what should I be doing with my after-tax 401k contributions?

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BeerTooth
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what should I be doing with my after-tax 401k contributions?

Post by BeerTooth » Mon Sep 09, 2019 11:36 am

I hit my $19,000 limit on pre-tax 401k contributions last pay period, so I have switched my contributions to the after-tax category for the remainder of the year. This ensures that I continue to receive my 6% employer match.

I'm projecting a little over $8,000 worth of after-tax contributions for the remainder of 2019.

This is the first year I've been in this situation, so I'm unsure if I need to be doing something else? I read something about Roth conversions, and backdoor Roth options, but I didn't quite grok it.

magicrat
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Re: what should I be doing with my after-tax 401k contributions?

Post by magicrat » Mon Sep 09, 2019 11:39 am

Rollover to Roth 401k or Roth IRA if your plan allows.

bloom2708
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Re: what should I be doing with my after-tax 401k contributions?

Post by bloom2708 » Mon Sep 09, 2019 11:42 am

Does your company support In Plan Roth conversions? Also known as Mega Back Door Roth.

Does your 401k allow you to set different allocations based on the source? Pre-tax, Post-tax, etc?

You are limited by your plan options.

If your post-tax is converted to Roth, then I would keep that mostly stocks. It will (eventually) end up in your Roth IRA when your work ends and if you consolidate your accounts to Fidelity or Vanguard or XXX.

Our post-tax contributions are flipped to Roth with each paycheck. They call it "daily", but you get paid 24 times. We can specify different funds based on the source. So that helps to target dollars.
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BeerTooth
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Re: what should I be doing with my after-tax 401k contributions?

Post by BeerTooth » Mon Sep 09, 2019 12:09 pm

I think this says that I'm not allowed to do an In-Plan Roth Rollover using After-Tax Contributions -

"In-Plan Roth Rollovers
You may convert all or part of the eligible portion of your vested Plan account into a Roth designated account within the Plan. The eligible portion of your vested Plan account includes all vested amounts in your account that are not Roth After-Tax Contributions or Roth Rollover Contributions but does not include those amounts that are (1) attributable to outstanding loan balances, (2) pension offsets, (3) subject to spousal consent requirements, (4) qualified nonelective contributions, or (5) safe harbor Matching Contributions. You may make two conversions each Plan Year for a minimum of $500 each time.
An in-plan conversion of Non-Roth Plan assets to a Roth designated account causes the converted amounts to become taxable in the year of the conversion. However, any future qualified distributions of the converted amounts, plus any accumulated earnings thereon, may be distributed to you tax-free. Very generally, Non-Roth Plan assets converted to a Roth designated account and related earnings may be distributed tax-free if the distribution is taken after the end of the five-taxable-year period beginning with the first day of the taxable year in which the conversion was made. In addition, assets converted to a Roth designated account remain subject to the distribution restrictions that were applicable to the amount before the conversion took place."

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whodidntante
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Re: what should I be doing with my after-tax 401k contributions?

Post by whodidntante » Mon Sep 09, 2019 12:15 pm

After tax contributions are useful when you can somehow get the money to a Roth IRA or Roth 401k. The mega backdoor Roth. This is certainly possible if you resign, but try to find a way to do it in service.

FYI your company may not match after tax contributions. Mine does not.

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BeerTooth
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Re: what should I be doing with my after-tax 401k contributions?

Post by BeerTooth » Mon Sep 09, 2019 12:21 pm

whodidntante wrote:
Mon Sep 09, 2019 12:15 pm
After tax contributions are useful when you can somehow get the money to a Roth IRA or Roth 401k. The mega backdoor Roth. This is certainly possible if you resign, but try to find a way to do it in service.

FYI your company may not match after tax contributions. Mine does not.
I confirmed on my most recent paycheck that the company is indeed matching my after-tax contributions.

Since the plan snippet above indicates I can't do the Mega Backdoor Roth, do I just continue making after-tax contributions until I resign/retire, then do a one-time rollover?

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Wiggums
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Re: what should I be doing with my after-tax 401k contributions?

Post by Wiggums » Mon Sep 09, 2019 12:21 pm

whodidntante wrote:
Mon Sep 09, 2019 12:15 pm
After tax contributions are useful when you can somehow get the money to a Roth IRA or Roth 401k. The mega backdoor Roth. This is certainly possible if you resign, but try to find a way to do it in service.

