After Tax 401K Contribution

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After Tax 401K Contribution

Postby paulsiu » Sun Jan 02, 2011 6:12 am

While reviewing my year end 401K contribution, I realized I misread the before tax limit and end up with several hundred dollars of after tax contribution. So I was wondering:

1. Are there side-effects to this? I Imagine this is going to be fun when I withdraw. I wonder why they don't separate it into different accounts, so I can track before and after tax.

2. What can I do with the after tax return? Can I convert it to a 401K Roth?

3. How do you track before and after tax in software like Quicken or Moneydance?

Thanks.

Paul
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Re: After Tax 401K Contribution

Postby ThePrune » Sun Jan 02, 2011 11:08 pm

paulsiu wrote:While reviewing my year end 401K contribution, I realized I misread the before tax limit and end up with several hundred dollars of after tax contribution. So I was wondering:

1. Are there side-effects to this? I Imagine this is going to be fun when I withdraw. I wonder why they don't separate it into different accounts, so I can track before and after tax.

One side effect is that those extra several hundred dollars are treated by the IRS as a "Deemed IRA" contribution. Here is what the IRS says:
Publication 590 wrote:Deemed IRAs. For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA. For this purpose, a “qualified employer plan” includes:

A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),

Had you independently contributed the maximum allowed to a tIRA or Roth IRA ($5,000, or $6,000 if you are at least 50)? If so, that plus the "deemed IRA" contribution will have put you over the dollar limit! This is one side-effect that I'm aware of.

paulsui wrote:2. What can I do with the after tax return? Can I convert it to a 401K Roth?

I'm not sure if you or your 401(k) plan administrator decides whether the extra dollars are to be treated as a traditional or a Roth "Deemed IRA". Why not contact your plan administrator?!

paulsui wrote:3. How do you track before and after tax in software like Quicken or Moneydance?

I have no idea! ! I do everythign in Excel.
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Re: After Tax 401K Contribution

Postby Default User BR » Mon Jan 03, 2011 3:28 am

ThePrune wrote:One side effect is that those extra several hundred dollars are treated by the IRS as a "Deemed IRA" contribution.

I don't believe that to be correct. An employee is allowed to make after-tax contributions to a 401(k). The only limit that come into play is the overall contribution limit of 49k, which includes pre-tax/Roth employee contributions, employer contributions, and employee after-tax contributions.

Basically the deemed IRA is an IRA offered by the qulafied play. The plan would have to send out the same tax documents as any other IRA showing the contributions. It's a separate account within the plan, and the employee would have to specifically contribute to it. After-tax contributions are just part of the 401(k), although the plan does have to track them separately.

One possibly advantage to after-tax contributions comes about if the qualified plan allows in-service rollovers of those amounts. They can be rolled over to a Roth, although a portion of taxable earnings must come with them. If that is significant, there are possible ways to isolate the non-taxable money.


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Postby Carl53 » Mon Jan 03, 2011 8:17 am

I had some after tax contributions to my 401k for various reasons. Before I rolled my 401k with my former employer to my VG TIRA, I withdrew the after tax 401k contributions to avoid later complications with having to track distributions from the IRA as before tax and after tax. At the same time you had to remove the earnings on the after tax. These I was able to direct to my VG IRA and reported them on my tax return as a transfer. It was a hassle but I'm glad I did as they were a small fraction of the total and it would not have been worth the headache to track.
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Postby JW Nearly Retired » Mon Jan 03, 2011 10:07 am

I've had some after-tax going into my 401k for decades. They track it and, hopefully, I will be able to roll these after-tax contributions into a Roth when I retire.

Getting to my question......... I've just now noticed that the 401k accounting process doesn't hit the $22000 ceiling exactly. My 2010 statement lists $22088 as the 401k before-tax contributions. I think it may have something to do with the catch-up contribution since that is given as $5588. Looking back at old statements show they were usually under/over by some small number, $88 was the highest. What do Bogleheads think..... should I try to make corrections?

My inclination is to make sure my catch-up can't be higher than $5500 in the future and then let sleeping dogs lie.
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Postby RJB » Mon Jan 03, 2011 10:26 am

My 401k after tax contributions were rolled over directly into a Vanguard Roth IRA. My 401k after tax contribution earnings were rolled over directly into a Vanguard Roll-over IRA. My 401k plan allowed rollovers of after tax contributions and earnings. The sooner that you move it, the better to keep the earnings inside the Roth. Hopefully your plan will allow that too.
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Postby Cloud » Mon Jan 03, 2011 10:44 am

My employers 401K plan clearly separates the after tax contributions. There's a separate line item to select how much of your pay you want to go into after tax contributions. If you don't elect for any after tax contributions they won't put in more then 16,500, period. It's impossible in our plan to end up with a penny over the 16,500 limit unless you specifically chose to do some after tax contributions.

Sounds to me like the OPs 401K plan screwed up and owes them back a few hundred dollars. I'd call the plan admin.
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Postby quarterstock » Mon Jan 03, 2011 10:50 am

If your 401k plan administrator allows after-tax contributions to be applied to the same account that contains pre-tax contributions, then they are most certainly tracking those quantities for you. However, it will cause some minor accounting headaches down the road, so I would suggest moving those after-tax contributions (and their associated earnings) to a more appropriate location.

It's quite likely that your plan allows in-service withdrawals. These withdrawals follow a set of priorities as to which dollars come out first. I suspect that after-tax contributions and associated earnings will be the first ones to come out penalty-free, but you'll have to check with your plan administrator to confirm. Ideally, you'll be able to roll directly into a Roth IRA, but you may have to roll into a Traditional IRA and then perform a conversion. I do this on an annual basis.

