After tax contributions to a 401k

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Topic Author
durazno

After tax contributions to a 401k

Post by durazno »

I found out my employer allows in-service withdrawals and after tax contributions to my 401k. I'd read a little about this but am still not so sure how it works or if it would be beneficial to me. Can anyone point me to a good resource for this? I couldn't find anything on the wiki.

Thanks,
Iced Tea
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

Why to do it: you can increase your Roth holdings.
When to do it: if you have exhausted all other tax-advantaged investing.
How to do it: make the contributions, request a direct rollover, put the rollover in a Roth. Distributions of after-tax contributions will bring a share of taxable earnings, so it's recommended to do the rollovers as soon after contribution as is allowed and practical to reduce the possibility of tax.


Brian
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

Default User BR wrote:Why to do it: you can increase your Roth holdings.
When to do it: if you have exhausted all other tax-advantaged investing.
How to do it: make the contributions, request a direct rollover, put the rollover in a Roth. Distributions of after-tax contributions will bring a share of taxable earnings, so it's recommended to do the rollovers as soon after contribution as is allowed and practical to reduce the possibility of tax.


Brian

Thanks Brian. Are there ever instances for young investors (I'm 30) when this may not be the preferred approach, instead of investing the money in a taxable account? I understand that by moving more work earnings into the Roth (through the rollover) the money won't be accessible for years to come.

Iced Tea
gsmith
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Re: After tax contributions to a 401k

Post by gsmith »

icedtea wrote:Thanks Brian. Are there ever instances for young investors (I'm 30) when this may not be the preferred approach, instead of investing the money in a taxable account? I understand that by moving more work earnings into the Roth (through the rollover) the money won't be accessible for years to come.
- Death, for monies waiting for rollover, inheritor would be stuck with a non-deductible IRA with paperwork few executors would understand
- Gains before Rollover, Taxed as ordinary income
- Losses before Rollover, "basis" could be lost if you don't leave a few pennies left
- Management Risk: They can change the rules without warning.
- Management Fee/Check writing fee high enough to eat into savings
- Trustee Risk: It's my understanding be sending you 2 1099-R every year, for the rollover and gains, pray they calculate it right.
- Legislative Risk, though hopefully you could complete the rollover before the benefits were ended.
- Additional paperwork; many accountants aren't aware of these shenanigans.
- Company fails tests, resulting in a refund, (See Highly compensated employee)

From 401k
- You lose ERISA bankruptcy protection on rollover (IRAs are only up to a million, vs none for taxable),
- You lose Fund choices if they have a good selection.
- You could argue that your tax bracket today could be higher then Long term capital gains when you sell, but in taxable vs. After-tax, you're still paying fed/state income on the money you're sending to taxable.
the money won't be accessible for years to come.
Waiting 5 years after rollover for return of capital is nothing, compared to IRA/401k rules, especially if you plan to retire before 59 1/2.
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interplanetjanet
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Re: After tax contributions to a 401k

Post by interplanetjanet »

gsmith wrote:Waiting 5 years after rollover for return of capital is nothing, compared to IRA/401k rules, especially if you plan to retire before 59 1/2.
The five year "seasoning" rule only applies to portions of Roth conversions that are taxed - this is basically the gain in your 401k before rolling it into the Roth. If this is low then the penalty will be quite low as well.

Example: you contribute $10k after-tax to your 401k. It grows by 5% to $10.5k and then you roll it into your first Roth IRA (Fisher-Price's My First Retirement Account), paying taxes on $500. If you had to withdraw this money from the RIRA, you would pay a 10% fee on the first $500 to come out (ordering rules) and then nothing on the next $10k - $50 is not that bad of a price to pay. If you roll over before there is much gain at all then the penalty will be negligible.

If you put money into a RIRA beforehand, what portions are subject to penalty would depend on ordering rules. Direct contributions and backdoor Roth "contributions" would both give no penalty for immediate withdrawal.

