Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

[natureexplorer]

Does your 401k allow (non-Roth) after-tax contributions?

If yes, does it allow in-service rollover of (non-Roth) after-tax 401k contributions?


I am trying to understand how common these features are. I am particularly interested in the responses from people working for big companies. Are there any big companies (say Fortune 1000) that don't have these features?

[Default User BR]

You need an option for, "I don't know, I never checked".


Brian

[peppers]

Yes, my megaglobalcorp allows it after age 55.

[SpecialK22]

In addition to allowing after-tax in-service distributions, my employer's plan also allows in-plan conversion of after-tax or pre-tax to Roth. Anyone else allowed something similar?

[interplanetjanet]

I am trying to understand how common these features are. I am particularly interested in the responses from people working for big companies. Are there any big companies (say Fortune 1000) that don't have these features?

In my experience, it's been mostly older companies that offer after-tax contributions. I work for a relatively new (15y old) Fortune-500 that does not, but used to work for several old and venerable ones that did. Newer plans seem to mostly offer Roth 401k options and seem to think that takes away the need to consider after-tax 401k contributions.

What I would love to hear is if anyone has found a "solo" or similar low-cost/small-scale 401k provider that offers them.

[mbres60]

Mine does. I have been contributing for many many years. Unfortunately it wasn't til recently that I read that I should have taken out and rolled over my money into a roth ira. Actually I may have been contributing since before Roth's. At this point I have a lot of gains which will all be taxable.

the company I work for is a Fortune 500 company and does allow in-service rollovers.

[SteelyEyed]

Mine does not, though I am working on getting both options added.

[Default User BR]

Mine does. I have been contributing for many many years. Unfortunately it wasn't til recently that I read that I should have taken out and rolled over my money into a roth ira. Actually I may have been contributing since before Roth's. At this point I have a lot of gains which will all be taxable.

the company I work for is a Fortune 500 company and does allow in-service rollovers.

Check to see if the plan accepts rollovers from IRAs. If so, then if you don't have any other taxable IRAs, roll out the after-tax amount to a TIRA and roll the earnings back in.


Brian

[THY4373]

I answered the poll for my plan which allows both after tax contribs and in-service rollovers for said contribs. I did not answer for wife's plan but hers does not allow either. Interplanetjanet might be right on her theory of "older" organizations tending to support both as my company is very "old school" when it comes to benefits (it has also been around a 100 years).

[mbres60]

Mine does. I have been contributing for many many years. Unfortunately it wasn't til recently that I read that I should have taken out and rolled over my money into a roth ira. Actually I may have been contributing since before Roth's. At this point I have a lot of gains which will all be taxable.

the company I work for is a Fortune 500 company and does allow in-service rollovers.

Check to see if the plan accepts rollovers from IRAs. If so, then if you don't have any other taxable IRAs, roll out the after-tax amount to a TIRA and roll the earnings back in.


Brian

I am unclear about what you are suggesting. As an fyi -My 401k is with Vanguard and I have access to Signal funds and Institutional funds so costs are lower than if I were to do an inservice withdrawal and open up my own IRA with them. I have Roth IRAs on my own but a couple of years ago I inherited a traditional IRA from my father. It is titled as an inherited IRA. Will I not be able to rollover my aftertax contributions to a Roth? I figure I will probably retire in about 1.5-2 years.

Edit to add: My dh retired from federal government and even though he had a tIRA he was able to rollover his voluntary contributions (similar to an after tax contribution) to a Roth.

[Flashes1]

My megacorp doesn't.

[retiredjg]

Interesting poll. Even though I'm retired, I answered "no" for the TSP which does not allow after-tax contributions.

[Default User BR]

I am unclear about what you are suggesting. As an fyi -My 401k is with Vanguard and I have access to Signal funds and Institutional funds so costs are lower than if I were to do an inservice withdrawal and open up my own IRA with them. I have Roth IRAs on my own but a couple of years ago I inherited a traditional IRA from my father. It is titled as an inherited IRA. Will I not be able to rollover my aftertax contributions to a Roth? I figure I will probably retire in about 1.5-2 years.