FYI your company may not match after tax contributions. Mine does not.
+1

My company also did not match after tax contributions.

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whodidntante
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Re: what should I be doing with my after-tax 401k contributions?

Post by whodidntante » Mon Sep 09, 2019 12:31 pm

BeerTooth wrote:
Mon Sep 09, 2019 12:21 pm
whodidntante wrote:
Mon Sep 09, 2019 12:15 pm
After tax contributions are useful when you can somehow get the money to a Roth IRA or Roth 401k. The mega backdoor Roth. This is certainly possible if you resign, but try to find a way to do it in service.

FYI your company may not match after tax contributions. Mine does not.
I confirmed on my most recent paycheck that the company is indeed matching my after-tax contributions.

Since the plan snippet above indicates I can't do the Mega Backdoor Roth, do I just continue making after-tax contributions until I resign/retire, then do a one-time rollover?
See if you can take an in service distribution of the after tax subaccount without horrible side effects, like losing the ability to contribute for six months. You'll be able to convert the after tax contributions after you leave the company, but if that includes a 300% gain you would have been better off making taxable investments.

retiredjg
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Re: what should I be doing with my after-tax 401k contributions?

Post by retiredjg » Mon Sep 09, 2019 12:39 pm

BeerTooth wrote:
Mon Sep 09, 2019 12:09 pm
I think this says that I'm not allowed to do an In-Plan Roth Rollover using After-Tax Contributions -

"In-Plan Roth Rollovers
You may convert all or part of the eligible portion of your vested Plan account into a Roth designated account within the Plan. The eligible portion of your vested Plan account includes all vested amounts in your account that are not Roth After-Tax Contributions or Roth Rollover Contributions but does not include those amounts that are (1) attributable to outstanding loan balances, (2) pension offsets, (3) subject to spousal consent requirements, (4) qualified nonelective contributions, or (5) safe harbor Matching Contributions. You may make two conversions each Plan Year for a minimum of $500 each time.
An in-plan conversion of Non-Roth Plan assets to a Roth designated account causes the converted amounts to become taxable in the year of the conversion. However, any future qualified distributions of the converted amounts, plus any accumulated earnings thereon, may be distributed to you tax-free. Very generally, Non-Roth Plan assets converted to a Roth designated account and related earnings may be distributed tax-free if the distribution is taken after the end of the five-taxable-year period beginning with the first day of the taxable year in which the conversion was made. In addition, assets converted to a Roth designated account remain subject to the distribution restrictions that were applicable to the amount before the conversion took place."
I don't think your plan says what you think it says. But first, are you aware that your after-tax contributions are not Roth?

I read that you cannot convert your Roth contributions to Roth (well, yeah....they are already Roth) and that you cannot convert Roth rollover contributions to Roth (they are already Roth as well....)

It's wordy and confusing. Ask your plan reps or HR or whoever interprets this stuff for you. I think you probably can do an in-plan Roth rollover of your after tax account.


If you cannot do an in-plan Roth rollover or if you prefer not to, see if you can roll your after-tax account out to Roth IRA. I suspect you can.

Spirit Rider
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Re: what should I be doing with my after-tax 401k contributions?

Post by Spirit Rider » Mon Sep 09, 2019 6:08 pm

I agree with @retiredjg. The plan description clearly states. You can do an in-plan Roth Rollover (IRR) of employee after-tax contributions. You are limited to two IRRs per year and you can do an in-service rollover of each IRR after five years.

I'm not as confident as @retiredjg that you can do in-service rollovers of employee after-tax contributions and earnings .

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BeerTooth
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Re: what should I be doing with my after-tax 401k contributions?

Post by BeerTooth » Sat Sep 14, 2019 12:19 pm

OK, I called my plan administrator yesterday. She confirmed that the company match does indeed apply to After-Tax contributions, and that After-Tax contributions can be converted to Roth 401k funds at any time. The only limitation is the minimum amount for conversion is $500. I'll probably wait until the end of the year and make one call to convert all $8000 of After-Tax contributions to Roth 401k. Then on January 1 I will switch back to contributing Pre-Tax until I max out again.

retiredjg
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Re: what should I be doing with my after-tax 401k contributions?

