After Tax 401k Contri's vs Trad 401k vs Roth 401k

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jbsmith05
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After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by jbsmith05 » Thu Oct 11, 2018 8:35 pm

Just reading about someone who's 401k plan allows them to contribute up to ~50K-ish after tax. This is the first I've ever heard of this.

Looking to hear more about this from the experts.


My current 401K has a traditional and roth option, which I contribute to both variants. I don't think mine allows this after tax contribution....I mean would any 401k plan that has a roth option allow this...what's the difference?

I mean if I can contribute ~50k more and then roll it to my roth IRA...heck why not.


So anyway - what can you tell me about this, I searched the forums but not many relevant results, mostly because as soon as you put "401k" as a search parameter you get thousands of results

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FiveK
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by FiveK » Thu Oct 11, 2018 8:38 pm

See After-tax 401(k) - Bogleheads.

Not all 401k plans have this option.

Soon2BXProgrammer
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by Soon2BXProgrammer » Thu Oct 11, 2018 8:53 pm

Yes, some plans that have roth options allow "aftertax".

My Megacorp allows you to do pretax/roth, then aftertax, then when you break the 55k IRS limit you can switch to a NQDC plan (pretax).

jbsmith05
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by jbsmith05 » Thu Oct 11, 2018 9:05 pm

So for those of you that are allowed to do the after-tax contri's - is this explicitly called out in your plan materials or just a hidden fact that you have to ask about?

I don't see it in any of my employer's documentation or in Fidelity's (where my 401k is) - which is leading me to believe it's not an option for me

Soon2BXProgrammer
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by Soon2BXProgrammer » Thu Oct 11, 2018 9:11 pm

jbsmith05 wrote:
Thu Oct 11, 2018 9:05 pm
So for those of you that are allowed to do the after-tax contri's - is this explicitly called out in your plan materials or just a hidden fact that you have to ask about?

I don't see it in any of my employer's documentation or in Fidelity's (where my 401k is) - which is leading me to believe it's not an option for me
Mine is called out. Also mine i can pick an aftertax %. Also in the plan materials they talk about "in service distributions of aftertax funds" which is what allows you to take the money out. It is all pretty apparent. Someone else that i know it isn't as apparent, they just switch to aftertax after they hit the limit for pretax/roth... but most people if it isn't spelled out, when they hit the pretax limit, their contributions just cut off.

bhsince87
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by bhsince87 » Thu Oct 11, 2018 9:17 pm

If they allow you to take yearly or more frequent distributions, and roll those into a Roth IRA, then these are AWESOME deals!

If not, they aren't much different than an after tax account.

On the downside, you might not have access to the funds when you want them.

On the plus side, they might offer more legal protection than a regular after tax account.
Retirement: When you reach a point where you have enough. Or when you've had enough.

jbsmith05
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by jbsmith05 » Thu Oct 11, 2018 9:17 pm

Soon2BXProgrammer wrote:
Thu Oct 11, 2018 9:11 pm
jbsmith05 wrote:
Thu Oct 11, 2018 9:05 pm
So for those of you that are allowed to do the after-tax contri's - is this explicitly called out in your plan materials or just a hidden fact that you have to ask about?

I don't see it in any of my employer's documentation or in Fidelity's (where my 401k is) - which is leading me to believe it's not an option for me
Mine is called out. Also mine i can pick an aftertax %. Also in the plan materials they talk about "in service distributions of aftertax funds" which is what allows you to take the money out. It is all pretty apparent. Someone else that i know it isn't as apparent, they just switch to aftertax after they hit the limit for pretax/roth... but most people if it isn't spelled out, when they hit the pretax limit, their contributions just cut off.

Ahh ok - pretty sure I don't have it because once I hit the 18,500 limit they quit taking contributions. I asked anyway, but i'd be 100% shocked if it's allowed...if it is I have no idea how to get the additional contributions to the plan!!

jbsmith05
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by jbsmith05 » Thu Oct 11, 2018 9:18 pm

bhsince87 wrote:
Thu Oct 11, 2018 9:17 pm
If they allow you to take yearly or more frequent distributions, and roll those into a Roth IRA, then these are AWESOME deals!

If not, they aren't much different than an after tax account.

On the downside, you might not have access to the funds when you want them.

