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

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

Poll ended at Thu Jan 24, 2013 4:27 pm

Yes and it allows in-service rollovers of (non-Roth) after-tax contributions.
21
42%
Yes, but it doesn't allow in-service rollovers of (non-Roth) after-tax contributions.
2
4%
No, my 401k doesn't allow (non-Roth) after-tax contributions.
26
52%
My employer doesn't even have a 401k.
1
2%
 
Total votes : 50

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

Postby natureexplorer » Fri Oct 26, 2012 4:27 pm

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

Postby Default User BR » Fri Oct 26, 2012 4:34 pm

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


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

Postby peppers » Fri Oct 26, 2012 4:53 pm

Yes, my megaglobalcorp allows it after age 55.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby SpecialK22 » Fri Oct 26, 2012 4:56 pm

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

Postby interplanetjanet » Fri Oct 26, 2012 5:32 pm

natureexplorer wrote: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.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby mbres60 » Fri Oct 26, 2012 7:00 pm

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

Postby SteelyEyed » Fri Oct 26, 2012 10:30 pm

Mine does not, though I am working on getting both options added.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Default User BR » Fri Oct 26, 2012 11:53 pm

mbres60 wrote: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.


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

Postby THY4373 » Sat Oct 27, 2012 7:59 am

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

Postby mbres60 » Sat Oct 27, 2012 8:10 am

Default User BR wrote:
mbres60 wrote: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.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Flashes1 » Sat Oct 27, 2012 8:33 am

My megacorp doesn't.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby retiredjg » Sat Oct 27, 2012 8:39 am

Interesting poll. Even though I'm retired, I answered "no" for the TSP which does not allow after-tax contributions.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Default User BR » Sat Oct 27, 2012 9:55 am

mbres60 wrote: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.


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

Postby retiredjg » Sat Oct 27, 2012 10:51 am

mbres60 wrote: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.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby doug91 » Sat Oct 27, 2012 1:33 pm

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

Postby mbres60 » Sat Oct 27, 2012 3:38 pm

Thanks all. I'll check things out.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby tfb » Sat Oct 27, 2012 10:48 pm

interplanetjanet wrote: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.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Default User BR » Mon Oct 29, 2012 9:49 am

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


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

Postby mojorisin » Tue Mar 26, 2013 2:39 pm

Default User BR wrote:
mbres60 wrote: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.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Default User BR » Tue Mar 26, 2013 2:45 pm

mojorisin wrote: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.


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

Postby nimo956 » Tue Mar 26, 2013 3:14 pm

Default User BR wrote: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?
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Default User BR » Tue Mar 26, 2013 4:12 pm

nimo956 wrote: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.


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

Postby mojorisin » Tue Mar 26, 2013 10:21 pm

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. :sharebeer
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby hoppy08520 » Tue Mar 26, 2013 10:25 pm

No :x
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Default User BR » Tue Mar 26, 2013 11:54 pm

mojorisin wrote: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?


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Last edited by Default User BR on Wed Mar 27, 2013 12:36 pm, edited 1 time in total.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby EmergDoc » Wed Mar 27, 2013 12:10 am

retiredjg wrote: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.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby retiredjg » Wed Mar 27, 2013 9:16 am

EmergDoc wrote:
retiredjg wrote: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. :wink:

Just out of curiosity, was all of that $25k elective deferrals or did you get to go over the limit while deployed?
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby poundwise » Thu Apr 10, 2014 1:26 am

My 15 yr old MyMegaCorp does not. Envious of those who have this option -- max out while you have the chance!
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Tabaxus » Fri Aug 29, 2014 4:30 pm

Option not offered, sadly.

Edit: Not surprising, either. Law firm benefits are... not good. No match, either. And the monthly premiums for my $5,500 out of pocket per year HDHP, which doesn't cover my wife, is $200/month. Blech all around.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby guptamanav » Tue Jan 20, 2015 3:40 pm

I used to work for such a company recently that allowed pre-tax, post-tax, and Roth 401k contributions. Note that the pre-tax + Roth cannot exceed 17,500 (for 2014). So, I did the $17,500 pre-tax to get the tax deduction and then did the after-tax contributions to fill the gap between (pre-tax + employer contributions) and the IRS limit of $52k.