Post by retiredjg » Sat Sep 14, 2019 12:33 pm

That sounds reasonable.

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anon_investor
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Re: what should I be doing with my after-tax 401k contributions?

Post by anon_investor » Sat Sep 14, 2019 1:14 pm

BeerTooth wrote:
Sat Sep 14, 2019 12:19 pm
OK, I called my plan administrator yesterday. She confirmed that the company match does indeed apply to After-Tax contributions, and that After-Tax contributions can be converted to Roth 401k funds at any time. The only limitation is the minimum amount for conversion is $500. I'll probably wait until the end of the year and make one call to convert all $8000 of After-Tax contributions to Roth 401k. Then on January 1 I will switch back to contributing Pre-Tax until I max out again.
If there is no cost to convert, you should do that whenever you have the minimum amount, to minimize growth before the Roth conversion, as any growth will receive the same tax treatment as regular non-roth 401k funds (ordinary income tax rates upon withdrawal in retirement).

Spirit Rider
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Re: what should I be doing with my after-tax 401k contributions?

Post by Spirit Rider » Sat Sep 14, 2019 4:30 pm

anon_investor wrote:
Sat Sep 14, 2019 1:14 pm
BeerTooth wrote:
Sat Sep 14, 2019 12:19 pm
OK, I called my plan administrator yesterday. She confirmed that the company match does indeed apply to After-Tax contributions, and that After-Tax contributions can be converted to Roth 401k funds at any time. The only limitation is the minimum amount for conversion is $500. I'll probably wait until the end of the year and make one call to convert all $8000 of After-Tax contributions to Roth 401k. Then on January 1 I will switch back to contributing Pre-Tax until I max out again.
If there is no cost to convert, you should do that whenever you have the minimum amount, to minimize growth before the Roth conversion, as any growth will receive the same tax treatment as regular non-roth 401k funds (ordinary income tax rates upon withdrawal in retirement).
Exactly.

jvini
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Re: what should I be doing with my after-tax 401k contributions?

Post by jvini » Sat Sep 14, 2019 5:21 pm

I rolled mine into a Roth account at Fidelity. This mega back door Roth is an amazing way to fund a Roth account if you don't qualify. You can contribute quite a bit above and beyond your pre tax 401k contribution, even more if you're over 50, and it really adds up. Not all or even many employers allow it, but if they do, take advantage! Earnings should not be rolled over, although if they aren't big, you could pay regular income taxes on them and I believe, roll them into an existing IRA if you have one. Please check me on that one, although I do know earnings should be kept separate from your after tax contributions.

sc9182
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Re: what should I be doing with my after-tax 401k contributions?

Post by sc9182 » Sat Sep 14, 2019 5:55 pm

If you have outside IRA, converting after tax contributions (with built in gains) to Roth IRA could invoke odd prorata rules (dunno, but sure to check!). If you don’t have outside IRA, no problem.

Covert after tax as soon as plan allows into Roth 401k! Thus keeping any prorate rules at bay.

Somebody who knows more on this topic - please clarify!

Spirit Rider
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Re: what should I be doing with my after-tax 401k contributions?

Post by Spirit Rider » Sat Sep 14, 2019 7:32 pm

jvini wrote:
Sat Sep 14, 2019 5:21 pm
You can contribute quite a bit above and beyond your pre tax 401k contribution, even more if you're over 50, and it really adds up.
The additional catch up contribution limit that begins in the year you turn 50 can never be used for employee after-tax tax contributions.

The annual addition limit (2019 = $56K) does not change in a year you are >= age 50. Your maximum employee after-tax contribution remains the annual addition limit - employee elective contributions - employer contributions.

It is a disservice to refer to a combine limit (2019 = $62K, because it is NOT a combined limit.Catch up contributions are not included in the annual addition limit. Catch up contributions can only be used when you exceed the employee elective contribution limit, an ADP testing failure limit or a plan limit.

Boatguy
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Re: what should I be doing with my after-tax 401k contributions?

Post by Boatguy » Sat Sep 14, 2019 7:45 pm

The pro rata rules don’t apply to a 401k to Roth conversion.