-janet
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

I've been reading some other posts about this and I think I understand this approach overall. But I still have a few questions I could use some help with:

1. Comparing this to choosing to contribute to your taxable account instead (after maxing your pre-tax 401k and Roth, of course)

Sounds like choosing after tax contributions to your 401k beats taxable if you can convert the money to a Roth quickly, mitigating the taxes you pay on cap gains. So what do I need to ask my 401k provider exactly? Just how many in service withdrawals per year they allow to a Roth? If you're making the after tax contributions each pay check, then is the idea that you'd do these in service withdrawals as frequently as possible into a single Roth account, to minimize taxes? And if you can only do 1 withdrawal per year, then you just pay taxes on whatever gains you've accumulated through the year?

2. Once the money goes into the Roth, is it subject to the 10% penalty if you withdraw before 59 1/2? Still not clear on that. If that's the case, then it sounds like one needs to consider the following: How much of your money that you can invest do you think you'll need earlier in life?

Thanks,
Iced Tea
xerty24
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Re: After tax contributions to a 401k

Post by xerty24 »

The basic idea here is that

Roth > Taxable, almost always

Sure there are possible penalties for accessing Roth earnings earlier than retirement age, but for long term retirement funds you'd be giving up huge amounts in tax (~25% or so, after compounding, much more if you don't hold forever) holding your investments in a taxable account vs Roth.
icedtea wrote:So what do I need to ask my 401k provider exactly? Just how many in service withdrawals per year they allow to a Roth?
Ask what the rules are on in-service withdrawals. Any fees? Any limits on when or how many you can do?
If you're making the after tax contributions each pay check, then is the idea that you'd do these in service withdrawals as frequently as possible into a single Roth account, to minimize taxes? And if you can only do 1 withdrawal per year, then you just pay taxes on whatever gains you've accumulated through the year?
Do yourself and your custodian a favor and limit your in service withdrawals to preferably 1 per year. I would contribute a large amount (most of my paycheck) for as long as it took to hit my after-tax goal, and then would do the in-service withdrawal/Roth conversion. Yes, you would owe (ordinary) income taxes on any gains that resulted up to this point.
2. Once the money goes into the Roth, is it subject to the 10% penalty if you withdraw before 59 1/2?
The converted amount is not taxed or penalized if you withdraw it (taxes were already paid). Earnings would be subject to tax and penalty if withdrawn early and without a good excuse.
No excuses, no regrets.
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

I called ING (the plan admin) and here's what the representative had to say:

- I can contribute before and after tax to my 401k at each pay check for a total of up to $50k, which includes my pre tax contribution, the employer match, and my after tax contributions. The rep could not comment on if my contribution of $5k to my Roth IRA affects this limit. I believe it does not. Correct?

- I can make up to 3 in service withdrawals per year. There is no fee. The withdrawal comes as a check paid out to me. i have 60 days to roll it over into a Roth. I would pay income tax on any earnings calculated at the date the withdrawal is issued. ING would provide me with a 1099R form indicating what amount is taxable.

Would I want to roll the money into my existing Roth IRA or am I supposed to open a second one? My first is with Vanguard.

Sounds like I'm in the clear to go ahead with this. I had planned to invest roughly 15k in post-tax work earnings into my taxable this year. This is in addition to the 17k pre tax and 5k Roth. Any advice on if I should instead invest all of this 15k into my after tax 401k and move to a Roth at the end of 2012? I suppose it's the logical move given the tax benefit vs taxable.

I will shoot an email to my CPA as well in case she can chime in.

Thanks again,
Iced Tea
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

Iced Tea, you are one lucky dude/dudette!

No, the rollover does not count toward your $5k regular Roth IRA contribution. I don't think it matters it this money goes to your old Roth IRA or a new one.
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

icedtea wrote:i have 60 days to roll it over into a Roth.
It's generally better if they can do it as a direct rollover. That would be a check made out to the custodian, with a for-benefit-of designation in your name. See if they can do that.


Brian
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baa_10
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Re: After tax contributions to a 401k

Post by baa_10 »

icetea....

The instructions you got from ING are close to how my 401k plan/administrator works. As Brian suggested, I do a direct rollover to my Roth IRA. This is the same Roth IRA that I make my annual contributions into. I front load my after-tax contributions into my 401k plan early in the year and then rollover to my Roth IRA as quickly as I can.... helps limit the taxable earnings that your after-tax contributions earn prior to the rollover to your Roth IRA.