When I left the company, Fidelity, the plan administrator rollover the after-tax 401k contributions to a Roth IRA and the sum of (pre-tax + employer contributions + after-tax earnings) to a traditional IRA. I actually chose to rollover the latter to my new 401k instead of the traditional IRA to allow for the backdoor Roth contribution ($5,500) every year without paying taxes on my pre-tax traditional IRA.

It all worked out. let me know if you have questions and I am happy to walk you through the process.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Alan S. » Tue Jan 20, 2015 4:20 pm

It may take awhile for plans to adopt all the flexibility accorded by Notice 2014-54 and In Plan Roth rollovers:

1) IRR both distributable and non distributable amounts from the pre tax account to the designated Roth
2) Notice 2014-54 allows employee to determine destination account for pre tax and post tax amounts. Direct rollovers would send pre tax amount to a TIRA and post tax amount to a Roth IRA. This could be applied to the after tax sub account separately.
3) Plan could also allow an IRR from the after tax sub account, but the earnings would be taxable.
4) To eliminate the taxable earnings, a transfer of the contributions to the designated Roth and the earnings to the pre tax account would not only be non taxable, but the earnings would not be in your TIRA affecting the back door Roth approach.
5) Final option to develop might be the ability to transfer the after tax contributions to your Roth IRA and the earnings to the pre tax 401k account.

Along with the portability, consider the creditor protection exposures if your state does not protect IRAs from creditors. Also consider the investment restrictions your plan may have that you can improve on if the funds were in your IRA instead of the plan.

Back to the contribution options, does anyone have a plan that allows options 3-5 above?
Any plan that accepts non Roth after tax contributions by lump sum check rather than payroll deduction?
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby retiredjg » Tue Jan 20, 2015 4:33 pm

Alan S. wrote:5) Final option to develop might be the ability to transfer the after tax contributions to your Roth IRA and the earnings to the pre tax 401k account.

This would be a nice touch!


Any plan that accepts non Roth after tax contributions by lump sum check rather than payroll deduction?

I recall one poster saying s/he did this. Don't remember who it was.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Fallout » Tue Jan 20, 2015 8:04 pm

Alan S. wrote:Any plan that accepts non Roth after tax contributions by lump sum check rather than payroll deduction?

My plan with Fidelity allows this.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Tamales » Tue Jan 20, 2015 9:19 pm

Alan S. wrote:Any plan that accepts non Roth after tax contributions by lump sum check rather than payroll deduction?


Do you mean e.g. write a check from your bank/brokerage account, for deposit into the after-tax portion of your 401k account? That would be incredible. Are you saying the law allows this? It would be especially useful for cases where you have a significant % of assets in after tax accounts. What governs annual dollar limits on this?
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Fallout » Tue Jan 20, 2015 10:40 pm

Tamales wrote:Do you mean e.g. write a check from your bank/brokerage account, for deposit into the after-tax portion of your 401k account? That would be incredible. What governs annual dollar limits on this?


This is what I do. The limit is the $53,000 limit for defined contribution plans.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Bill M » Wed Jan 21, 2015 7:41 am

Alan S. wrote:3) Plan could also allow an IRR from the after tax sub account, but the earnings would be taxable.

My plan allowed this, and I used it to convert the entire sub account to Roth with only minor tax impact.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby retiredjg » Wed Jan 21, 2015 8:08 am

Fallout wrote:
Alan S. wrote:Any plan that accepts non Roth after tax contributions by lump sum check rather than payroll deduction?

My plan with Fidelity allows this.

Fallout, are you the person who said s/he makes a contribution on Friday and rolls it out to Roth on Monday/Tuesday when the money has posted? Sweet deal, by the way.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby Fallout » Wed Jan 21, 2015 9:32 am

retiredjg wrote:Fallout, are you the person ...

That wasn't me, but that is essentially what I do. It is a sweet deal and this late starter is happy to have it.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby retiredjg » Wed Jan 21, 2015 10:16 am

Sorry, I should have noticed you have not been around long enough to have posted that many months back. You are one lucky dude/dudette. :happy
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby ERISA Stone » Wed Jan 21, 2015 11:10 am

I thought it might be a useful tidbit here: after-tax (non-Roth) contributions are added to matching contributions for non-discrimination testing within a 401(k) plan - the ACP Test. The test is essentially this: take the average of the HCE contribution rate vs. the NHCE contribution rate, and (generally) the NHCE average must be within 2 percentage points of the HCE average. I believe the average matching contribution is around 3% nationally.