I'm unaware of any "deemed IRA" issues that pertain to the case you outlined. While I'm not an expert, I don't believe ThePrune's comments to be accurate advice.
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Postby Ron » Mon Jan 03, 2011 11:04 am

quarterstock wrote:If your 401k plan administrator allows after-tax contributions to be applied to the same account that contains pre-tax contributions, then they are most certainly tracking those quantities for you. However, it will cause some minor accounting headaches down the road, so I would suggest moving those after-tax contributions (and their associated earnings) to a more appropriate location.

I contributed "above the line" for many years to my then 401(k), held by Fidelity.

Upon retirement, Fidelity easily broke out the taxable contributions. The remainder (e.g. tax-deferred and distributions/gains on those original taxable contributions) were rolled over to a TIRA. No "headache" at all - for either Fidelity or me.

The contributions I made for many years (on which tax was already paid - at the current rate, at the time of contribution) was up to me on how to receive (e.g. a check, contribution to a bank or taxable investment account). I used it to cover a good portion of requirement expenses in my year of retirement.

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Postby Cloud » Mon Jan 03, 2011 11:06 am

quarterstock, or anyone, whats the advantage of contributing after tax monies into a 401K plan? The only thing I can think of is the earnings grow tax free until withdrawn. Seems like very little advantage to tie up your savings when you could instead save and invest it at a discount firm that way your money is not tied up until age 59.5.

If it's true you can roll that money over into a ROTH than does that allow me to effectively stash away more the the current 16.5K IRA and 5K ROTH limit? My current plan allows me to contribute 80% of my pay towards TIRA or ROTH IRA up to the 16,500 limit and, if I'm reading this right, another 10% of pay post tax.. Or does the post tax pay count towards my 16.5K limit? If not then this allows me a back door to put additional 10% of my pay in post tax then later roll it into a ROTH? And while I'm doing this can I continue to put my 5K a year into my ROTH I control at a discount firm?
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Postby quarterstock » Mon Jan 03, 2011 1:45 pm

Cloud wrote:quarterstock, or anyone, whats the advantage of contributing after tax monies into a 401K plan? The only thing I can think of is the earnings grow tax free until withdrawn. Seems like very little advantage to tie up your savings when you could instead save and invest it at a discount firm that way your money is not tied up until age 59.5.

There's an advantage to CONTRIBUTE after-tax salary deferrals to a 401k, but there's no advantage to MAINTAIN those funds in a 401k.
If it's true you can roll that money over into a ROTH than does that allow me to effectively stash away more the the current 16.5K IRA and 5K ROTH limit?

Yes. It's a technique that allows high-income individuals to increase their tax-advantaged space, provided that their 401k plan administrator allows it. Yours might not. It's become particularly useful since 2010, now that high-income individuals can "back-door" funds into a Roth IRA via a non-deductible Traditional IRA in some situations.

All 401k's have two federally mandated annual limits: a $16500 limit for income deferrals and a $49000 all-in limit that includes all employer- and employee-based contributions.

So from a practical standpoint, a high-income individual who desires to save a substantial amount for retirement might choose to:
1. First, contribute to a 401k to receive a full employee match;
2. Second, contribute $5000 to a Traditional IRA on a non-deductible basis, with the intent to ultimately roll over to a Roth IRA.
3. Third, continue deferrals to a 401k up to the $16.5k limit
4. If more tax-advantaged space is needed, and your 401k plan administrator allows it, you may then continue making after-tax contributions to the 401k up to the 49k limit, with the intent to roll those dollars over to a Roth IRA. (either directly or obliquely via a non-deductible IRA depending on your plan and broker's rules).

For my case, I request a check from my 401k plan administrator each january for the previous year's post-tax contributions and their associated earnings. Those funds are deposited into my Traditional IRA at my discount broker and characterized as a rollover. I then write a check for an additional $5k into the Traditional IRA that's treated as non-deductible contribution. Then the entire ball of wax is converted to a Roth IRA. This only works if you have no other pre-tax monies in any Traditional IRA's. Otherwise, there's proportioning rules that must be adhered to.

Of course, you must pay income tax during the current year for on any capitial gains made on those after-tax 401k contributions. And you'll be filling out a 8606 form to disclose your rollovers and IRA basis amounts. But those are minor headaches to boost your tax-advantaged space to $64k/year.
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Postby quarterstock » Mon Jan 03, 2011 1:57 pm

Ron wrote:The contributions I made for many years (on which tax was already paid - at the current rate, at the time of contribution) was up to me on how to receive (e.g. a check, contribution to a bank or taxable investment account). I used it to cover a good portion of requirement expenses in my year of retirement.


So you effectively treated a portion of your 401k at Fidelity as a vanilla brokerage account. You contributed after-tax dollars; their market value increased; you withdrew those contributions and earnings at retirement; and paid tax on the earnings portion at the going capital gains rate to do so. Nothing wrong with that.

Today, we have the option to roll over those after-tax contributions (and associated earnings) in a 401k into a Roth IRA to shelter from capital-gains tax drag. I believe it to be a superior strategy going forward.
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Postby waitforit » Mon Jan 03, 2011 1:59 pm

I have a hard time wrapping my head around this. Can I benefit from after-tax contributions?

My wife and I max 401k and Roth accounts (I don't make enough to be ineligible).

If I contributed aftertax, would my 401k plan allow me to rollover those assets while still working for the company? If not I just see trapping those funds for a long time and this would negate the benefit.

Should I do this instead of my taxable account?
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Postby El Jefe » Mon Jan 03, 2011 2:07 pm

If I contributed aftertax, would my 401k plan allow me to rollover those assets while still working for the company?


As I understand it, it is generally allowable but the specific plan must explicitly allow for in-service withdrawals. Read your Summary Plan Description.
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Postby quarterstock » Mon Jan 03, 2011 2:20 pm

waitforit wrote:I have a hard time wrapping my head around this. Can I benefit from after-tax contributions?

