After-tax 401(k)

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After-tax 401(k) is a type of deferred 401k subaccount, with different rules from traditional and Roth 401k accounts. They are typically used in strategies to rollover money to Roth IRAs far in excess of normal contribution limits.

Advantages

  • Subject to much higher contribution limits than traditional 401ks (up to $52,000 in 2014)
  • Some 401ks allow for in-service distributions, allowing employees to roll over funds during employment without a triggering event.[footnotes 1]
  • Protection from creditors under ERISA.

Disadvantages

  • Death, for monies waiting for rollover, the inheritor is left with a non-deductible IRA with very complicated paperwork.
  • Gains before rollover are taxed as ordinary income.
  • Losses before rollover, "basis" could be lost if you don't leave a few pennies in the account.
  • Management Risk: the rules can be changed without warning.
  • Management Fee/Check writing fees may be high enough to eat into savings.
  • Trustee Risk: it's my understanding they will be sending you two 1099-R's every year, for the rollover and for the gains, pray they calculate it correctly.
  • Legislative Risk: hopefully you could complete the rollover before the benefits were ended.
  • Additional paperwork: many accountants aren't aware of the documentation requirements.
  • Company fails nondiscrimination tests, resulting in a refund (See Highly compensated employee).

After-Tax 401k limits

Traditional and Roth accounts share a employee contribution limit up to $17,500 per person. However, Section 415(c)(1)(A) limits total contributions to defined contribution plans to $52,000 in 2014. The limit for an after-tax 401k is the difference between the amount already contributed by the employer and employee, and the Section 415 limit.

Notes

  1. An event that a participant in a qualified plan must experience in order to be eligible to receive a distribution from a qualified plan. For most 401(k) plans, the triggering events are:
    • Attaining retirement age
    • Termination of employment (you are no longer employed by the company that offers the 401(k) plan in question)
    • Death - in this case, your beneficiaries are allowed to distribute your assets
    • Disability - the document that governs the 401(k) plan generally provides a definition of "disability"
    • Your employer terminates the 401(k) plan and does not replace it with another qualified plan
    See: Triggering Event, Can I roll my 401(k) and/or IRA funds into a more liquid investment fund without penalty?, on Investopedia

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