Now suppose, everyone in the company receives the 3% match - the test would pass since both averages would be 3%. Now add in an HCE who contributes an additional $25k as an after-tax contribution. If you are part of a large company, this probably doesn't have much of an effect since more HCE's would help push the contribution average closer to within 2% points of the NHCE average. However, if you are a small company (I think of 100 EEs or less when I use this term), it will probably cause you to fail the nondiscrimination test, and then refunds/forfeitures are due.

Most companies like to have an idea of how testing is going to look before the end of the year, and they do not like this possibility that one person could cause the test to fail. This is the primary reason employers prefer not to offer the after-tax contribution. The second reason is virtually no one uses this option. I estimate that I have administered or reviewed between 300-500 plans, and if I have ever had a participant make an after-tax (non-Roth) contribution, I don't remember it.

I see plenty of people on this website that use this feature. My assumption is most of them would be considered HCEs.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby retiredjg » Wed Jan 21, 2015 11:33 am

That's interesting. Thanks for sharing. I guess it also explains why some companies have a percentage limit on how much can go into the after-tax (non-Roth) account.

Interesting that you never saw such a contribution in that many plans!
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby ERISA Stone » Wed Jan 21, 2015 11:39 am

retiredjg wrote: Interesting that you never saw such a contribution in that many plans!


Seriously. Obviously people make the contribution based on postings on here. It's hard for me to fathom that even just a few plans didn't have them after joining this site.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby retiredjg » Wed Jan 21, 2015 11:45 am

ERISA Stone wrote:
retiredjg wrote: Interesting that you never saw such a contribution in that many plans!


Seriously. Obviously people make the contribution based on postings on here. It's hard for me to fathom that even just a few plans didn't have them after joining this site.

From what I remember a few years ago, many of the people who had this option never knew about it. Sometimes even their HR people didn't know, but they could find out by calling the plan directly or finding the magic words in the plan documents.

It is true this has been discussed a lot since you joined. Not so much in earlier years, at least that I remember.
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby LFT_PFT » Wed Jan 21, 2015 2:18 pm

The test is essentially this: take the average of the HCE contribution rate vs. the NHCE contribution rate, and (generally) the NHCE average must be within 2 percentage points of the HCE average. I believe the average matching contribution is around 3% nationally.


How is the contribution rate defined?

Is the contribution rate = (Employee Contribution + Employer Match + Non-ROTH After-Tax)

Also, if testing fails is there an order to the refund until testing compliance. ie after-tax first? If testing fails are there forfeitures of contributions or only refunds?
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Re: Does Your 401k Allow (Non-Roth) AFTER-TAX Contributions?

Postby ERISA Stone » Wed Jan 21, 2015 2:31 pm

LFT_PFT wrote:
The test is essentially this: take the average of the HCE contribution rate vs. the NHCE contribution rate, and (generally) the NHCE average must be within 2 percentage points of the HCE average. I believe the average matching contribution is around 3% nationally.


How is the contribution rate defined?

Is the contribution rate = (Employee Contribution + Employer Match + Non-ROTH After-Tax)

Also, if testing fails is there an order to the refund until testing compliance. ie after-tax first? If testing fails are there forfeitures of contributions or only refunds?


The ACP (Actual Contribution Percentage) rate used for the ACP Test is: (Employer Match + non-Roth Aftertax)/Plan Compensation (up to the max limit - I believe $265k for 2015). I'm not sure about the hierarchy for refunds/forfeitures. I believe it would be determined by the plan document, but from an employer perspective, I think you want it to come from after-tax (vs. match) first. If the ACP test fails, the correction is based on the vested percentage of the participant in question, if it's related to a matching contribution. The participant would receive a refund for the amount they would otherwise be vested. The remaining amount would be forfeited to the plan. Obviously, the after-tax contribution is 100% vested, so any refund would go back to the participant.

There is a separate test called the ADP test that tests the employee contributions - pre-tax and Roth. It is calculated the same way the ACP is calculated.
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