My wife and I max 401k and Roth accounts (I don't make enough to be ineligible).

If I contributed aftertax, would my 401k plan allow me to rollover those assets while still working for the company? If not I just see trapping those funds for a long time and this would negate the benefit.

Should I do this instead of my taxable account?


I cannot say. 401k administrators have different methods of handling after-tax contributions to a 401k. Some allow it, some don't. You'll have to contact your plan administrator to find out.

If:
    you desire to save more than $21500 per year for retirement;
    and your plan administrator allows post-tax contributions;
    and your plan administrator allows for in-service withdrawals of after-tax contributions and their associated earnings without penalty;
    and your IRA custodian will accept the check as a rollover from a QRP and not as a contribution to your Roth IRA,

then you would benefit from this technique.
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Postby Default User BR » Mon Jan 03, 2011 2:43 pm

Cloud wrote:Sounds to me like the OPs 401K plan screwed up and owes them back a few hundred dollars. I'd call the plan admin.

I don't agree. My plan is set up so that you invest X percent of your salary. If you hit the 16.5k limit during the year, it automatically switches to after-tax. I suspect the OP's plan is similar. Nothing wrong as long as you understand how it works. This feature has allowed me to boost my Roth holdings by using in-service rollovers of the after-tax amounts.



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Postby Cloud » Mon Jan 03, 2011 3:27 pm

quarterstock wrote:
Cloud wrote:quarterstock, or anyone, whats the advantage of contributing after tax monies into a 401K plan? The only thing I can think of is the earnings grow tax free until withdrawn. Seems like very little advantage to tie up your savings when you could instead save and invest it at a discount firm that way your money is not tied up until age 59.5.

There's an advantage to CONTRIBUTE after-tax salary deferrals to a 401k, but there's no advantage to MAINTAIN those funds in a 401k.
If it's true you can roll that money over into a ROTH than does that allow me to effectively stash away more the the current 16.5K IRA and 5K ROTH limit?

Yes. It's a technique that allows high-income individuals to increase their tax-advantaged space, provided that their 401k plan administrator allows it. Yours might not. It's become particularly useful since 2010, now that high-income individuals can "back-door" funds into a Roth IRA via a non-deductible Traditional IRA in some situations.

All 401k's have two federally mandated annual limits: a $16500 limit for income deferrals and a $49000 all-in limit that includes all employer- and employee-based contributions.

So from a practical standpoint, a high-income individual who desires to save a substantial amount for retirement might choose to:
1. First, contribute to a 401k to receive a full employee match;
2. Second, contribute $5000 to a Traditional IRA on a non-deductible basis, with the intent to ultimately roll over to a Roth IRA.
3. Third, continue deferrals to a 401k up to the $16.5k limit
4. If more tax-advantaged space is needed, and your 401k plan administrator allows it, you may then continue making after-tax contributions to the 401k up to the 49k limit, with the intent to roll those dollars over to a Roth IRA. (either directly or obliquely via a non-deductible IRA depending on your plan and broker's rules).

For my case, I request a check from my 401k plan administrator each january for the previous year's post-tax contributions and their associated earnings. Those funds are deposited into my Traditional IRA at my discount broker and characterized as a rollover. I then write a check for an additional $5k into the Traditional IRA that's treated as non-deductible contribution. Then the entire ball of wax is converted to a Roth IRA. This only works if you have no other pre-tax monies in any Traditional IRA's. Otherwise, there's proportioning rules that must be adhered to.

Of course, you must pay income tax during the current year for on any capitial gains made on those after-tax 401k contributions. And you'll be filling out a 8606 form to disclose your rollovers and IRA basis amounts. But those are minor headaches to boost your tax-advantaged space to $64k/year.


Thank you! One more question. I currently have a roll over IRA from a previous job. So if I roll that money into my employers 401K in 2011 can I then contribute 5K into a non deductible IRA and preform the after tax conversion from both employers 401K and non deductible IRA into a ROTH in the same year?

Example:
    January, roll an IRA from a previous job into my current employers plan.
    February, make a non deductible 5K contribution into a newly created TIRA at a discount broker.
    Throughout the year in 2011 max out employers traditional 401K (16.5K) and make additional deposits of 10% of payroll into same employers sponsored plan post tax.
    June, request an in-service distribution (they allow this) of the post tax monies to be sent to me then roll that money into same TIRA I already established that's currently holding 5K.
    July, convert TIRA account to a ROTH account.
    Repeat every year.


What confuses me is this would allow more then 5K to be put into the non deductible TIRA then converted every year. 5K deposit straight from my bank, plus additional 10% by doing in-service 401k rollover every year.

I understand the backdoor TIRA to ROTH but I never knew you could also add monies with another back door in-service after tax 401K rollover. Do I have this straight?
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Postby quarterstock » Mon Jan 03, 2011 5:01 pm

I think you have a good understanding of the issue Cloud. I glossed over the idea of isolating your basis in a Traditional IRA, but you seem to be going down the right path: you would first roll over your Traditional IRA (which you are calling a "rollover" IRA) into your current employer's 401k. Then you would be free to perform a Roth IRA conversion without any proportioning rules to hinder you. I know there's a lengthy discussion of this process over at the fairmark forums.

Remember, the IRS regs only place limits on annual contributions to QRP's and IRA's. There are no federally-mandated limits on the amount you can rollover between the accounts. Your plan administrator however, probably will place some restrictions on your ability to perform in-service withdrawals.