Brad
Simplicity is the ultimate sophistication. ~Leonardo DaVinci
AlexC
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Re: After tax contributions to a 401k

Post by AlexC »

Just wondering what kind of companies allow after tax 401k contributions. We have a 401k w/ Employee Fiduciary and they've told us after tax contributions are subject to top-heavy rules even though we have a safe harbor plan for the pre tax. It doesn't make sense to me why after tax contributions would be limited by the IRS using the same formula as pre tax top heavy rules. Do those able to make after tax contributions work for mega corps?
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

AlexC wrote:Do those able to make after tax contributions work for mega corps?
I do.

Brian
xerty24
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Re: After tax contributions to a 401k

Post by xerty24 »

AlexC wrote:Just wondering what kind of companies allow after tax 401k contributions. We have a 401k w/ Employee Fiduciary and they've told us after tax contributions are subject to top-heavy rules even though we have a safe harbor plan for the pre tax.
This is true - there is no safe harbor for after tax contributions. It is very likely HCE participation in an after tax plan could be severely limited or entirely prohibited by top heavy rules unless at least some NHCEs are participating also. Typically what is means is you need a very high average employee salary to make this work (or have no NHCEs).
No excuses, no regrets.
xerty24
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Re: After tax contributions to a 401k

Post by xerty24 »

icedtea wrote:- I can contribute before and after tax to my 401k at each pay check for a total of up to $50k, which includes my pre tax contribution, the employer match, and my after tax contributions. The rep could not comment on if my contribution of $5k to my Roth IRA affects this limit. I believe it does not. Correct?
Correct. Also note that you should "leave room" for whatever matching you might get, which might increase if you get a raise, etc, depending on the terms of your matching.
- I can make up to 3 in service withdrawals per year. There is no fee. The withdrawal comes as a check paid out to me. i have 60 days to roll it over into a Roth. I would pay income tax on any earnings calculated at the date the withdrawal is issued. ING would provide me with a 1099R form indicating what amount is taxable.
Do look into a "direct rollover", where the money is either sent to your IRA custodian directly or at least the check is made out to them FBO you, rather than to you directly.
Would I want to roll the money into my existing Roth IRA or am I supposed to open a second one? My first is with Vanguard.
Getting it eventually into your existing Roth is fine. Do note however that after tax money is NOT Roth money until you do a Roth conversion. The simplest thing is for your company to do a direct rollover and conversion, and then send the Roth check to either you or Vanguard. If they can't do this, you'll need to put the rollover funds into a tIRA first and then convert it to Roth (being aware this may have tax implications if you have other pretax IRAs). Its also possible that your plan might allow an in-plan Roth conversion of the after tax monies, which you could do prior to the outbound rollover. That would also avoid any of the accidental tax consequences I mentioned.
I had planned to invest roughly 15k in post-tax work earnings into my taxable this year. This is in addition to the 17k pre tax and 5k Roth. Any advice on if I should instead invest all of this 15k into my after tax 401k and move to a Roth at the end of 2012? I suppose it's the logical move given the tax benefit vs taxable.
Generally yes, since Roth is better than taxable. Do be aware of the tax implications I mentioned above if both 1) you can't do a direct conversion/rollover, and 2) you have significant pretax IRA balances that you do not wish to convert at this time.
No excuses, no regrets.
madbrain
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Re: After tax contributions to a 401k

Post by madbrain »

AlexC wrote:Just wondering what kind of companies allow after tax 401k contributions. We have a 401k w/ Employee Fiduciary and they've told us after tax contributions are subject to top-heavy rules even though we have a safe harbor plan for the pre tax. It doesn't make sense to me why after tax contributions would be limited by the IRS using the same formula as pre tax top heavy rules. Do those able to make after tax contributions work for mega corps?
I worked at a megacorp for 2 years when I was able to make after-tax contributions. There was no HCE restriction.
The match was fully vested from the start, and was for both pre-tax and after-tax contributions.

I work for an even bigger megacorp now, but its 401k plan doesn't allow after-tax contributions.
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

madbrain wrote:The match was fully vested from the start, and was for both pre-tax and after-tax contributions.
Can after-tax contributions have a match? I don't think so, but I'm not positive.

