Traditional 401k and Roth 401k?

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conlaw1234
Posts: 21
Joined: Mon Jun 11, 2018 9:58 am

Traditional 401k and Roth 401k?

Post by conlaw1234 » Thu Aug 09, 2018 4:47 pm

Hi Everyone,

Apologies if I missed another post similar to this. I looked and didn't find something.

It's come to my attention that the contribution limits for a 401k plan is $55,000 for tax year 2018. The traditional (pre-tax) limit is $18,500 which means the law allows you to contribute $36,500, including employer contributions, to a Roth 401k, after-tax 401k, or a combination thereof.

I called my company's 401k plan administrator and they confirmed this. So, if I am understanding this correctly, I can contribute up to $18,500 pre-tax to my 401k, and then the remaining, up to $36,500 ($55,000 - $18,500), to a Roth 401k. This would mean that the excess contribution over $18,500 would grow tax free, and when I withdraw, assuming I meet the qualifications to withdraw (outlined below), then the earnings would also be tax free. This is similar to a Roth IRA.

Is this correct or am I missing something? Is there a downside to doing this (other than not having the money available as cash in case you need it)? I understand if you withdraw and your withdrawal does not meet the definition of a qualified withdrawal, then it is subject to a 10% penalty.

I am already maxing out my traditional 401k and back-door Roth IRA. So, this, if I'm understanding correctly, would allow me to take advantage of tax free growth.

This is from my plan document for withdrawals:

Any earning on roth contributions can generally be withdrawn tax-free if you meet two requirements for a qualified distributions. 1) at least 5 years must have elapsed from the first day of the year of your initial Roth 401k contribution and (2) you must have reached age 59.5 or become disabled or deceased.

retiredjg
Posts: 33262
Joined: Thu Jan 10, 2008 12:56 pm

Re: Traditional 401k and Roth 401k?

Post by retiredjg » Thu Aug 09, 2018 5:03 pm

I'm afraid it does not work that way. :(

Your elective deferrals (the $18.5k limited amount) can go into traditional 401k and/or Roth 401k, but the total is just $18.5k between the two of theose.

If your plan allows "after tax employee contributions", you can contribute more money. This money (usually) goes into a separate account of it's own. Not all plans even have this option.

Your a elective deferrals (Roth and traditional) and your after tax contributions and your employer contributions and forfeitures can total the $55k.

It is confusing because what you think of as "employee contributions" aren't - they are elective deferrals. And "employee contributions" means after tax money (not Roth) and not all plans even have this option.

retiredjg
Posts: 33262
Joined: Thu Jan 10, 2008 12:56 pm

Re: Traditional 401k and Roth 401k?

Post by retiredjg » Thu Aug 09, 2018 5:03 pm

In general, traditional 401k and Roth IRA makes a good combination for many people. There are exceptions though.

conlaw1234
Posts: 21
Joined: Mon Jun 11, 2018 9:58 am

Re: Traditional 401k and Roth 401k?

Post by conlaw1234 » Thu Aug 09, 2018 5:23 pm

retiredjg wrote:
Thu Aug 09, 2018 5:03 pm
I'm afraid it does not work that way. :(

Your elective deferrals (the $18.5k limited amount) can go into traditional 401k and/or Roth 401k, but the total is just $18.5k between the two of theose.

If your plan allows "after tax employee contributions", you can contribute more money. This money (usually) goes into a separate account of it's own. Not all plans even have this option.

Your a elective deferrals (Roth and traditional) and your after tax contributions and your employer contributions and forfeitures can total the $55k.

It is confusing because what you think of as "employee contributions" aren't - they are elective deferrals. And "employee contributions" means after tax money (not Roth) and not all plans even have this option.
My plan has three options: (1) traditional 401K, (2) Roth 401k, and (3) after-tax. I asked the representative if I can max out then 18,500 pre-tax and contribute to the Roth-401k option and she said yes. She also said I can contribute to the after-tax option and then convert it to a roth 401k but that ultimately leads to option 2. Am I getting bad advice from the 401k company? I'm not looking for tax advice from them, just what I can and can't do with the 401k plan, which, I would think, would be up their alley.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Traditional 401k and Roth 401k?