I see no problem with your strategy. But feel free to run your plan by a qualified professional rather than trusting a stranger on the internet, if you like. ;)
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Re: After Tax 401K Contribution

Postby ThePrune » Mon Jan 03, 2011 9:15 pm

Default User BR wrote:
ThePrune wrote:One side effect is that those extra several hundred dollars are treated by the IRS as a "Deemed IRA" contribution.

I don't believe that to be correct. An employee is allowed to make after-tax contributions to a 401(k). The only limit that come into play is the overall contribution limit of 49k, which includes pre-tax/Roth employee contributions, employer contributions, and employee after-tax contributions.

Basically the deemed IRA is an IRA offered by the qulafied play. The plan would have to send out the same tax documents as any other IRA showing the contributions. It's a separate account within the plan, and the employee would have to specifically contribute to it. After-tax contributions are just part of the 401(k), although the plan does have to track them separately.

EDITED - It turns out that an employer plan can be customized to offer both a plain vanilla 401(k) as well as a secondary Qualified Plan for after-tax money. Sometimes people loosely refered to such an employer plan as being a "401(k) plan", but it's really something more. I have discovered that such after-tax plan components, called Thrift Plans, we once quite common but are no longer so.

So if the employer has set up such a customized plan, there would indeed be the possibility of saving $16,500 into the 401(k) component pre-tax, and then additional money after-tax into the Qualified Plan component up to the section 415(c) limit of $49,000 (2010). An employer can also set up the additional plan as a "Deemed IRA", but this is not a necessity for the secondary plan (as I previously thought it was :oops: ).

But such additional contributions are not an option for an employer plan set up as a pre-approved, standard 401(k) plan. When a standard 401(k) plan receives after-tax money, it is currently considered to be a designated Roth 401(k) contribution. The employee can save either (or both) pre-tax and after-tax money, but the $16,500 limit still applies to the sum of these.

For those of you who have an employer that set up a more flexible retirement savings plan arangement (with contributons up to $49,000 per year), then take advantage of your good fortune.
Last edited by ThePrune on Fri Feb 11, 2011 1:12 am, edited 2 times in total.
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Postby livesoft » Mon Jan 03, 2011 10:04 pm

quarterstock wrote:So you effectively treated a portion of your 401k at Fidelity as a vanilla brokerage account. You contributed after-tax dollars; their market value increased; you withdrew those contributions and earnings at retirement; and paid tax on the earnings portion at the going capital gains rate to do so. Nothing wrong with that.

Is that tax rate correct? My impression was that when you withdraw from a non-Roth IRA that you pay taxes as ordinary income, thus you pay at your higher marginal income tax rate than at the lower capital gains rate.

Therefore it is a bad idea to contribute after-tax to a regular 401(k) account unless you can get the money into a Roth right away. Otherwise you end up paying more taxes on your gains than if you had invested tax-efficiently in a taxable account.
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Postby Cloud » Mon Jan 03, 2011 11:56 pm

OK, looking at what ThePrune posted and what I could google it looks like I'm still limited to a nondeductible IRA contribution of 5K in any combination of IRAs or Deemed IRAs aka post tax Employer 401K contributions. Sorry to stray a bit from the OPs original post.

http://www.taxchicks.com/index.iml/413/ ... A-Strategy
Deemed IRAs

Where a "qualified employer plan" elects to allow employees to make voluntary employee contributions into a separate account or annuity in a "qualified employer plan," it will be considered a “Deemed IRA.” Deemed IRAs are treated in the same manner as an individual retirement account or annuity. This gives the employees participating in their employer’s qualified plan the option to designate their voluntary contribution into a separate Traditional or Roth IRA.

However, all of the normal IRA income and AGI limitations will apply to "Deemed IRA" contributions. This can create problems if an individual also contributes to a Regular IRA and the combination of the Regular IRA and the Deemed IRA exceed the annual limitation. Another trap exists when a taxpayer designates the Deemed IRA as a Roth IRA and later discovers their income disqualifies them from having a Roth IRA. If you are not sure of the implications of Deemed IRA designations for your specific circumstances, consult with your tax or financial advisor.
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Re: After Tax 401K Contribution

Postby bdpb » Tue Jan 04, 2011 12:59 am

ThePrune wrote:Sorry about my delay in getting back to this posting stream.

The relevant IRS regulations were published in Internal Revenue Bulletin 2004-34: Deemed IRAs in Qualified Retirement Plans. Link: http://www.irs.gov/irb/2004-34_IRB/ar08.html

Bulletin Section A. Overview wrote:if a qualified employer plan allows employees to make voluntary employee contributions to a separate account or annuity established under the plan and under the terms of the qualified employer plan the account or annuity meets the applicable requirements of section 408 or section 408A for an individual retirement account or annuity, then the account or annuity is treated for purposes of the Code in the same manner as an individual retirement plan rather than as a qualified employer plan. It further provides that contributions to such a “deemed IRA” are treated as contributions to the deemed IRA rather than to the qualified employer plan.

In general, the proposed regulations provided that a qualified employer plan and a deemed IRA would be treated as separate entities under the Code and that each entity would be subject to the rules generally applicable to that entity for purposes of the Code. Thus, a qualified employer plan (excluding the deemed IRA portion of the plan), whether it is a plan under section 401(a), 403(a), or 403(b), or a governmental plan under section 457(b), would be subject to the rules applicable to that type of plan rather than to the rules applicable to IRAs under section 408 or 408A. Similarly, the deemed IRA portion of the qualified employer plan would generally be subject to the rules applicable to traditional and Roth IRAs under sections 408 and 408A, respectively, and not to the rules applicable to plans under section 401(a), 403(a), 403(b), or 457.

As I read the regulation, once you have exceeded the legally allowed pre-tax contributions to a 401(k), any additional money goes into a deemed IRA that is fully subject to all the usual contribution limits for traditional or Roth IRAs. This was the thrust of my original comments.