Is it possible you mean your designated Roth contributions were matched? They are not the same thing.
xerty24
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Re: After tax contributions to a 401k

Post by xerty24 »

retiredjg wrote:
madbrain wrote:The match was fully vested from the start, and was for both pre-tax and after-tax contributions.
Can after-tax contributions have a match? I don't think so, but I'm not positive.

Is it possible you mean your designated Roth contributions were matched? They are not the same thing.
Either can be matched, bur of course the match is pretax regardless of the type of contributions you make to earn the match.
No excuses, no regrets.
egghead
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Re: After tax contributions to a 401k

Post by egghead »

My 401k (also ING plan administrator) matches on pretax and/or aftertax contributions. They do not match on 50+ catch-up contribution.
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

Ok. I was skeptical, so I went in search for more info. I think you guys are right!

I learned something else - the words "employee contribution" don't mean what I thought!

"Employee contribution" actually means an after-tax contribution to a 401k (or more specifically the 401(m) plan). What I thought was "employee contribution" is actually "elective contribution" which can be pre-tax or designated as a Roth contribution. It is the elective contributions that are subject to the $17k annual limit this year. Employee contributions are subject to the $50k limit.

Anyway, here is an old reference, but I suspect the definitions have not changed. http://www.irs.gov/pub/irs-tege/matching.pdf See the definitions on page 3. It also clearly states "Matching contributions” are employer contributions made to a defined contribution plan on account of an employee’s employee contributions or elective contributions."

To understand, you have to know that "employee contributions" means after-tax contributions, not elective contributions. It would be so much easier if they were just named "Wilber contributions" or something.

The things we learn here just amaze me every day.
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

Thanks all. Incredibly helpful.

I'll check the following with my 401k administrator:

- Do they offer direct rollover?

- Does my employer offer the match on after tax contributions? I think they do

If all goes well, I was thinking of this approach:

- Increasing my pre tax 401k contribution so that I contribute the 17k max by around mid-year

Then, once I reach the 17k max pre tax, contributing exclusively to after tax as much as i can (taking into account the 17k and employer match, any raise I may get, etc.)

This way, I'll back-load the after tax in the last 6 months of the year to mitigate the taxable gains. I can do up to 3 in service withdrawals per year but it sounds like doing one at the very end of the year would work fine. I'm guessing it's essential I do the rollover before 12/31?

Thanks,
Iced Tea
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

icedtea wrote:- Increasing my pre tax 401k contribution so that I contribute the 17k max by around mid-year
This could backfire. Ask if you get your full match if you do it this way. Sometimes, the full match only happens if you contribute from each paycheck.
I'm guessing it's essential I do the rollover before 12/31?
I don't see why that would be essential (other than you lose your 3 rollovers for the year). If you rollover before 12/31 whatever gets taxed will get taxed for that tax year. If you don't rollover until January, whatever is taxable will be taxed in the next tax year.
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

retiredjg wrote:
icedtea wrote:- Increasing my pre tax 401k contribution so that I contribute the 17k max by around mid-year
This could backfire. Ask if you get your full match if you do it this way. Sometimes, the full match only happens if you contribute from each paycheck.
I'm guessing it's essential I do the rollover before 12/31?
I don't see why that would be essential (other than you lose your 3 rollovers for the year). If you rollover before 12/31 whatever gets taxed will get taxed for that tax year. If you don't rollover until January, whatever is taxable will be taxed in the next tax year.
Point 1 above - Right, I'd only do this if I got the match for just contributing after tax.

Point 2 above - Ah ok, thanks for clarifying that. Makes sense.
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

[quote="retiredjg"Can after-tax contributions have a match?/quote]
Yes. My company does that.


Brian
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

Default User BR wrote:
retiredjg wrote:Can after-tax contributions have a match?
Yes. My company does that. Brian
Hard to believe, but I'm a believer!
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

I spoke with another ING rep and her info was quite different. She said my plan offers hardship withdrawals only. Otherwise, one can't make a withdrawal till after they leave the company. She said hardship withdrawals are checks made directly to the employee, which cannot be rolled over into a Roth. So I guess I was not fully informed by the other rep, and this after tax --> Roth approach isn't going to work for me after all.