On the plus side, they might offer more legal protection than a regular after tax account.
From what I was reading is that you simply convert the after-tax contribution to a Roth IRA at the end of the year

Soon2BXProgrammer
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by Soon2BXProgrammer » Thu Oct 11, 2018 9:24 pm

jbsmith05 wrote:
Thu Oct 11, 2018 9:18 pm
bhsince87 wrote:
Thu Oct 11, 2018 9:17 pm
If they allow you to take yearly or more frequent distributions, and roll those into a Roth IRA, then these are AWESOME deals!

If not, they aren't much different than an after tax account.

On the downside, you might not have access to the funds when you want them.

On the plus side, they might offer more legal protection than a regular after tax account.
From what I was reading is that you simply convert the after-tax contribution to a Roth IRA at the end of the year
Just so your aware.. there are plans that allow after tax contributions, but might not offer "in service distributions" to roll over to a roth ira.. or they might also not allow conversions of the aftertax to roth401k.

(my plan allows both).. You must be very careful before you lock up a bunch of money, to make sure you plan allows one of the two conversion to roth approaches. if it is neither, and the money has to stay in the aftertax account, that isn't a good deal if your going to stay there for years (plural).

jbsmith05
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by jbsmith05 » Thu Oct 11, 2018 9:34 pm

^^ Thanks for the tip/advice!!

bhsince87
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by bhsince87 » Thu Oct 11, 2018 9:35 pm

Soon2BXProgrammer wrote:
Thu Oct 11, 2018 9:24 pm
jbsmith05 wrote:
Thu Oct 11, 2018 9:18 pm
bhsince87 wrote:
Thu Oct 11, 2018 9:17 pm
If they allow you to take yearly or more frequent distributions, and roll those into a Roth IRA, then these are AWESOME deals!

If not, they aren't much different than an after tax account.

On the downside, you might not have access to the funds when you want them.

On the plus side, they might offer more legal protection than a regular after tax account.
From what I was reading is that you simply convert the after-tax contribution to a Roth IRA at the end of the year
Just so your aware.. there are plans that allow after tax contributions, but might not offer "in service distributions" to roll over to a roth ira.. or they might also not allow conversions of the aftertax to roth401k.

(my plan allows both).. You must be very careful before you lock up a bunch of money, to make sure you plan allows one of the two conversion to roth approaches. if it is neither, and the money has to stay in the aftertax account, that isn't a good deal if your going to stay there for years (plural).
Yes, this is the point I was trying to make. But you made it better than I did!
Retirement: When you reach a point where you have enough. Or when you've had enough.

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cheese_breath
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by cheese_breath » Thu Oct 11, 2018 10:03 pm

This is the second thread in the past 2 or 3 weeks where a father or grandfather has given directions of what he wants done with his money or materials, and the person entrusted to carry out his wishes comes here to seek out other options. Why not just do what he asked you to do period. You don't have to agree with it, just do what you've been entrusted to do.
The surest way to know the future is when it becomes the past.

jbsmith05
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by jbsmith05 » Thu Oct 11, 2018 10:07 pm

cheese_breath wrote:
Thu Oct 11, 2018 10:03 pm
This is the second thread in the past 2 or 3 weeks where a father or grandfather has given directions of what he wants done with his money or materials, and the person entrusted to carry out his wishes comes here to seek out other options. Why not just do what he asked you to do period. You don't have to agree with it, just do what you've been entrusted to do.
Huh?

bada bing
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by bada bing » Fri Oct 12, 2018 2:15 am

My employer's 401K is at Fidelity as well. It allows after-tax contributions, in-service distributions and
in-plan recharacterizations. I also didn't know this was available until 4 years ago and discovered it on my
own by reading of it and then calling Fidelity and asking.

If you call fidelity, the rep can look up your plan documents and give you an answer in a couple minutes.
I have found Fidelity to be the best source of information on the plan, the people at my Megacorp HR dept.
are pretty much clueless. The one caveat is that when talking to a Fidelity CSR you have to know what
questions you want answered. The CSR's appear to not want to be seen as offering advice, so they don't
embellish answers with extra information or offer opinions or ideas.

If allowed by your plan, the initial set up at Fidelity involves opening a tIRA and a Roth IRA to receive earnings
and after-tax contributions respectively. After the initial set up, subsequent mega-backdoor roll overs take just
a couple minute phone call.