Does this apply to 401(k)? The following definitions from the document
suggest it doesn't.

(h) Definitions. The following definitions apply for purposes of this section:

(1) Qualified employer plan. A qualified employer plan is a plan described in section 401(a), an annuity plan described in section 403(a), a section 403(b) plan, or a governmental plan under section 457(b).
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Postby bdpb » Tue Jan 04, 2011 1:13 am

livesoft wrote:Therefore it is a bad idea to contribute after-tax to a regular 401(k) account unless you can get the money into a Roth right away. Otherwise you end up paying more taxes on your gains than if you had invested tax-efficiently in a taxable account.

I think this is similar to the back door Roth (although there might be a little
more time delay or number of withdrawal limits to the 401k).
I think one can usually specify which investments the after-tax is
allocated to, so to minimize this problem you could allocate to your
lowest yielding bond funds.
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Postby SpecialK22 » Tue Jan 04, 2011 1:46 am

At least concerning my 401(k), after-tax contributions are held within the same account as other contributions. The account does, however, discern between pre-tax, Roth, after-tax and employer contributions. At the end of each year I roll the after-tax portion into my Vanguard Roth IRA, and this amount has so far never reduced my normal yearly contribution limits to a Roth IRA.
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Postby ThePrune » Tue Jan 04, 2011 9:45 am

SpecialK22 wrote:At least concerning my 401(k), after-tax contributions are held within the same account as other contributions. The account does, however, discern between pre-tax, Roth, after-tax and employer contributions. At the end of each year I roll the after-tax portion into my Vanguard Roth IRA, and this amount has so far never reduced my normal yearly contribution limits to a Roth IRA.

SpecialK22, a couple questions just to make sure I'm clear on what you're saying before I make any further comments.

Does Vanguard also act as custodian for your 401(k) plan?

Do you max out your pre-tax 401(k) contributions each year ($16,500, or $22,000 if at least 50 years of age), and then make additional, after-tax contributions to that acount?

Do you make the maximum annual Roth IRA direct contribution each year ($5,000, or $6,000 if at least 50 years of age)?
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Postby Cloud » Tue Jan 04, 2011 10:41 am

I just called my plan to ask...

They said, the after tax 401K contributions are limited only to the 49K total plan limits including all my pre tax, post tax, and employer match.

They also said this in no way affects me being able to put an additional 5K into an IRA outside this plan every year.

Last, I can roll this after tax monies over into my IRA up to 4 times a year.

Seems like a win win. Thanks those who said this was possible. It's extremely hard to find any info about this on the web.
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Postby neurosphere » Tue Jan 04, 2011 11:09 am

Cloud wrote:I just called my plan to ask...

They said, the after tax 401K contributions are limited only to the 49K total plan limits including all my pre tax, post tax, and employer match.

They also said this in no way affects me being able to put an additional 5K into an IRA outside this plan every year.

Last, I can roll this after tax monies over into my IRA up to 4 times a year.

Seems like a win win. Thanks those who said this was possible. It's extremely hard to find any info about this on the web.


As always, there is information on the web, but it's VERY hard to figure out what applies, what doesn't apply, what is old info, new info, etc. Thanks for calling your plan and (assuming they are correct!) shedding some light.

This thread raised an issue for me which I had not previously heard about tax treatment of after-tax IRA conversions if one has existing deductible IRAs. Can someone comment on the situation below?

In 2011 I plan to:

A) Max out my 401k
B) Max out my ROTH IRA
C) I have existing $1000 in AFTER-TAX 401k contributions which I was hoping to covert to a ROTH via an in-service distribution.

Two questions:

1) Given that I have a existing rollover 'traditional' IRA (was previous employers' 401k and SIMPLE) of $10,000, what are the tax implications, if any, of converting $1000 of the after-tax 401k --> ROTH IRA.

2) Is this board in agreement that I can continue to make after-tax contributions (up to the $49,000 overall limit) to the 401k DESPITE also maxing out a ROTH IRA (i.e. back to the question of the 'deemed IRA' $5000 limit rule). Because I'm confused about whether the same rules apply to after-tax funds in a 401K as apply to non-deductible funds in an IRA, for the purposes of converting to a ROTH.
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Postby ThePrune » Tue Jan 04, 2011 3:34 pm

Cloud wrote:I just called my plan to ask...

They said, the after tax 401K contributions are limited only to the 49K total plan limits including all my pre tax, post tax, and employer match.

They also said this in no way affects me being able to put an additional 5K into an IRA outside this plan every year.

Last, I can roll this after tax monies over into my IRA up to 4 times a year.

Cloud, thank you very much for talking to your plan administrator. Please allow me to ask a clarifying question.

Your plan administrator allows you to make both pre- and post-tax contributions. I've no problem with that. But can the total of those contributions be more than $16,500 (or $22,000 if you are at least age 50) - the legally mandated annual limits for 401(k) contributions?
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Postby cliffedelgado » Tue Jan 04, 2011 3:52 pm

ThePrune wrote:
Cloud wrote:I just called my plan to ask...

They said, the after tax 401K contributions are limited only to the 49K total plan limits including all my pre tax, post tax, and employer match.

They also said this in no way affects me being able to put an additional 5K into an IRA outside this plan every year.

Last, I can roll this after tax monies over into my IRA up to 4 times a year.

Cloud, thank you very much for talking to your plan administrator. Please allow me to ask a clarifying question.

Your plan administrator allows you to make both pre- and post-tax contributions. I've no problem with that. But can the total of those contributions be more than $16,500 (or $22,000 if you are at least age 50) - the legally mandated annual limits for 401(k) contributions?