She did say after tax contributions get the match.

-Iced Tea
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

So how can you know which one to believe?

Without the ability to rollout to Roth IRA or convert to Roth 401k, after tax contributions seem to be nothing more than a supersized non-deductible IRA. Unless you desperately need tax-advantaged space, I'm not sure it is a good idea.
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

retiredjg wrote:So how can you know which one to believe?

Without the ability to rollout to Roth IRA or convert to Roth 401k, after tax contributions seem to be nothing more than a supersized non-deductible IRA. Unless you desperately need tax-advantaged space, I'm not sure it is a good idea.
Haha, good question. They're sending me some documentation in the mail, so I'll have to see what it says.

I agree, if I can't do a rollover to a Roth while I'm with the company, it's not going to be advantageous. I might as well stick to my original plan of maxing pretax 401k, maxing Roth and investing in my taxable.

I'll post when I get the documentation.
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

retiredjg wrote:
Default User BR wrote:
retiredjg wrote:Can after-tax contributions have a match?
Yes. My company does that. Brian
Hard to believe, but I'm a believer!
Why? They're still contributions. One guy I know makes all after-contributions.


Brian
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

icedtea wrote:I spoke with another ING rep and her info was quite different. She said my plan offers hardship withdrawals only. Otherwise, one can't make a withdrawal till after they leave the company. She said hardship withdrawals are checks made directly to the employee, which cannot be rolled over into a Roth. So I guess I was not fully informed by the other rep, and this after tax --> Roth approach isn't going to work for me after all.

She did say after tax contributions get the match.
I would press the issue. Ask to see the relevant plan documents.


Brian
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

Called again and the third agent said I can make the in service withdrawals from after tax contributions. She said ING would be able to write the check to the institution holding my Roth (in my case, Vanguard) on my behalf but that they'd only mail the check to me. The agent said this information isn't probably written out in the documentation they're mailing me. Can I believe this third agent is telling the whole truth and move on? She said no one had ever asked her about doing a rollover before with after tax money as an in service withdrawal, so she had to do some research on the matter.

If this is all true, then would I just mail the check to Vanguard myself to add the money to my Roth?
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

Default User BR wrote:Why? They're still contributions. One guy I know makes all after-contributions. Brian
Probably because the whole concept is so new to me. :lol:
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

icedtea wrote:Called again and the third agent said I can make the in service withdrawals from after tax contributions. She said ING would be able to write the check to the institution holding my Roth (in my case, Vanguard) on my behalf but that they'd only mail the check to me. The agent said this information isn't probably written out in the documentation they're mailing me. Can I believe this third agent is telling the whole truth and move on? She said no one had ever asked her about doing a rollover before with after tax money as an in service withdrawal, so she had to do some research on the matter.
That sounds pretty typical. My plan does it that way as well. As this agent actually researched, I would say that it's probably accurate. The next step is to request the distribution.


Brian
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

Default User BR wrote:
icedtea wrote:Called again and the third agent said I can make the in service withdrawals from after tax contributions. She said ING would be able to write the check to the institution holding my Roth (in my case, Vanguard) on my behalf but that they'd only mail the check to me. The agent said this information isn't probably written out in the documentation they're mailing me. Can I believe this third agent is telling the whole truth and move on? She said no one had ever asked her about doing a rollover before with after tax money as an in service withdrawal, so she had to do some research on the matter.
That sounds pretty typical. My plan does it that way as well. As this agent actually researched, I would say that it's probably accurate. The next step is to request the distribution.


Brian
Well, I haven't started contributing after tax so that'll have to come first :) Is there anything else I can do to verify this is all do-able in my 401k or do I just need to go with it? Sounds like I won't see all of this confirmed in the written documentation.

My plan is to boost my pre tax contribution so I reach the 17k limit in mid-year, and then switch over to contributing after tax. I just want to be sure this will all work.

Thanks Brian for the comments throughout my post.