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JoMoney
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by JoMoney » Fri Oct 12, 2018 2:22 am

jbsmith05 wrote:
Thu Oct 11, 2018 10:07 pm
cheese_breath wrote:
Thu Oct 11, 2018 10:03 pm
This is the second thread in the past 2 or 3 weeks where a father or grandfather has given directions of what he wants done with his money or materials, and the person entrusted to carry out his wishes comes here to seek out other options. Why not just do what he asked you to do period. You don't have to agree with it, just do what you've been entrusted to do.
Huh?
I'm guessing this was mis-posted and meant for a different thread.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

SRenaeP
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by SRenaeP » Fri Oct 12, 2018 7:25 am

jbsmith05 wrote:
Thu Oct 11, 2018 8:35 pm
So anyway - what can you tell me about this, I searched the forums but not many relevant results, mostly because as soon as you put "401k" as a search parameter you get thousands of results
If you search for mega backdoor Roth, you will likely find numerous threads on the topic.

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cheese_breath
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by cheese_breath » Fri Oct 12, 2018 7:55 am

jbsmith05 wrote:
Thu Oct 11, 2018 10:07 pm
cheese_breath wrote:
Thu Oct 11, 2018 10:03 pm
This is the second thread in the past 2 or 3 weeks where a father or grandfather has given directions of what he wants done with his money or materials, and the person entrusted to carry out his wishes comes here to seek out other options. Why not just do what he asked you to do period. You don't have to agree with it, just do what you've been entrusted to do.
Huh?
I screwed up. This was meant to go into a different thread. My apology.
The surest way to know the future is when it becomes the past.

DarkHelmetII
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by DarkHelmetII » Fri Oct 12, 2018 10:01 am

Soon2BXProgrammer wrote:
Thu Oct 11, 2018 8:53 pm
when you break the 55k IRS limit you can switch to a NQDC plan (pretax).
what is this???

aristotelian
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by aristotelian » Fri Oct 12, 2018 10:05 am

OP, you might also do a search for "megabackdoor Roth".

Soon2BXProgrammer
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by Soon2BXProgrammer » Fri Oct 12, 2018 10:10 am

DarkHelmetII wrote:
Fri Oct 12, 2018 10:01 am
Soon2BXProgrammer wrote:
Thu Oct 11, 2018 8:53 pm
when you break the 55k IRS limit you can switch to a NQDC plan (pretax).
what is this???
at my employer, i have the option when i break the 55k limit to switch to a "non qualified deferred compensation" plan, also known sometimes as a "top hat" plan, or a "benefit restoration" plan. that allows me to continue to save at my 30% contribution rate until the end of the year.

NQDC plans are "not qualified" by definition, you are a general creditor of the company that holds it. the funds are on "paper", there is no trust account, and when you leave the company, there is normally some payment schedule/options. I have selected payable over 15 years starting the january after termination.

we have this plan because a lot of higher level managers/executives/high paid employees would have issues with the 55k limit due to matches even at a more modest contribution level. at my employer they refer to it as a "benefits restoration plan" so that the matches can continue.

the side affect of enrolling in my NQDC plan is that i am not allowed to make contribution percentage changes except once a year during enrollment.

i think its possible to break the 55k limit at my employeer between deferring 30%, the companies matches, and the empoyee bonus at maybe a base salary around 100k.. so that makes it a lot of people.

changingtimes
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by changingtimes » Fri Oct 12, 2018 12:51 pm

My plan (held at Vanguard) has always allowed contributions to continue when you max out for the year. But in the past year they also added a Roth 401k, plus the option to convert any after-tax contributions into a Roth (in-service Roth rollover, though I believe you can also move it to an external Roth IRA) . I had about $3,500 in orphan after-tax contributions from years ago, with about $3,500 in earnings on top, so I did the in-plan rollover with all of that, and am now maxing out my pre-tax and then letting it continue with after-tax contributions. The only thing I'm skeptical about is that the elections page says that you can contribute up to 50% of your wages to pre-tax, and up to 15% after tax, but our HR guy says that if you max pre-tax at 50% it will continue to do your after-tax contributions at the same level. I'm going to hit it next month, so I guess I'll see.

I can execute the in-plan rollover via the Vanguard web site whenever I want, so I'll be doing it as soon as it lets me after each paycheck.

DarkHelmetII
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by DarkHelmetII » Fri Oct 12, 2018 2:02 pm

Soon2BXProgrammer wrote:
Fri Oct 12, 2018 10:10 am
DarkHelmetII wrote:
Fri Oct 12, 2018 10:01 am
Soon2BXProgrammer wrote:
Thu Oct 11, 2018 8:53 pm
when you break the 55k IRS limit you can switch to a NQDC plan (pretax).
what is this???
at my employer, i have the option when i break the 55k limit to switch to a "non qualified deferred compensation" plan, also known sometimes as a "top hat" plan, or a "benefit restoration" plan. that allows me to continue to save at my 30% contribution rate until the end of the year.