I'm not cloud, but I can tell you that my plan allows up to 49K total. The limits are (assuming age < 50)
pre-tax 401k + roth 401k <= 16500
pre-tax 401k + roth 401k + employer contribution + after-tax <= 49000
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Postby Cloud » Tue Jan 04, 2011 4:01 pm

ThePrune wrote:
Cloud wrote:I just called my plan to ask...

They said, the after tax 401K contributions are limited only to the 49K total plan limits including all my pre tax, post tax, and employer match.

They also said this in no way affects me being able to put an additional 5K into an IRA outside this plan every year.

Last, I can roll this after tax monies over into my IRA up to 4 times a year.

Cloud, thank you very much for talking to your plan administrator. Please allow me to ask a clarifying question.

Your plan administrator allows you to make both pre- and post-tax contributions. I've no problem with that. But can the total of those contributions be more than $16,500 (or $22,000 if you are at least age 50) - the legally mandated annual limits for 401(k) contributions?


Yes, and I specifically asked that since I've been maxing at 16,500 every year since that limit was in place. They told me I can still max my 401K at (16,500 combined total of Tax deferred and/or ROTH) + employer match of roughly 5,300 + X% of after tax pay up to a total limit of 49K. The 16,500 limit only applies to the combined employee 401K ROTH / 401K Deferred contributions. I can go beyond the 16,500 using a separate post tax contribution up to 49K total. Since our after tax limit is 10% I won't be able to hit the 49K limit :(

Our 401K plan has different and clear election options of which all can be used concurrently:
BEFORE-TAX BASE PAY (0 to 80%)
BEFORE-TAX PERF PAY (0 to 80%)
ROTH 401(K) BASE PAY (0 to 80%)
ROTH 401(K) PERF PAY (0 to 80%)
AFTER-TAX BASE PAY (0 to 10%)
AFTER-TAX PERF PAY (0 to 10%)

My big question was can I do all of the above and also contribute to a post tax IRA outside the plan on my own and roll the post tax employee contributions into that plan. Again, YES. This blows my mind because I would be in affect adding more then 5K of IRA deductions per year. Again I asked them are you sure? They said yes, it's OK, the rolled over monies that you add yearly to your 5K IRA don't count as additional funds that would be limited or governed by IRS limits, they are just plain old rollover funds and the IRS doesn't care how much they amount to. So yes, it's possible for some to backdoor ROTH up to $37,500 (49K - 16.5K leaving 32,500 assuming no employer match) + (5K IRA). Honestly It could be more because I don't know if you must max the 16.5 or even put any into it that bucket.
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Postby ThePrune » Tue Jan 04, 2011 4:14 pm

RESTATEMENT OF CORE DISAGREEMENT

EDITED OUT to prevent future confusion. See my clarifications in an above posting relative to employer plans that combine 401(k) contributions with an additional after-tax Qualified Plan contribution.
Last edited by ThePrune on Thu Feb 10, 2011 11:00 pm, edited 1 time in total.
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Postby SpecialK22 » Tue Jan 04, 2011 5:22 pm

ThePrune wrote:Does Vanguard also act as custodian for your 401(k) plan?


No, Vanguard is not the custodian of my 401(k).

ThePrune wrote:Do you max out your pre-tax 401(k) contributions each year ($16,500, or $22,000 if at least 50 years of age), and then make additional, after-tax contributions to that acount?


Yes, although to be technically correct I max out the $16,500 as Roth contributions. I then make additional contributions to the account as after-tax.


ThePrune wrote:Do you make the maximum annual Roth IRA direct contribution each year ($5,000, or $6,000 if at least 50 years of age)?


Yes, I put $5k (I am under 50) into my Roth IRA each year.


My plan does not set up a separate account for the after-tax contributions. Any pre-tax, Roth, after-tax or employer contributions are all lumped into the same account. I think the total annual contribution limit is $49k; it's only the 402(g) limit which restricts the amount of electively deferred contributions to $16,500. I admit I am not an expert on this, but both my 401(k) administrator and Vanguard have said what I am doing does not affect contribution limits to a Roth IRA.
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Postby cliffedelgado » Tue Jan 04, 2011 5:32 pm

ThePrune wrote:**********************************
Let's assume for the moment that I'm wrong in what I've said above. (It happens regularly :oops: ) Let's suppose that your employer lets you make the maximum of $49,000 of annual contributions (no employer match here). If you're under age 50, you get a $16,500 annual pre-tax contribution - that's the IRS rule about which I've heard no disagreement. The remaining $32,500 would then need to be after-tax money.

So what's the legal status of the $32,500 of after-tax money? What does the IRS call it?

You can't call it a 401(k) contribution, because you've already maxed that out with the first $16,500!


I think it's called a non-deductible or after-tax 401 contribution. Not to be confused with a Roth 401K contribution.

ThePrune wrote:
***************************************
Is it actually possible to do such a thing, to contribute $32,500 in one year to an IRA? Sure ! :shock: Just open a large number of IRAs with different custodians and contribute up to $5,000 each! Each custodian has no way of knowing that the other IRAs exist. They will all send you (and the IRS) a Form 5498 - IRA Contribution Information early the next year.


As a data point, I made after-tax 401k contributions in 2009 (not Roth 401k contribution) and did not receive a 5498.

I'm guessing some 401k plans will explicitly declare an account as a deemed IRA. If it was declared as a deemed IRA, what you are saying makes sense. (Though I did not go into it in great detail as I am quite sure my plan is not a deemed IRA.)
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A Sweet Deal on Roth IRA Conversions

Postby zed » Tue Jan 04, 2011 5:59 pm

This might be a bit dated - January 2009.

