confusing.
ArthurO wrote:However, I don't want to risk Mega backdoor roth just yet, I question gray area and legality of it...
You are not eligible to do the mega back door roth IRA contribution because your plan does not allow for in-service rollovers. The mega back door consists of putting money into after-tax 401k/403b and then sending that money to Roth IRA pretty quickly so it doesn't go up much in value. If you can't send the money to Roth IRA, there is no mega back door.

On the other hand, if you simply mean the distribution of funds when you leave the company or retire, why on earth would they let you put money in an after-tax account if there were not some legal method to distribute the money when the time comes?
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: After TAX 403b contributions should I do it?

Post by placeholder »

livesoft wrote:So investing after-tax in a 403(b) is pretty much like buying a variable annuity?
Similar but possibly cheaper depending on plan and potentially more flexible after separation from service in terms of rollovers.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

Variable annuity? I don't get it. :confused

I think it is just like a tIRA filled with non-deductible contributions. Not of much use unless you need bond space. Or unless you can get it converted to Roth before it makes much money.
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: After TAX 403b contributions should I do it?

Post by livesoft »

retiredjg wrote:Variable annuity? I don't get it. :confused
When one buys a VA, the money is from after-tax. The gains are taxed at your marginal income tax rate. There are early withdrawal penalties. When you die, your heirs don't get a stepped up basis.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

livesoft wrote:
retiredjg wrote:Variable annuity? I don't get it. :confused
When one buys a VA, the money is from after-tax. The gains are taxed at your marginal income tax rate. There are early withdrawal penalties. When you die, your heirs don't get a stepped up basis.
Got it.

:oops: Duh....
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

retiredjg wrote:This too is confusing.
ArthurO wrote:However, I don't want to risk Mega backdoor roth just yet, I question gray area and legality of it...
You are not eligible to do the mega back door roth IRA contribution because your plan does not allow for in-service rollovers. The mega back door consists of putting money into after-tax 401k/403b and then sending that money to Roth IRA pretty quickly so it doesn't go up much in value. If you can't send the money to Roth IRA, there is no mega back door.

On the other hand, if you simply mean the distribution of funds when you leave the company or retire, why on earth would they let you put money in an after-tax account if there were not some legal method to distribute the money when the time comes?
Yes my plan does allow in service withdrawal agter age of 40 for which I qualify and it also allows for 3 different contributions namely pre tax, post tax, and roth so I don't know what you know about my plan, no offence, I choose not to do mega roth for reasons stated already
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

ArthurO wrote:Yes my plan does allow in service withdrawal agter age of 40 for which I qualify and it also allows for 3 different contributions namely pre tax, post tax, and roth so I don't know what you know about my plan, no offence, I choose not to do mega roth for reasons stated already
Well, I don't know anything about your plan in specific. However, I do know what you said above....
ArthurO wrote:My 403b plan just recently added 403b after tax contributions to the arsenal so I can invest over 17500 limit. Unfortunately in service roll overs to the ROTH option or rollovers to ROTH IRA is NOT allowed.
If it is not allowed, how is it allowed?

Or perhaps there is some nuance to your statement that I didn't understand?
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

retiredjg wrote:
ArthurO wrote:Yes my plan does allow in service withdrawal agter age of 40 for which I qualify and it also allows for 3 different contributions namely pre tax, post tax, and roth so I don't know what you know about my plan, no offence, I choose not to do mega roth for reasons stated already
Well, I don't know anything about your plan in specific. However, I do know what you said above....
ArthurO wrote:My 403b plan just recently added 403b after tax contributions to the arsenal so I can invest over 17500 limit. Unfortunately in service roll overs to the ROTH option or rollovers to ROTH IRA is NOT allowed.
If it is not allowed, how is it allowed?

Or perhaps there is some nuance to your statement that I didn't understand?
It is NOT allowed before age of 40, and it IS ALLOWED after age of 40... turns out i just turned 40... i admit the 2 posts are confusing... I qualify for this "MEGA ROTH" as of last month... before i qualified for after tax contributions but was not allowed to take money out...

The rules of all these plans are ridiculous if you ask me, but I don't make them I can only follow them
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

ArthurO wrote:I qualify for this "MEGA ROTH" as of last month...
Then you know these things.
  • -you qualify for in-service withdrawal, and

    -your in-service withdrawal can be sent directly to a Roth IRA as a "qualified rollover contribution" (just ask your HR people)

    -or your in-service withdrawal can be rolled into a tIRA and then converted by you to Roth IRA using Form 8606 (not recommended if you have other tIRA, SEP IRA, SIMPLE IRA)
Where is the grey area?

And please don't get aggravated with me - I'm trying to help you figure this out.
Topic Author
ArthurO
Posts: 722
Joined: Sat May 24, 2014 12:25 pm

Re: After TAX 403b contributions should I do it?

Post by ArthurO »

retiredjg wrote:
ArthurO wrote:I qualify for this "MEGA ROTH" as of last month...
Then you know these things.
  • -you qualify for in-service withdrawal, and

    -your in-service withdrawal can be sent directly to a Roth IRA as a "qualified rollover contribution" (just ask your HR people)

    -or your in-service withdrawal can be rolled into a tIRA and then converted by you to Roth IRA using Form 8606 (not recommended if you have other tIRA, SEP IRA, SIMPLE IRA)
Where is the grey area?

And please don't get aggravated with me - I'm trying to help you figure this out.
I am not aggrevated with you at all. In fact this is the only place to discuss these strategies. Yesn technically speaking I am allowed to tale money out to traditional ira and roll it [ver to my roth, I dont have traditional ira only roth so no basis would incur, I still choose not to take that route, i am staying out for now,

And by the way hr people are useless here, they dont want to roll over to roth directly, there is just so few people here contributing max to roth, never mind doing after tax
TIAX
Posts: 1434
Joined: Sat Jan 11, 2014 11:19 am

Re: After TAX 403b contributions should I do it?

Post by TIAX »

One benefit to consider is a 403(b)'s bankruptcy and creditor protection that a taxable account wouldn't have.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: After TAX 403b contributions should I do it?

Post by retiredjg »

ArthurO wrote:I still choose not to take that route, i am staying out for now,
Ok then. :|

Just out of curiosity, didn't you say somewhere that you use the "back door" to contribute to Roth IRA? If so, why "back door" but not "mega back door"? In many ways it is the same thing.

Or do you have issues with the "back door" as well?
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: After TAX 403b contributions should I do it?

Post by livesoft »

livesoft wrote:... I tell folks to never invest after-tax in a 401(k) or 403(b) unless that money can be converted to a Roth very quickly.
OK, it now appears that for the OP, the after-tax 403(b) contributions can be converted to a Roth very quickly. So I would be doing the mega Roth. I would not care what HR folks thought about this. I would be very happy to be the first person to get them to do this for employees. :)
Wiki This signature message sponsored by sscritic: Learn to fish.
Post Reply