NQDC plans are "not qualified" by definition, you are a general creditor of the company that holds it. the funds are on "paper", there is no trust account, and when you leave the company, there is normally some payment schedule/options. I have selected payable over 15 years starting the january after termination.

we have this plan because a lot of higher level managers/executives/high paid employees would have issues with the 55k limit due to matches even at a more modest contribution level. at my employer they refer to it as a "benefits restoration plan" so that the matches can continue.

the side affect of enrolling in my NQDC plan is that i am not allowed to make contribution percentage changes except once a year during enrollment.

i think its possible to break the 55k limit at my employeer between deferring 30%, the companies matches, and the empoyee bonus at maybe a base salary around 100k.. so that makes it a lot of people.
Is this up to the employer's discretion? Let's assume the employer offers post-tax contributions. Also, how are the NQDC distributions taxed? Very helpful, I never heard of this before.

Soon2BXProgrammer
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by Soon2BXProgrammer » Fri Oct 12, 2018 2:22 pm

DarkHelmetII wrote:
Fri Oct 12, 2018 2:02 pm
Soon2BXProgrammer wrote:
Fri Oct 12, 2018 10:10 am
DarkHelmetII wrote:
Fri Oct 12, 2018 10:01 am
Soon2BXProgrammer wrote:
Thu Oct 11, 2018 8:53 pm
when you break the 55k IRS limit you can switch to a NQDC plan (pretax).
what is this???
at my employer, i have the option when i break the 55k limit to switch to a "non qualified deferred compensation" plan, also known sometimes as a "top hat" plan, or a "benefit restoration" plan. that allows me to continue to save at my 30% contribution rate until the end of the year.

NQDC plans are "not qualified" by definition, you are a general creditor of the company that holds it. the funds are on "paper", there is no trust account, and when you leave the company, there is normally some payment schedule/options. I have selected payable over 15 years starting the january after termination.

we have this plan because a lot of higher level managers/executives/high paid employees would have issues with the 55k limit due to matches even at a more modest contribution level. at my employer they refer to it as a "benefits restoration plan" so that the matches can continue.

the side affect of enrolling in my NQDC plan is that i am not allowed to make contribution percentage changes except once a year during enrollment.

i think its possible to break the 55k limit at my employeer between deferring 30%, the companies matches, and the empoyee bonus at maybe a base salary around 100k.. so that makes it a lot of people.
Is this up to the employer's discretion? Let's assume the employer offers post-tax contributions. Also, how are the NQDC distributions taxed? Very helpful, I never heard of this before.
as far as i know, all NQDC are always pretax. the reason is that they are effectively a contract between you and the employer, for you to take less money now, and them pay it to you later. When they distribute the money later it comes with a W2 and i believe the amount is also listed in box 11.

it is completely up to the employers discretion if they want to offer a NQDC plan or not.

Distributions are taxed as income.

from a social security/medicare perspective they are taxed before they go in. this is actually good as if you are over the SSA wage base, it isn't taxed ever from a social security perspective.

see
https://www.investopedia.com/terms/d/de ... sation.asp
https://www.investopedia.com/terms/n/nqdc.asp
https://www.investopedia.com/articles/p ... s-work.asp

for some general information.. there are a lot of forms of NQDC plans.

my whole NQDC plan is invested in a single bond like investment (i can pick from lots of things), it is a fixed interest fund currently yielding 4% for 2018. (they have some magic calculator based on last years AA industrial yields). think of it as a "stable value fund" on steroids. I use this instrument to cover a significant amount of my bond funds for my portfolio.. However, i do have risk that the employer goes belly up and all those funds go away. Currently my whole NQDC is a small enough slice of my total portfolio that if my employer went bankrupt it wouldnt break me.

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Earl Lemongrab
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Re: After Tax 401k Contri's vs Trad 401k vs Roth 401k

Post by Earl Lemongrab » Fri Oct 12, 2018 3:10 pm

jbsmith05 wrote:
Thu Oct 11, 2018 9:05 pm
So for those of you that are allowed to do the after-tax contri's - is this explicitly called out in your plan materials or just a hidden fact that you have to ask about?
Megacorp had it described in the Summary Plan Description, plus the various menus in the web pages would list it as an option where appropriate.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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