... Employees who make (or who have made) after-tax contributions to their employer's retirement plan, listen up. You can now take that money and convert it to a Roth IRA tax-free.
...
But under the new rules for after-tax money in 401(k)s -- and 403(b)s and 457 plans -- the full <amount> would escape taxes. Plus, there is no limit on how much you may convert.
...
Not all retirement plans allow after-tax contributions. But if yours is among those that do, this is a great way to keep some of your retirement savings growing tax-free without paying the usual price of admission to convert to a Roth IRA. Normally, you must wait to switch jobs or retire before you can move money out of your employer-based retirement account. But some plans permit in-service distributions, allowing you to roll over some or all of your 401(k) money to an IRA once you reach age 59½.


Also see the comments at the end of the article.

Full article: http://www.kiplinger.com/magazine/archives/2009/01/sweet-deal-on-roth-ira-conversion.html

Curiosity got the better of me so I called my 401k plan admin (ING). They do permit in-service distributions. They told me that after-tax contributions can be distributed into my Roth (Vanguard) as frequently as I want. I would be on the hook for taxes on any earnings up to the time of the transfer.

So it's do-able, plan permitting. The question is, are there IRS limits.
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Postby neurosphere » Tue Jan 04, 2011 6:12 pm

Is the tax-free treatment of after-tax 401k --> ROTH in any way changed if I have also have money in an existing rollover IRA funding with previously deducted money?
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Postby Default User BR » Tue Jan 04, 2011 9:50 pm

ThePrune wrote: But can the total of those contributions be more than $16,500 (or $22,000 if you are at least age 50) - the legally mandated annual limits for 401(k) contributions?

You have a mistaken assumption. The 16.5k is for employee pre-tax OR designated Roth contributions (in any combination). After-tax contributions to a tax-deferred 401(k) do not come under this limit. They only come under the overall 49k limit.



Brian
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Postby Default User BR » Tue Jan 04, 2011 9:59 pm

neurosphere wrote:Is the tax-free treatment of after-tax 401k --> ROTH in any way changed if I have also have money in an existing rollover IRA funding with previously deducted money?


You might want to review this thread:

http://www.bogleheads.org/forum/viewtopic.php?p=853567



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Postby Default User BR » Tue Jan 04, 2011 10:05 pm

ThePrune wrote:RESTATEMENT OF CORE DISAGREEMENT

The crux of the disagreements in this posting stream have to do with the legal identity (from the IRS perspective) of any employee contributions that exceed the maximum annual 401(k) contribution limit of $16,500 (or $22,000 if you are at least age 50).

Once again, an INCORRECT starting assumption. That is not the limit for 401(k) contributions. The rest ignored because it's based on this false premise.



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Re: After Tax 401K Contribution

Postby quarterstock » Wed Jan 05, 2011 7:16 pm

ThePrune wrote:As I read the regulation, once you have exceeded the legally allowed pre-tax contributions to a 401(k), any additional money goes into a deemed IRA that is fully subject to all the usual contribution limits for traditional or Roth IRAs. This was the thrust of my original comments.

I understand your position. I think we agree that it's possible for an employer to offer a 401k plan alongside a deemed IRA plan. But I maintain that that situation is quite rare and doesn't apply to anyone posting in this thread. You assert that any contributions made to a 401k plan in excess of the $16500 limit are de facto contributions to a deemed IRA. That just doesn't appear to be the case. Let me quote the same IRS Reg. 2004-34:

Section 408(q) provides that, if a qualified employer plan allows employees to make voluntary employee contributions to a separate account or annuity established under the plan and under the terms of the qualified employer plan the account or annuity meets the applicable requirements of section 408 or section 408A for an individual retirement account or annuity, then the account or annuity is treated for purposes of the Code in the same manner as an individual retirement plan rather than as a qualified employer plan. It further provides that contributions to such a “deemed IRA” are treated as contributions to the deemed IRA rather than to the qualified employer plan.

emphasis mine. This reg refers to a separate account that is set up alongside a 401k account and must conform to IRA provisions, such as providing a 5498 annually. That's not the case that we're describing here where after-tax contributions reside in the same account as pre-tax contributions. I'm unaware of anyone receiving a 5498 for these after-tax contributions. I know that I haven't. For these reasons, I continue to assert that your interpretation of this regulation is incorrect.

Furthermore, we have the following testimony in this thread:
    I have rolled after-tax contributions from my 401k to my Traditional IRA after making my $5k contribution without objection from my IRA custodian.
    DefaultBR claims that he has rolled after-tax contributions to his 401k into an IRA without issue
    RJB rolled after-tax 401k contributions directly into a Roth IRA and their associated earnings into a traditional IRA.
    SpecialK22 has done the same at Vanguard, without restricting his ability to contribute $5000 to his IRA.
    Cloud has spoken with his plan administrator and confirmed that the strategy doesn't impact the $5000 annual contribution limit to the IRA.
    cliffdelgado made contributions to his 401k on an after-tax basis and didn't receive a 5498.
    zed posted a link to a 2009 kiplinger article that advocated the technique.

Your interpretation of the regulation is in the clear minority, so I would suggest that the onus is upon you to provide a more compelling argument that flows from a source other than your interpretation of the text.
Last edited by quarterstock on Wed Jan 05, 2011 7:19 pm, edited 1 time in total.
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Postby quarterstock » Wed Jan 05, 2011 7:18 pm

livesoft wrote:Is that tax rate correct? My impression was that when you withdraw from a non-Roth IRA that you pay taxes as ordinary income, thus you pay at your higher marginal income tax rate than at the lower capital gains rate.

Therefore it is a bad idea to contribute after-tax to a regular 401(k) account unless you can get the money into a Roth right away. Otherwise you end up paying more taxes on your gains than if you had invested tax-efficiently in a taxable account.