-Iced Tea
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

It's a contract so it has to be documented somewhere. You just have to be persistent until you get those folks educated. :lol:

I too believe the 1st and 3rd reps must be correct because this is just not an easy mistake to make - saying the roll/convert is allowed. It would be easier (in my mind anyway) to make a mistake the other way - assuming after tax and roll/convert to Rothness is not allowed.

I would definitely give it a trial run - put in $1000 and then start the mechanism to move it or convert it. I would do this trial run now, not later. I suspect you may be on the phone a lot. Hope you are keeping records of who is telling you what! :lol
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

retiredjg wrote:It's a contract so it has to be documented somewhere. You just have to be persistent until you get those folks educated. :lol:

I too believe the 1st and 3rd reps must be correct because this is just not an easy mistake to make - saying the roll/convert is allowed. It would be easier (in my mind anyway) to make a mistake the other way - assuming after tax and roll/convert to Rothness is not allowed.

I would definitely give it a trial run - put in $1000 and then start the mechanism to move it or convert it. I would do this trial run now, not later. I suspect you may be on the phone a lot. Hope you are keeping records of who is telling you what! :lol
Good idea. Since I get up to 3 in service withdrawals a year supposedly, then trying it once after just a single contribution couldn't hurt.
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

Related question to this thread - why would someone benefit from making after tax contributions to a 401k if they planned on keeping the money in their 401k until they left their company? In which cases would this be more advantageous than just investing in a taxable account?

Thanks,
Iced Tea
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

Someone in desperate need for tax-advantaged space might find it useful. Maybe someone who wants 70% bonds or something?
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tfb
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Re: After tax contributions to a 401k

Post by tfb »

icedtea wrote:why would someone benefit from making after tax contributions to a 401k if they planned on keeping the money in their 401k until they left their company? In which cases would this be more advantageous than just investing in a taxable account?
When they are young and they don't plan to stay with the company for more than a few years. If a plan doesn't allow in-service withdrawals, those contributions will still go to Roth after a few years. After that, all growth will be tax free -- beats taxable account.
Harry Sit has left the forums.
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

tfb wrote:
icedtea wrote:why would someone benefit from making after tax contributions to a 401k if they planned on keeping the money in their 401k until they left their company? In which cases would this be more advantageous than just investing in a taxable account?
When they are young and they don't plan to stay with the company for more than a few years. If a plan doesn't allow in-service withdrawals, those contributions will still go to Roth after a few years. After that, all growth will be tax free -- beats taxable account.
I wonder if anyone has ever done an analysis from when you break even between after tax with no in service withdrawals and taxable. Ie. how many years can you work for one company and contribute after tax before it becomes better to have just invested in taxable. It seems most people on this forum invest in taxable. I'm sure many of our 401k's don't offer after tax contributions but for those whose plans do but you're not taking advantage of it, why? I'm still learning about all of this stuff so I only ask out of curiosity. Perhaps I should start a poll...

I'm planning to do a test run with my 401k and an in service withdrawal, but I want to get the paperwork from ING first. Any day now...

-Iced Tea
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

I finally got the documentation from ING about my 401k. It states that in service withdrawals are allowed but it doesn't state how many withdrawals are allowed per year.

From the documentation:

There are two types of withdrawals; “Non-Hardship Withdrawals” and “Hardship Withdrawals”.
Both types of withdrawals are subject to certain restrictions and are limited by IRS rules.
NON-HARDSHIP WITHDRAWALS
You may make non-hardship withdrawals on the following:
• If you are age 59 ½ or older – the entire vested value of your RE 401(k) account.
• If you are under age 59 ½ - Traditional after-tax contributions and Rollover contributions, as
well as any gains on those contributions.
You can request a non-hardship withdrawal by going to the website or using the RE 401(k)
Information Line. You will be mailed a check from your RE 401(k) account within several days of
the time you apply for the withdrawal through the website or the RE 401(k) Information Line.
Please see the Special Tax Rules section for important tax information about non-hardship
withdrawals.

-----

It also doesn't state if there's a cap on how much you can contribute between pre-tax and after tax. It does say:

You can choose to contribute from 1% to 75% of your pay, subject to annual IRS dollar limits. You can
make your contributions as before-tax, traditional after-tax, Roth 401(k) after-tax or in any combination.

