After Tax 401k vs. Roth 401k - There's a Difference???

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ChiefIllini
Posts: 64
Joined: Sun Mar 02, 2014 1:25 pm

After Tax 401k vs. Roth 401k - There's a Difference???

Post by ChiefIllini » Thu Mar 06, 2014 10:35 am

I literally just found out that my after-tax contributions to my 401k are not "Roth." That means I'll be subject to taxes on the earnings when I withdraw!! :oops: Luckily, it only represents about $4k of my total 401k portfolio.

Anyway, I contribute up the match, then do my Roth IRA and now I'll begin to max out my pre-tax 401k and will not contribute to the after-tax portion.

Why would one want to contribute to an after-tax 401k if the earnings are taxed upon withdrawal? Why not keep it in a taxable account for flexibility?

Nukeboilermaker
Posts: 294
Joined: Mon Apr 11, 2011 9:49 am

Re: After Tax 401k vs. Roth 401k - There's a Difference???

Post by Nukeboilermaker » Thu Mar 06, 2014 10:52 am

A couple years ago some new hires started at my site (same department), one of them was into investing and had all the new hires putting into after tax vs Roth or traditional 401k. I corrected them and explained the difference and a couple of them listened to my methodology of t401k + rIRA vs r401k and placing money into after tax contributions instead of other more flexible investment opportunities. I also highly recommended this site as an excellent resource. The best reasoning I can come up with is to "add compounding" or if the individual simply isn't disciplined enough to do additional outside investing.

The coworker was fresh out of U of Illinois, so maybe it has something to do with that (as here is a common theme apparently... Unless your name is Mike...)

P.S. Boiler Up!

ChiefIllini
Posts: 64
Joined: Sun Mar 02, 2014 1:25 pm

Re: After Tax 401k vs. Roth 401k - There's a Difference???

Post by ChiefIllini » Thu Mar 06, 2014 11:52 am

Nukeboilermaker wrote:A couple years ago some new hires started at my site (same department), one of them was into investing and had all the new hires putting into after tax vs Roth or traditional 401k. I corrected them and explained the difference and a couple of them listened to my methodology of t401k + rIRA vs r401k and placing money into after tax contributions instead of other more flexible investment opportunities. I also highly recommended this site as an excellent resource. The best reasoning I can come up with is to "add compounding" or if the individual simply isn't disciplined enough to do additional outside investing.

The coworker was fresh out of U of Illinois, so maybe it has something to do with that (as here is a common theme apparently... Unless your name is Mike...)

P.S. Boiler Up!
This is probably something that should be covered in the required personal finances courses at all schools...oh wait.

Go Illini!

Nukeboilermaker
Posts: 294
Joined: Mon Apr 11, 2011 9:49 am

Re: After Tax 401k vs. Roth 401k - There's a Difference???

Post by Nukeboilermaker » Thu Mar 06, 2014 12:15 pm

ChiefIllini wrote: This is probably something that should be covered in the required personal finances courses at all schools...oh wait.
It absolutely should be! I would say in high school too. Welcome to the forum.

Alan S.
Posts: 7739
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: After Tax 401k vs. Roth 401k - There's a Difference???

Post by Alan S. » Thu Mar 06, 2014 12:16 pm

ChiefIllini wrote:I literally just found out that my after-tax contributions to my 401k are not "Roth." That means I'll be subject to taxes on the earnings when I withdraw!! :oops: Luckily, it only represents about $4k of my total 401k portfolio.

Anyway, I contribute up the match, then do my Roth IRA and now I'll begin to max out my pre-tax 401k and will not contribute to the after-tax portion.

Why would one want to contribute to an after-tax 401k if the earnings are taxed upon withdrawal? Why not keep it in a taxable account for flexibility?
Most after tax non Roth 401k contributions go into an "after tax sub account" within the plan that can be distributed out of the plan along with any earnings generated on that contribution while you are still there. Therefore, check into the requesting the distribution of the after tax sub account ASAP and either doing a direct rollover into your Roth IRA, or just receiving a check that you can do a 60 day rollover to your Roth IRA. Only the small amount of earnings will be taxable if you do this and all future earnings will of course be in the Roth IRA and eventually will be tax free. If the check is made out to you there will be 20% withholding on only the earnings portion, and you will have to replace the small amount of withholding to make the rollover complete.

placeholder
Posts: 3957
Joined: Tue Aug 06, 2013 12:43 pm

Re: After Tax 401k vs. Roth 401k - There's a Difference???

Post by placeholder » Thu Mar 06, 2014 1:54 pm

Yep with my plan I can put in 23k tax deferred (with catch up) and another 6k or so in after tax which I can roll out to a Roth IRA to nearly double the amount I can put in Roth each year.

ChiefIllini
Posts: 64
Joined: Sun Mar 02, 2014 1:25 pm

Re: After Tax 401k vs. Roth 401k - There's a Difference???

Post by ChiefIllini » Thu Mar 06, 2014 2:42 pm

placeholder wrote:Yep with my plan I can put in 23k tax deferred (with catch up) and another 6k or so in after tax which I can roll out to a Roth IRA to nearly double the amount I can put in Roth each year.
So this is not all doom and gloom! :D Clicking around the Fidelity 401k website, I found that I can rollover the $4k to an IRA. So this means I can contribute essentially $10k per year to a Roth IRA??
$5500/year to Roth
$~5000/year to after-tax 401k and convert at the yend of the year

By the way, here's my previous thread about my info...
http://www.bogleheads.org/forum/viewtop ... st=1979618
Tax Filing Status: Single
Tax Rate: 25% Federal, 5% State
State of Residence: IL
Age: 26

So how should I prioritze my contributions?
1) Pre-Tax 401k up to the match
2) Roth IRA at Vanguard
3) After-Tax 401k then rollover once per year (This will result in earnings taxes correct?)
4) Pre-Tax 401k up to the maximum contribution limit
5) Taxable

Not sure if this matters, but in the next few years my federal tax rate will jump to 28% after I get married.

ChiefIllini
Posts: 64
Joined: Sun Mar 02, 2014 1:25 pm

Re: After Tax 401k vs. Roth 401k - There's a Difference???

Post by ChiefIllini » Thu Mar 06, 2014 8:50 pm

ChiefIllini wrote:
placeholder wrote:Yep with my plan I can put in 23k tax deferred (with catch up) and another 6k or so in after tax which I can roll out to a Roth IRA to nearly double the amount I can put in Roth each year.
So this is not all doom and gloom! :D Clicking around the Fidelity 401k website, I found that I can rollover the $4k to an IRA. So this means I can contribute essentially $10k per year to a Roth IRA??
$5500/year to Roth
$~5000/year to after-tax 401k and convert at the yend of the year

By the way, here's my previous thread about my info...
http://www.bogleheads.org/forum/viewtop ... st=1979618
Tax Filing Status: Single
Tax Rate: 25% Federal, 5% State
State of Residence: IL
Age: 26

So how should I prioritze my contributions?
1) Pre-Tax 401k up to the match
2) Roth IRA at Vanguard
3) After-Tax 401k then rollover once per year (This will result in earnings taxes correct?)
4) Pre-Tax 401k up to the maximum contribution limit
5) Taxable

Not sure if this matters, but in the next few years my federal tax rate will jump to 28% after I get married.
By the way, can I somehow "merge" my after-tax roller money into my existing Roth IRA that way I don't have multiple IRAs? Any advantage to holding more than one?

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