Also, for what it’s worth, the match that you are “getting” on your spillover is very likely the basic match that you are entitled to receive on your $19k max contributions. For example, if your company matches 5% of your contribution, they will give you that 5% ($950) over the course of a FULL YEAR. You hit your $19k early, so if you had stopped contributing to the spillover, your matching contributions would have stopped as well. If you were to look at your paycheck, you’d likely see that you are tracking towards that $950 match ( or whatever your company’s percentage is), and not anything more.

retiredjg
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Re: what should I be doing with my after-tax 401k contributions?

Post by retiredjg » Sun Sep 15, 2019 7:57 am

sc9182 wrote:
Sat Sep 14, 2019 5:55 pm
If you have outside IRA, converting after tax contributions (with built in gains) to Roth IRA could invoke odd prorata rules (dunno, but sure to check!). If you don’t have outside IRA, no problem.
Sending the after-tax money and its earnings directly to Roth IRA does not involve pro-rating with a traditional tIRA.

decapod10
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Re: what should I be doing with my after-tax 401k contributions?

Post by decapod10 » Sun Sep 15, 2019 9:46 am

jvini wrote:
Sat Sep 14, 2019 5:21 pm
I rolled mine into a Roth account at Fidelity. This mega back door Roth is an amazing way to fund a Roth account if you don't qualify. You can contribute quite a bit above and beyond your pre tax 401k contribution, even more if you're over 50, and it really adds up. Not all or even many employers allow it, but if they do, take advantage! Earnings should not be rolled over, although if they aren't big, you could pay regular income taxes on them and I believe, roll them into an existing IRA if you have one. Please check me on that one, although I do know earnings should be kept separate from your after tax contributions.
You can roll over the earnings from after tax 401k to Roth and pay taxes as you said. That's what we do, since it's usually not very much relatively speaking unless the market is just going nuts.

jvini
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Re: what should I be doing with my after-tax 401k contributions?

Post by jvini » Sun Sep 15, 2019 10:04 am

Spirit Rider wrote:
Sat Sep 14, 2019 7:32 pm
jvini wrote:
Sat Sep 14, 2019 5:21 pm
You can contribute quite a bit above and beyond your pre tax 401k contribution, even more if you're over 50, and it really adds up.
The additional catch up contribution limit that begins in the year you turn 50 can never be used for employee after-tax tax contributions.

The annual addition limit (2019 = $56K) does not change in a year you are >= age 50. Your maximum employee after-tax contribution remains the annual addition limit - employee elective contributions - employer contributions.

It is a disservice to refer to a combine limit (2019 = $62K, because it is NOT a combined limit.Catch up contributions are not included in the annual addition limit. Catch up contributions can only be used when you exceed the employee elective contribution limit, an ADP testing failure limit or a plan limit.
Yup. I just meant you can contribute more to your 401k. Sorry for the confusion. Disservice is a bit much, but hey, some of us drink a lot of coffee. :happy

CoastalWinds
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Re: what should I be doing with my after-tax 401k contributions?

Post by CoastalWinds » Sun Sep 15, 2019 10:36 am

BeerTooth wrote:
Sat Sep 14, 2019 12:19 pm
OK, I called my plan administrator yesterday. She confirmed that the company match does indeed apply to After-Tax contributions, and that After-Tax contributions can be converted to Roth 401k funds at any time. The only limitation is the minimum amount for conversion is $500. I'll probably wait until the end of the year and make one call to convert all $8000 of After-Tax contributions to Roth 401k. Then on January 1 I will switch back to contributing Pre-Tax until I max out again.
I’m going thru a similar process with my DH’s new 401k plan now, trying to figure out if I can do the 2-step Megabackdoor roth process. I have a similar paragraph to yours about ability to do an in-plan rollover to Roth (step 2), but our plan is silent on whether one can make after-tax (non-Roth) contributions (which is step 1). Does your summary plan document clearly state that after-tax contributions are allowed?

johnra
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Re: what should I be doing with my after-tax 401k contributions?

Post by johnra » Sun Sep 15, 2019 1:15 pm

I put my after-tax contributions into a ~2% savings and then rollover to my Roth right away each month. There is no tax advantage to having growth in an after-tax plan, in fact growth would be better in a taxable account where it would be taxed as long term gains rather than taxable income.