-----

It also has info in the back about Special Tax Rules, as follows:

Plan Withdrawals and Distributions
In general - The taxable portion of a distribution (before-tax contributions, Company matching
contributions, rollover contributions and all investment earnings on those contributions and any
investment earnings on traditional after-tax contributions) will, in general, be subject to ordinary
income taxes. In addition, any taxable amount you receive before age 59½ that is not due to your
death, disability, payment of tax-deductible medical expenses, or separation from service after
you have attained age 55 will be subject to a 10% penalty tax.

Plan Withdrawals and Distributions – (The 10% penalty does not apply to distributions made
to comply with Qualified Domestic Relations Orders “QDROs”.) These same rules apply to
distributions based on financial hardship. Federal income tax rules also require that Federal income tax be withheld at a rate of 20% on all
cash distributions and withdrawals eligible for rollover to an Individual Retirement Account (an
"IRA") or a subsequent employer's tax-qualified plan, unless the distribution is payable to an IRA
or a subsequent employer's tax-qualified plan (see "Rollovers" below).

If the participant chooses to have the Plan pay the distribution or withdrawal to the participant, the
participant will receive only 80% of the taxable portion of the distribution, because the Plan
administrator is required to withhold 20% of the taxable portion of the distribution and send it to
the IRS as income tax withholding to be credited against the participant's income taxes in the
year in which such taxes are withheld. The participant can roll over the remaining 80% of the 30
payment by paying it to the participant's IRA or to another employer's tax-qualified plan that
accepts rollovers. This payment must be made within 60 days of receiving the distribution. The
amount rolled over will not be taxed until it is distributed from the IRA or other employer's plan.
The participant will be taxed on the 20% portion of the distribution that was withheld and not
rolled over and may also be subject to the 10% early withdrawal tax described above on such
amounts withheld.

If the participant wants to roll over 100% of the taxable portion of a distribution to an IRA or
subsequent employer's tax-qualified plan, the participant must find other money to replace the
20% that was withheld. In this case, the 20% withheld will be eligible for refund after filing of the
participant's tax return and none of the amount rolled over will be taxed until distributed from the
IRA or subsequent employer's plan.

-----

What does the above mean exactly? Am I subject to a penalty tax if I do an inservice withdraw of after tax contributions, get paid out in a check directly paid to me, then roll the money into my Roth IRA at Vanguard? I will try to call ING again but I'm not sure I'll get the answers there.

I haven't made any after tax contributions to my 401k yet. Just trying to sort all this out first.

Thanks,
Iced Tea
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interplanetjanet
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Re: After tax contributions to a 401k

Post by interplanetjanet »

icedtea wrote:I wonder if anyone has ever done an analysis from when you break even between after tax with no in service withdrawals and taxable. Ie. how many years can you work for one company and contribute after tax before it becomes better to have just invested in taxable.
This depends on your tax bracket during withdrawal and the amount of gain before and after the conversion. None of these factors is known with certainty when you start making contributions.

I think that it's highly likely that if you will not be at your job more than the majority of your remaining preretirement years, after tax 401k contributions (rolled over to Roth and Traditional plans upon separation) make sense. I would have no qualms about making them, but I have never stayed at the same job for 10+ years.

-janet
FB01
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Re: After tax contributions to a 401k

Post by FB01 »

Can anyone please explain me..who can do after tax 401K...

1) Called Vanguard and they said..it is only self employed or business owners
2) I see that here some people who work in mega corps...are able to do so..how so...

I do not work for mega corp but would like do after tax 401K...is there any way..

Thanks,
FB
Thanks, | FB
cliffedelgado
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Re: After tax contributions to a 401k

Post by cliffedelgado »

FB01 wrote:Can anyone please explain me..who can do after tax 401K...

1) Called Vanguard and they said..it is only self employed or business owners
2) I see that here some people who work in mega corps...are able to do so..how so...

I do not work for mega corp but would like do after tax 401K...is there any way..

Thanks,
FB
It depends on your employer's 401k plan. Check in the plan documents.
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retiredjg
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Re: After tax contributions to a 401k

Post by retiredjg »

icedtea wrote:What does the above mean exactly? Am I subject to a penalty tax if I do an inservice withdraw of after tax contributions, get paid out in a check directly paid to me, then roll the money into my Roth IRA at Vanguard?
No, I don't think so.