My understanding is that inherited IRAs do not participate in pro-rata calculations for Roth conversion. See this prior discussion: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=99336

What I am suggesting is to take distribution of the after-tax contributions, which will bring the taxable earnings as well. Roll the funds to a traditional IRA. Do a rollover back to the 401(k) of an amount equal to the earnings. There is a special rule that forbids rolling non-taxable amounts into a qualified plan, so there is an explicit exception to the pro-rata distribution rule. Then the TIRA has only non-taxable basis left in it, and you convert that to Roth with no tax due.

It's actually a bit easier to do the conversion first and the rollover into the 401(k) second. It makes things more precise, as you know the basis amount exactly, then you roll the entire remaining portion. It doesn't really matter as long as the taxable amount in participating IRAs is 0 on 12/31 of the year in which the conversion is done.


Brian

[retiredjg]

As an fyi -My 401k is with Vanguard and I have access to Signal funds and Institutional funds so costs are lower than if I were to do an inservice withdrawal and open up my own IRA with them.... Will I not be able to rollover my aftertax contributions to a Roth? I figure I will probably retire in about 1.5-2 years.

You need to find out.

I have read about one poster's experience that when you retire, the 401k people can roll the after-tax money to Roth IRA and the pre-tax money to tIRA. Edit: I'm not positive this is correct, but that poster seemed to think so.

Doing this before you retire is difficult (many steps and many moving parts) and there are questions about the legality of doing it that way.

So I'm thinking you need to get with your HR people or do your own research so you'll know what is going to happen and what your choices are. Or do what Brian is saying which we know (from his experience) works, if your plan allows you to roll IRA money into the 401k.

Your question is about staying put to get the lower cost Signal shares. Not a bad idea, but it also may mean more earnings that will eventually get taxed. Hard to say which is better choice.

[doug91]

Interesting poll - that's way less common than I'd inferred from the number of posters here who talk about it (and from the three older, Fortune 1000 companies that I've been at that allowed it, although I didn't understand it well enough to take advantage of it until last year). Definitely something I'll have to keep an eye out for if I'm on the job market again - I sure like the fact that mine has it (and has in-service withdrawals).

[mbres60]

Thanks all. I'll check things out.

[tfb]

In my experience, it's been mostly older companies that offer after-tax contributions. I work for a relatively new (15y old) Fortune-500 that does not, but used to work for several old and venerable ones that did. Newer plans seem to mostly offer Roth 401k options and seem to think that takes away the need to consider after-tax 401k contributions.

This is true. Before safe harbor rules came out, older plans used after-tax contributions as a spill-over for HCEs. Instead of returning contributions from HCEs when the plan ran into problems with nondiscrimination testing, the plan would reclassify the contributions as after-tax. Or it would limit the pre-tax contributions but allow additional contributions after tax. Newer plans use safe harbor rules to avoid nondiscrimination testing. Accepting after-tax contributions would run counter to avoiding nondiscrimination testing. Older plans that accepted after-tax contributions still do because it would be too much trouble to get rid of them.

[Default User BR]

I'm surprised at the numbers so far, although I think the poll is badly flawed due to an excluded option.


Brian

[mojorisin]

I am unclear about what you are suggesting. As an fyi -My 401k is with Vanguard and I have access to Signal funds and Institutional funds so costs are lower than if I were to do an inservice withdrawal and open up my own IRA with them. I have Roth IRAs on my own but a couple of years ago I inherited a traditional IRA from my father. It is titled as an inherited IRA. Will I not be able to rollover my aftertax contributions to a Roth? I figure I will probably retire in about 1.5-2 years.

My understanding is that inherited IRAs do not participate in pro-rata calculations for Roth conversion. See this prior discussion: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=99336

What I am suggesting is to take distribution of the after-tax contributions, which will bring the taxable earnings as well. Roll the funds to a traditional IRA. Do a rollover back to the 401(k) of an amount equal to the earnings. There is a special rule that forbids rolling non-taxable amounts into a qualified plan, so there is an explicit exception to the pro-rata distribution rule. Then the TIRA has only non-taxable basis left in it, and you convert that to Roth with no tax due.

It's actually a bit easier to do the conversion first and the rollover into the 401(k) second. It makes things more precise, as you know the basis amount exactly, then you roll the entire remaining portion. It doesn't really matter as long as the taxable amount in participating IRAs is 0 on 12/31 of the year in which the conversion is done.