Spirit Rider
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Re: what should I be doing with my after-tax 401k contributions?

Post by Spirit Rider » Sun Sep 15, 2019 1:33 pm

jvini wrote:
Sun Sep 15, 2019 10:04 am
Yup. I just meant you can contribute more to your 401k. Sorry for the confusion. Disservice is a bit much, but hey, some of us drink a lot of coffee. :happy
I wasn't referring to you. You didn't even mention a combined limit, that was me.

I was referring to the many web sites that always refer to the combined contribution limit >= the year your turn age 50. Without any clarification of the specific circumstances that allow you to use the catch up contributions. It has caused some individuals to be mislead to making excess employee after-tax contributions in lightweight custom one-participant 401k plans.

retiredjg
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Re: what should I be doing with my after-tax 401k contributions?

Post by retiredjg » Sun Sep 15, 2019 2:06 pm

CoastalWinds wrote:
Sun Sep 15, 2019 10:36 am
....but our plan is silent on whether one can make after-tax (non-Roth) contributions (which is step 1). Does your summary plan document clearly state that after-tax contributions are allowed?
The magic words to look for (oddly) are "employee contributions". The $19k you might think of as employee contributions are called "elective deferrals".

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BeerTooth
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Re: what should I be doing with my after-tax 401k contributions?

Post by BeerTooth » Sun Sep 15, 2019 3:54 pm

CoastalWinds wrote:
Sun Sep 15, 2019 10:36 am
BeerTooth wrote:
Sat Sep 14, 2019 12:19 pm
OK, I called my plan administrator yesterday. She confirmed that the company match does indeed apply to After-Tax contributions, and that After-Tax contributions can be converted to Roth 401k funds at any time. The only limitation is the minimum amount for conversion is $500. I'll probably wait until the end of the year and make one call to convert all $8000 of After-Tax contributions to Roth 401k. Then on January 1 I will switch back to contributing Pre-Tax until I max out again.
I’m going thru a similar process with my DH’s new 401k plan now, trying to figure out if I can do the 2-step Megabackdoor roth process. I have a similar paragraph to yours about ability to do an in-plan rollover to Roth (step 2), but our plan is silent on whether one can make after-tax (non-Roth) contributions (which is step 1). Does your summary plan document clearly state that after-tax contributions are allowed?
yes, my plan summary clearly states that after-tax contributions are allowed, but in order to confirm the rollover option, and do the rollover, I had to pickup the phone and do battle with the automated menu

Topic Author
BeerTooth
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Re: what should I be doing with my after-tax 401k contributions?

Post by BeerTooth » Mon Sep 16, 2019 11:03 am

Boatguy wrote:
Sat Sep 14, 2019 7:45 pm
The pro rata rules don’t apply to a 401k to Roth conversion.

Also, for what it’s worth, the match that you are “getting” on your spillover is very likely the basic match that you are entitled to receive on your $19k max contributions. For example, if your company matches 5% of your contribution, they will give you that 5% ($950) over the course of a FULL YEAR. You hit your $19k early, so if you had stopped contributing to the spillover, your matching contributions would have stopped as well. If you were to look at your paycheck, you’d likely see that you are tracking towards that $950 match ( or whatever your company’s percentage is), and not anything more.
That's not how an employer match works. It is a percentage of your salary, not a percentage of the IRS limit. When I login to my account, it lists Employer Contributions YTD: ~$5,700. My salary is about $130k with a mid-year raise, and we are (37/52) weeks into the year. $130k * 0.06 * (37/52) = $5,550 so it's tracking as expected.

Spirit Rider
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Re: what should I be doing with my after-tax 401k contributions?

Post by Spirit Rider » Mon Sep 16, 2019 1:55 pm

BeerTooth wrote:
Mon Sep 16, 2019 11:03 am
Boatguy wrote:
Sat Sep 14, 2019 7:45 pm
The pro rata rules don’t apply to a 401k to Roth conversion.