Any penalty, if any actually applies (and I'm not sure it does), would be only for the amount they have to withhold for taxes and then only if you did not make up that amount when you put the money into tIRA/Roth IRA.

This (if it applies) would be avoided if you have the check either sent directly to the new custodian or if you have the check made out to the new custodian instead of yourself.
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

FB01 wrote:Can anyone please explain me..who can do after tax 401K...

1) Called Vanguard and they said..it is only self employed or business owners
2) I see that here some people who work in mega corps...are able to do so..how so...

I do not work for mega corp but would like do after tax 401K...is there any way..
After-tax contributions are a feature allowed by but not required of 401(k) plans. If your employer does not provide this feature, then most likely you are out of luck. I don't recall anyone identifying a solo 401(k) provider that has this. Even if you found one, it would be for self-employment or a sole-proprietor business, or something of that nature.


Brian
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

icedtea wrote:What does the above mean exactly? Am I subject to a penalty tax if I do an inservice withdraw of after tax contributions, get paid out in a check directly paid to me, then roll the money into my Roth IRA at Vanguard? I will try to call ING again but I'm not sure I'll get the answers there.
It means that if you don't replace the withheld taxes, you'll owe penalty and taxes on that amount. You'll later recover the tax on your return. What you want to do is see if they will do a direct rollover, that is make the check out to the receiving institution with a for-benefit-of designation in your name. Then taxes don't need to be withheld at all. At any rate, the amount of withheld tax should be small, as almost all the money is non-taxable.


Brian
Topic Author
durazno

Re: After tax contributions to a 401k

Post by durazno »

Default User BR wrote:
icedtea wrote:What does the above mean exactly? Am I subject to a penalty tax if I do an inservice withdraw of after tax contributions, get paid out in a check directly paid to me, then roll the money into my Roth IRA at Vanguard? I will try to call ING again but I'm not sure I'll get the answers there.
It means that if you don't replace the withheld taxes, you'll owe penalty and taxes on that amount. You'll later recover the tax on your return. What you want to do is see if they will do a direct rollover, that is make the check out to the receiving institution with a for-benefit-of designation in your name. Then taxes don't need to be withheld at all. At any rate, the amount of withheld tax should be small, as almost all the money is non-taxable.


Brian
Thanks. ING had said they can issue the check to Vanguard on my behalf, but they will only send the check to me. Would that be enough to avoid the withheld taxes?

I'm not sure what you mean by replacing the withheld tax. How do you do that?

I'm going to try calling ING again to confirm the 3 in service withdrawals a year. My plan is to test a withdrawal on a single contribution, to make sure it works out. But I want to be sure I can do more than 1 withdrawal a year first.
Default User BR
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Re: After tax contributions to a 401k

Post by Default User BR »

icedtea wrote:Thanks. ING had said they can issue the check to Vanguard on my behalf, but they will only send the check to me. Would that be enough to avoid the withheld taxes?
Yes, that's very common. You probably need to indicate on the withdrawal form that you don't want any withholding.
icedtea wrote:I'm not sure what you mean by replacing the withheld tax. How do you do that?
You take a distribution with $1000 taxable. They withhold $200 for taxes. When you do the rollover, take $200 from your savings and add it to the amount they sent and do the rollover. You get the original back when you file your taxes. Try to avoid that.


Brian
gsmith
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Re: After tax contributions to a 401k

Post by gsmith »

The document you should ask for is the "Summary Plan Document", and possibly the Organizing Documents themselves.
At the company I work for, HR has a binder for 401k audits with checkmark boxes describing the various restrictions they chose to place on funds.

In our case, adding after-tax+in-service distributions was an forwarding to the VP an email exchange our 401k rep highlighting that this would be a massive benefit that would cost nothing to implement. Sadly, I think I'm the only one taking advantage of it.

For my $25 fee, I got a check made out to Charles Schwab with no taxes withheld, and a get a letter from the trustee telling me this was after tax.
I expect 2 1099-Rs. One for the $100 earnings, and the other showing the rollover.
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