You're correct Livesoft. I misspoke. Your conclusion is absolutely correct.
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Re: After Tax 401K Contribution

Postby ThePrune » Wed Jan 05, 2011 8:41 pm

quarterstock wrote:
ThePrune wrote: Your interpretation of the regulation is in the clear minority, so I would suggest that the onus is upon you to provide a more compelling argument that flows from a source other than your interpretation of the text.

quarterstock, I agree fully that it's time for me to "shut up". After much research today I have located the direct e-mail for the IRS Employee Retirement Plan question center: RetirementPlanQuestions@irs.gov . Amazingly difficult to find. They also take direct telephone calls: (877) 829-5500.

On Thursday I will start the process of geting official IRS clarification on these issues. And if, as most of you suspect, I'm told I'm in error, then I will edit all my posts in this stream to note the error. I'd hate for future readers to become confused from my posts.
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Postby Cloud » Wed Jan 05, 2011 8:48 pm

ThePrune, I'll be here waiting for your update! Thanks!
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Re: After Tax 401K Contribution

Postby quarterstock » Wed Jan 05, 2011 8:51 pm

ThePrune wrote:On Thursday I will start the process of geting official IRS clarification on these issues. And if, as most of you suspect, I'm told I'm in error, then I will edit all my posts in this stream to note the error. I'd hate for future readers to become confused from my posts.


Sounds good. I'm only interested in arriving at the correct answer, and I'm happy to see this conversation remain civil. Please do let us know if you receive any correspondence that's contrary to the general consensus on this board.
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Postby zed » Wed Jan 05, 2011 8:58 pm

ThePrune, Having being described by others as one who "googles" for a living I can attest to the fact that 99% of what you find on the web is crapp-ola, present company excepted of course, thank you for grabbing the reins and being willing to goto the source for clarification on this.

zed

EDIT:
Having said that. The onus is upon all of us to "test" everything. Do your own homework. Don't simply be satisfied with what somebody says on a blog.
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Postby zed » Fri Jan 07, 2011 8:59 pm

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Postby MarkNYC » Fri Jan 07, 2011 11:18 pm

This is a somewhat confusing topic, partly due to certain relevant terms that are sometimes misused or misunderstood. Some clarification may help:

Elective contribution is a contribution made to a 401k plan by the employer on an employee's behalf pursuant to the employee's cash-or-deferred election. Although employees consider this salary deferral amount an employee contribution it is technically an employer contribution.

$16,500 is the annual limit on "elective contributions." This amount is per taxpayer per year. Any amount deferred in excess of $16,500 (excluding allowable catch-up amounts) is an excess deferral (not an excess contribution).

A participant who has elective contributions of $16,500 or less could still have an excess contribution if he/she is a highly compensated employee (HCE) and the plan fails the anti-discriminatory test for the year.

$49,000 is the limit on annual additions to a plan participant's account. Annual additions include both elective contributions and non-elective contributions such as employer matching contributions, forfeitures, and employee voluntary contributions. The annual dollar limit is for each plan.
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Postby ThePrune » Sat Jan 08, 2011 4:29 pm

MarkNYC wrote:This is a somewhat confusing topic, partly due to certain relevant terms that are sometimes misused or misunderstood.

Even the IRS at times uses different terms to mean the same thing. For example, what you clearly defined as Elective Contribution is also called an Elective Deferral by the IRS.

IRS Publication 525 (2010) page 8 wrote:Elective Deferrals
If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to social security and Medicare taxes.

Elective deferrals include elective contributions to the following retirement plans:
*Cash or deferred arrangements (section 401(k) plans).

What I liked very much about your posting was the clarity of the definitions. It's a good reminder to the rest of us to include such definitions for technical tax terms in our discussions, especially definitions quoted from original IRS sources. I must admit that often our "disagreements" are based solely on differences in understanding for the terms we are using.

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Postby LadyGeek » Wed Feb 09, 2011 10:07 pm

I've got after-tax contributions in my employer's regular 401(k), not Roth. The summary plan description states:

- Roth 401(k) contributions can either replace or complement regular before-tax and after-tax contributions and are subject to plan and annual maximum limits set by the IRS.

- I may withdraw after-tax contributions plus any attributable earnings on those contributions, but my company match will be suspended for 6 months.

- (after-tax contributions) the taxable portion of the withdrawal is based on the ratio of my remaining after-tax contributions to the total value of my after-tax account (contributions plus earnings). In many cases, the IRS also imposes a 10% early withdrawal penalty on the taxable portion of the withdrawal.

I maxed out my Roth IRA, so no room there. Withdrawals will be taxed with a 6 month match penalty on top of that, so it's best to just leave the funds as-is.

Question: Do I need to report 401(k) after-tax contributions on Form 8606? I read the instructions, but it only applies to traditional IRAs and the like. Nothing on 401(k)s.

My employer is tracking this for me, but I'm wondering if I need to report anything on my side(?). I'm thinking no.
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Postby tfb » Wed Feb 09, 2011 10:37 pm

LadyGeek wrote:Question: Do I need to report 401(k) after-tax contributions on Form 8606?

No. Your plan administrator is responsible for issuing the correct 1099-R forms when you take money out of the plan. Make sure your contributions are accounted for correctly on your statements.
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Re: After Tax 401K Contribution

Postby orsorum » Sat Apr 09, 2011 3:05 pm

quarterstock wrote:
ThePrune wrote:On Thursday I will start the process of geting official IRS clarification on these issues. And if, as most of you suspect, I'm told I'm in error, then I will edit all my posts in this stream to note the error. I'd hate for future readers to become confused from my posts.


Sounds good. I'm only interested in arriving at the correct answer, and I'm happy to see this conversation remain civil. Please do let us know if you receive any correspondence that's contrary to the general consensus on this board.


Just wanted to follow up on the status of this request from the Service. I am keenly interested in anything you may hear...
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