Post by retiredjg » Thu Aug 09, 2018 5:33 pm

It is more likely you are just not communicating because the terminology is awkward until you learn it. What you think you are asking and what she thinks she is answering may be two different things. It is also possible she is wrong, but I would not assume that - the people at the level of answering these questions usually know what they are talking about.

It appears that you do have the three options of traditional 401k, Roth 401k, and after tax employee contributions. It also appears you have the option to do an "in plan roth Rollover" or IRR meaning you roll the after tax account (including the earnings if any exist) into Roth 401k. This is not unusual. If you do that, any earnings that have occurred in the after-tax account will be taxed.

There is also a possibility of rolling your aftertax account out to Roth IRA - your plan may or may not offer this option. Some people like it better. Some don't. there are several ways of doing this.

Do a search on "mega back door Roth" using the google box above (and also search in the Wiki) for more information.

megabad
Posts: 387
Joined: Fri Jun 01, 2018 4:00 pm

Re: Traditional 401k and Roth 401k?

Post by megabad » Thu Aug 09, 2018 5:40 pm

conlaw1234 wrote:
Thu Aug 09, 2018 5:23 pm
She also said I can contribute to the after-tax option and then convert it to a roth 401k but that ultimately leads to option 2.
It appears that your plan allows for after-tax contributions and in-plan conversions from after-tax to Roth 401k. Just contribute any excess over $18,500 (in 2018) in the form of after-tax contributions and then convert this money to Roth at intervals as allowed by the plan.

conlaw1234
Posts: 21
Joined: Mon Jun 11, 2018 9:58 am

Re: Traditional 401k and Roth 401k?

Post by conlaw1234 » Thu Aug 09, 2018 5:44 pm

retiredjg wrote:
Thu Aug 09, 2018 5:33 pm
It is more likely you are just not communicating because the terminology is awkward until you learn it. What you think you are asking and what she thinks she is answering may be two different things. It is also possible she is wrong, but I would not assume that - the people at the level of answering these questions usually know what they are talking about.

It appears that you do have the three options of traditional 401k, Roth 401k, and after tax employee contributions. It also appears you have the option to do an "in plan roth Rollover" or IRR meaning you roll the after tax account (including the earnings if any exist) into Roth 401k. This is not unusual. If you do that, any earnings that have occurred in the after-tax account will be taxed.

There is also a possibility of rolling your aftertax account out to Roth IRA - your plan may or may not offer this option. Some people like it better. Some don't. there are several ways of doing this.

Do a search on "mega back door Roth" using the google box above (and also search in the Wiki) for more information.
I called my 401k company again, and the guy confirmed basically what you said. This was not what the previous lady said.

My plan doesn't have a Roth IRA option, only a roth 401k option. I did some research and it looks like if I do the after-tax contribution, a conversion to roth-401K will be taxed (earnings only) but a conversion to a roth IRA won't be taxed. Is this correct?

Since my company's plan doesn't offer a Roth IRA, if I leave contribute money into after tax contribution account, and leave it there until I leave the company, can I then roll the entire thing (earnings included) over to a Roth IRA tax free?

megabad
Posts: 387
Joined: Fri Jun 01, 2018 4:00 pm

Re: Traditional 401k and Roth 401k?

Post by megabad » Thu Aug 09, 2018 6:02 pm

conlaw1234 wrote:
Thu Aug 09, 2018 5:44 pm
I called my 401k company again, and the guy confirmed basically what you said. This was not what the previous lady said.

My plan doesn't have a Roth IRA option, only a roth 401k option. I did some research and it looks like if I do the after-tax contribution, a conversion to roth-401K will be taxed (earnings only) but a conversion to a roth IRA won't be taxed. Is this correct?
No (unless I am misunderstanding your intent). If you choose to rollover and convert the earnings on after-tax 401k contributions to Roth IRA, you will owe income taxes on this amount. This is why most try to keep gains to a minimum if they utilize this strategy. If you were to split the after tax 401k rollover into both a traditional IRA (for earnings) and Roth IRA (for contributions), than you would have no income tax obligation in the year of rollover.