Also, for what it’s worth, the match that you are “getting” on your spillover is very likely the basic match that you are entitled to receive on your $19k max contributions. For example, if your company matches 5% of your contribution, they will give you that 5% ($950) over the course of a FULL YEAR. You hit your $19k early, so if you had stopped contributing to the spillover, your matching contributions would have stopped as well. If you were to look at your paycheck, you’d likely see that you are tracking towards that $950 match ( or whatever your company’s percentage is), and not anything more.
That's not how an employer match works. It is a percentage of your salary, not a percentage of the IRS limit. When I login to my account, it lists Employer Contributions YTD: ~$5,700. My salary is about $130k with a mid-year raise, and we are (37/52) weeks into the year. $130k * 0.06 * (37/52) = $5,550 so it's tracking as expected.
You are missing the forest for the trees. Boatguy might have misspoke, but you are missing the whole point of their post.

I don't mean to speak for Boatguy, but I am sure Boatguy meant the company matches your contribution up to 5% of your compensation. If the company doesn't do a year-end true-up as most don't. If contribute > 5% and reach the $19K limit before year-end. You will lose out on company matching contributions, because there is no longer any contributions to be matched up to 5%.

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BeerTooth
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Re: what should I be doing with my after-tax 401k contributions?

Post by BeerTooth » Mon Sep 16, 2019 2:06 pm

Spirit Rider wrote:
Mon Sep 16, 2019 1:55 pm
BeerTooth wrote:
Mon Sep 16, 2019 11:03 am
Boatguy wrote:
Sat Sep 14, 2019 7:45 pm
The pro rata rules don’t apply to a 401k to Roth conversion.

Also, for what it’s worth, the match that you are “getting” on your spillover is very likely the basic match that you are entitled to receive on your $19k max contributions. For example, if your company matches 5% of your contribution, they will give you that 5% ($950) over the course of a FULL YEAR. You hit your $19k early, so if you had stopped contributing to the spillover, your matching contributions would have stopped as well. If you were to look at your paycheck, you’d likely see that you are tracking towards that $950 match ( or whatever your company’s percentage is), and not anything more.
That's not how an employer match works. It is a percentage of your salary, not a percentage of the IRS limit. When I login to my account, it lists Employer Contributions YTD: ~$5,700. My salary is about $130k with a mid-year raise, and we are (37/52) weeks into the year. $130k * 0.06 * (37/52) = $5,550 so it's tracking as expected.
You are missing the forest for the trees. Boatguy might have misspoke, but you are missing the whole point of their post.

I don't mean to speak for Boatguy, but I am sure Boatguy meant the company matches your contribution up to 5% of your compensation. If the company doesn't do a year-end true-up as most don't. If contribute > 5% and reach the $19K limit before year-end. You will lose out on company matching contributions, because there is no longer any contributions to be matched up to 5%.
what Boatguy wrote is more wrong than simply misspeaking - it's total misrepresentation of how a company match works. An early career employee could read that and think "$950 total for the whole year - why even bother to contribute?"
There is a world of difference between 5% of $19,0000 and 5% of a typical professional salary.

Yes, I understand the nuance that the company match is accrued on a paycheck-by-paycheck basis, not a yearly aggregate total. That's the reason why I'm making after-tax contributions, to ensure that I still collect the company match for the entire year.

Spirit Rider
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Re: what should I be doing with my after-tax 401k contributions?

Post by Spirit Rider » Mon Sep 16, 2019 2:35 pm

BeerTooth wrote:
Mon Sep 16, 2019 2:06 pm
what Boatguy wrote is more wrong than simply misspeaking - it's total misrepresentation of how a company match works. An early career employee could read that and think "$950 total for the whole year - why even bother to contribute?"
There is a world of difference between 5% of $19,0000 and 5% of a typical professional salary.

Yes, I understand the nuance that the company match is accrued on a paycheck-by-paycheck basis, not a yearly aggregate total. That's the reason why I'm making after-tax contributions, to ensure that I still collect the company match for the entire year.
I think you are overreacting. It was pretty clear by context the point Boatguy was trying to make.

Boatguy
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Re: what should I be doing with my after-tax 401k contributions?

Post by Boatguy » Mon Sep 16, 2019 5:42 pm

Thanks, Spirit Rider, for correctly explaining my intent. My math was indeed wrong (and I know better) and I apologize for that, but I was just trying to stop the string of comments regarding a company match on “excess” savings. Spirit Rider said what I was thinking but in my hurry to post something failed to write.

OP—-I was just trying to help. My bad.

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