Brian

I have a 401k plan which allows post tax, and transfer to an IRA. However I already do a "back door roth" in my and wife's accounts - $5k in each traditional then roll over to our Roth. Are you stating that I can conduct a 401k after tax conversion into a Roth IRA as well? I can contribute up to 7% so that would be a big deal!

Would like to understand this scenario more. Thanks.

[Default User BR]

I have a 401k plan which allows post tax, and transfer to an IRA. However I already do a "back door roth" in my and wife's accounts - $5k in each traditional then roll over to our Roth. Are you stating that I can conduct a 401k after tax conversion into a Roth IRA as well? I can contribute up to 7% so that would be a big deal!

Would like to understand this scenario more. Thanks.

Yes. As always, rollovers are independent of contributions. If starting fresh, you make your after-tax non-Roth contributions to the 401(k), request a rollover distribution, then send it to your Roth. Assuming that the earnings are minor, the tax due will be negligible. This will not affect your backdoor Roth.

If you had accumulated after-tax contributions for a while, so that the earnings were significant, you could roll the distribution to a TIRA and roll the earnings back. Then you'd convert the remainder. Most people find going directly to Roth preferable, even if they pay a few dollars in tax.


Brian

[nimo956]

If starting fresh, you make your after-tax non-Roth contributions to the 401(k), request a rollover distribution, then send it to your Roth. Assuming that the earnings are minor, the tax due will be negligible. This will not affect your backdoor Roth.

I'm starting fresh and will be employing this strategy. What is the actual procedure you have to follow to do it correctly? I envision the company that handles my 401k misunderstanding what I say and sending me a check for the whole amount! Can I send the rollover amount directly to my Roth IRA, or does it need to go to a traditional IRA first before it can be converted?

[Default User BR]

I'm starting fresh and will be employing this strategy. What is the actual procedure you have to follow to do it correctly? I envision the company that handles my 401k misunderstanding what I say and sending me a check for the whole amount! Can I send the rollover amount directly to my Roth IRA, or does it need to go to a traditional IRA first before it can be converted?

The exact procedure will be up to your company. At MyMegaCorp, I request a distribution using the forms provided. If using the online forms, you select which of the available funds you wish to distribute. A single distribution must be all from one of the categories. For after-tax, it is an option to do a direct rollover. When that is selected, there is a spot for the receiving institution information. MyMegaCorp will generate a check made out to the new custodian, FBO the employee name, and sent to the address of record for the employee. After that, it is forwarded to the new custodian with instructions.

The rollover can go to the Roth directly. In fact, it's best to do so if taxes aren't an issue.


Brian

[mojorisin]

Wow, this is quite amazing. So if I'm adding $15k annual as "after tax" 401k contributions I could "roll over" that $15k into my existing ROTH IRA? Very cool. I'll be calling FIDO tomorrow to jump on this.

Great info.

[hoppy08520]

No

[Default User BR]

Wow, this is quite amazing. So if I'm adding $15k annual as "after tax" 401k contributions I could "roll over" that $15k into my existing ROTH IRA? Very cool. I'll be calling FIDO tomorrow to jump on this.

If your employer plan allows it, then yes. You could theoretically do up to 51k - your elective deferrals - any employer contributions. So if you contributed 17,500 pre-tax and got a 5% employer match for 875, you could contribute up to 32,625 after-tax and roll it out to a Roth. [edit: originally the numbers showed a very generous 50% match, rather than the 5% indicated]

Again, that's assuming your employer allows you to contribute that much. MyMegaCorp restricts contributions to 25% of salary, so I don't get close to the full benefit. I do add a nice extra chunk each year though.

Like many things, I wish I'd known of it sooner, but what can you do?


Brian

[EmergDoc]

Interesting poll. Even though I'm retired, I answered "no" for the TSP which does not allow after-tax contributions.

Sure it does, when you're active duty and deployed. I contributed a tax-exempt $25K during one deployment, then rolled it out to a Roth (in a complicated manner) upon leaving the service.

[retiredjg]

Interesting poll. Even though I'm retired, I answered "no" for the TSP which does not allow after-tax contributions.

Sure it does, when you're active duty and deployed. I contributed a tax-exempt $25K during one deployment, then rolled it out to a Roth (in a complicated manner) upon leaving the service.

Not exactly the same thing I don't think, but...I guess that's sort of correct.

Just out of curiosity, was all of that $25k elective deferrals or did you get to go over the limit while deployed?