Since my company's plan doesn't offer a Roth IRA, if I leave contribute money into after tax contribution account, and leave it there until I leave the company, can I then roll the entire thing (earnings included) over to a Roth IRA tax free?
No see above. You could potentially face a very large income tax bill on the earnings. In this case, if the earnings were very large, you would almost certainly want to split the rollover into both traditional IRA and Roth IRA accounts.

retiredjg
Posts: 33262
Joined: Thu Jan 10, 2008 12:56 pm

Re: Traditional 401k and Roth 401k?

Post by retiredjg » Thu Aug 09, 2018 6:05 pm

conlaw1234 wrote:
Thu Aug 09, 2018 5:44 pm
I called my 401k company again, and the guy confirmed basically what you said. This was not what the previous lady said.

My plan doesn't have a Roth IRA option, only a roth 401k option. I did some research and it looks like if I do the after-tax contribution, a conversion to roth-401K will be taxed (earnings only) but a conversion to a roth IRA won't be taxed. Is this correct?
No that is not correct. Any untaxed money going into Roth status (Roth 401k or Roth IRA) will be taxed.

It is not your 401k that has the Roth IRA option - I was talking about rolling the after-tax account out of the 401k plan into your own Roth IRA.
Since my company's plan doesn't offer a Roth IRA, if I leave contribute money into after tax contribution account, and leave it there until I leave the company, can I then roll the entire thing (earnings included) over to a Roth IRA tax free?
No. The earnings in the after tax account will always be taxed if they make their way into Rothness.

It would not be wise to make the after-tax contributions and leave them there for a long time. There is some evidence that doing it for 5 years is probably OK.

If you decide to use the after-tax account, roll that money to Roth 401k or Roth IRA at least a few times a year - the more often you do it, the less time earnings will have to accrue.

conlaw1234
Posts: 21
Joined: Mon Jun 11, 2018 9:58 am

Re: Traditional 401k and Roth 401k?

Post by conlaw1234 » Thu Aug 09, 2018 6:07 pm

megabad wrote:
Thu Aug 09, 2018 6:02 pm
conlaw1234 wrote:
Thu Aug 09, 2018 5:44 pm
I called my 401k company again, and the guy confirmed basically what you said. This was not what the previous lady said.

My plan doesn't have a Roth IRA option, only a roth 401k option. I did some research and it looks like if I do the after-tax contribution, a conversion to roth-401K will be taxed (earnings only) but a conversion to a roth IRA won't be taxed. Is this correct?
No (unless I am misunderstanding your intent). If you choose to rollover and convert the earnings on after-tax 401k contributions to Roth IRA, you will owe income taxes on this amount. This is why most try to keep gains to a minimum if they utilize this strategy. If you were to split the after tax 401k rollover into both a traditional IRA (for earnings) and Roth IRA (for contributions), than you would have no income tax obligation in the year of rollover.

Since my company's plan doesn't offer a Roth IRA, if I leave contribute money into after tax contribution account, and leave it there until I leave the company, can I then roll the entire thing (earnings included) over to a Roth IRA tax free?
No see above. You could potentially face a very large income tax bill on the earnings. In this case, if the earnings were very large, you would almost certainly want to split the rollover into both traditional IRA and Roth IRA accounts.
What if immediately after after-tax contributions, I convert it to a Roth IRA. Then, there would be minimal to no earnings. This seems to take care of the issue?

retiredjg
Posts: 33262
Joined: Thu Jan 10, 2008 12:56 pm

Re: Traditional 401k and Roth 401k?

Post by retiredjg » Thu Aug 09, 2018 6:10 pm

A good thing to keep in mind when it comes to taxes....Almost all money is taxed at some point.

There are only a few exceptions to this. For example, the earnings that occur inside a Roth IRA are not taxed if you are at least 59.5 and your Roth IRA is over 5 years old when you take that money out. It is one of only a few free lunches.

Second thing - Money is never taxed a second time if you do your paperwork right.

megabad
Posts: 387
Joined: Fri Jun 01, 2018 4:00 pm

Re: Traditional 401k and Roth 401k?

Post by megabad » Thu Aug 09, 2018 6:22 pm

conlaw1234 wrote:
Thu Aug 09, 2018 6:07 pm
What if immediately after after-tax contributions, I convert it to a Roth IRA. Then, there would be minimal to no earnings. This seems to take care of the issue?
This would definitely reduce the amount of taxes you would owe. Assuming your plan allows for routine immediate in-service rollovers of after tax money than this may be prudent.
retiredjg wrote:
Thu Aug 09, 2018 6:10 pm
A good thing to keep in mind when it comes to taxes....Almost all money is taxed at some point.
So true. Death and taxes. Death and taxes...

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patrick013
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Re: Traditional 401k and Roth 401k?

Post by patrick013 » Thu Aug 09, 2018 6:38 pm

conlaw1234 wrote:
Thu Aug 09, 2018 6:07 pm
What if immediately after after-tax contributions, I convert it to a Roth IRA. Then, there would be minimal to no earnings. This seems to take care of the issue?
I don't think you can do that every month. Once a year probably, so some
tax may be payable as balances increase.

But then you can pick your own stock funds of any kind any fund company.
age in bonds, buy-and-hold, 10 year business cycle

retiredjg
Posts: 33262
Joined: Thu Jan 10, 2008 12:56 pm

Re: Traditional 401k and Roth 401k?

Post by retiredjg » Thu Aug 09, 2018 6:41 pm

conlaw1234 wrote:
Thu Aug 09, 2018 6:07 pm
What if immediately after after-tax contributions, I convert it to a Roth IRA. Then, there would be minimal to no earnings. This seems to take care of the issue?
While that might be optimal, that is likely 26 actions each year. Not only is that a lot of trouble on your part, your plan may limit these conversions/rollovers to a certain number. The number of in plan rollovers may be different from the number of roll outs to Roth IRA that they allow.

Fidelity apparently makes it very easy if you roll from a Fidelity 401k to a Fidelity Roth IRA. And some people with Fido plans do it every payday. Other plans....not so much.

You should have something called a "Summary Plan Document" that tells you things like how many times you can do this. Read it.

bradpevans
Posts: 236
Joined: Sun Apr 08, 2018 1:09 pm

Re: Traditional 401k and Roth 401k?

Post by bradpevans » Thu Aug 09, 2018 9:27 pm

conlaw1234 wrote:
Thu Aug 09, 2018 6:07 pm
megabad wrote:
Thu Aug 09, 2018 6:02 pm
conlaw1234 wrote:
Thu Aug 09, 2018 5:44 pm
I called my 401k company again, and the guy confirmed basically what you said. This was not what the previous lady said.

My plan doesn't have a Roth IRA option, only a roth 401k option. I did some research and it looks like if I do the after-tax contribution, a conversion to roth-401K will be taxed (earnings only) but a conversion to a roth IRA won't be taxed. Is this correct?
No (unless I am misunderstanding your intent). If you choose to rollover and convert the earnings on after-tax 401k contributions to Roth IRA, you will owe income taxes on this amount. This is why most try to keep gains to a minimum if they utilize this strategy. If you were to split the after tax 401k rollover into both a traditional IRA (for earnings) and Roth IRA (for contributions), than you would have no income tax obligation in the year of rollover.

Since my company's plan doesn't offer a Roth IRA, if I leave contribute money into after tax contribution account, and leave it there until I leave the company, can I then roll the entire thing (earnings included) over to a Roth IRA tax free?
No see above. You could potentially face a very large income tax bill on the earnings. In this case, if the earnings were very large, you would almost certainly want to split the rollover into both traditional IRA and Roth IRA accounts.
What if immediately after after-tax contributions, I convert it to a Roth IRA. Then, there would be minimal to no earnings. This seems to take care of the issue?
My plan charges $20 every time I move the money from after tax 401K to Roth IRA - so I let it build a little

Another option if you can cash flow it is to bump your after tax % very high, and max out quickly, then rollover quickly

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