401(k) front loading: pre-tax, Roth, after-tax and match

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
MathIsMyWayr
Posts: 891
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

401(k) front loading: pre-tax, Roth, after-tax and match

Post by MathIsMyWayr » Wed Oct 09, 2019 9:28 am

My employer's 401(k) plan offers pre-tax, Roth, and after-tax with an immediate conversion to Roth 401(k). The contribution percentage has to be set separately for each. The employer match is only for pre-tax and Roth, but is true-up. I usually try to front load annual 401(k) contributions. One sticking point with a front loading is the (remote) possibility of a job change. I understand that the IRS annual contribution limit applies to the total individual contributions over all employers in the same line of work. I also understand that the total IRS annual plan limit, $56k + catch up in 2019, is per employer. For the next year's front loading, I am thinking of contributing the minimum to pre-tax to get the maximum match and the maximum amount to after-tax while leaving an adequate room for the entire year's match assuming the pre-tax contribution limit will be filled up gradually over the year. Once the after-tax contribution amount hits the projected maximum, I plan to accelerate the contribution to pre-tax while leaving a space to get the maximum match just in case of a job change. I am wondering whether this is the best plan for front loading.

lakpr
Posts: 2501
Joined: Fri Mar 18, 2011 9:59 am

Re: 401(k) front loading: pre-tax, Roth, after-tax and match

Post by lakpr » Wed Oct 09, 2019 10:05 am

I suggest you do maximize everything at the current employer, then opt for Roth contribution at the next employer enough to get the full match. Since it is a Roth contribution, it won’t reduce your income or taxes.

User avatar
FiveK
Posts: 7538
Joined: Sun Mar 16, 2014 2:43 pm

Re: 401(k) front loading: pre-tax, Roth, after-tax and match

Post by FiveK » Thu Oct 10, 2019 12:29 am

lakpr wrote:
Wed Oct 09, 2019 10:05 am
I suggest you do maximize everything at the current employer, then opt for Roth contribution at the next employer enough to get the full match. Since it is a Roth contribution, it won’t reduce your income or taxes.
Unfortunately, if one makes $19K of elective contributions - either traditional or Roth or a combination - to one employer, there is no room for Roth (or traditional) elective contributions at the next employer.

That said, if it is indeed a "(remote) possibility" then it might not be worth changing what has been working well in previous years.

lakpr
Posts: 2501
Joined: Fri Mar 18, 2011 9:59 am

Re: 401(k) front loading: pre-tax, Roth, after-tax and match

Post by lakpr » Thu Oct 10, 2019 5:02 am

Technically true, but overcontributing the $19k limit isn't illegal. If you do it as a traditional contribution but don't remove the excess contribution by April 15 of the year next when such excess contribution is made, the only consequence is to have it double taxed -- the money will have gone in after tax, and will also be taxable at withdrawal.

With a Roth contribution in excess of $19k, and not withdrawn after April 15 next year, such double taxing possibility is eliminated. No real IRS guidance exists in this case as to what the taxpayer is expected to do in such cases. I suspect the money will remain as Roth contributions in the plan and non taxable at withdrawal.

Topic Author
MathIsMyWayr
Posts: 891
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

Re: 401(k) front loading: pre-tax, Roth, after-tax and match

Post by MathIsMyWayr » Thu Oct 10, 2019 7:11 am

If you plan to change jobs and plan carefully, you may contribute a large sum to after-tax 401(k).
The IRS annual limits (including catch-up):
  • Plan: $56k + $6k (per plan)
    Employee contribution: $19k + $6k (combined)
    Employer match: $10k-$15k
    Total after-tax voluntary contribution with 2 employers : 2*$62k - $25k - match = $99k - match
Your may be able to contribute $84k-$89k to mega backdoor Roth by front-loading after-tax 401(k) in the first employer's plan. You also have to make sure to get the maximum match from the second employer. I am not advocating for a job change for maga backdoor Roth, but this is something to plan for if you plan for a job change.

Example with the first (current) employer:
1. Fill up the maximum after-tax space in case of no job change : $62k - $25k - tot_match
2. Fill up the pre-tax or Roth with room for min. contribution for the remainder of the year.
3. If your job change schedule is finalized, fill up the remaining 401(k) space. A big pay helps. Once 1) and 2) are done, you only have to fill up the remaining plan space with after-tax contribution.

User avatar
FiveK
Posts: 7538
Joined: Sun Mar 16, 2014 2:43 pm

Re: 401(k) front loading: pre-tax, Roth, after-tax and match

Post by FiveK » Thu Oct 10, 2019 12:25 pm

lakpr wrote:
Thu Oct 10, 2019 5:02 am
Technically true, but overcontributing the $19k limit isn't illegal. If you do it as a traditional contribution but don't remove the excess contribution by April 15 of the year next when such excess contribution is made, the only consequence is to have it double taxed -- the money will have gone in after tax, and will also be taxable at withdrawal.

With a Roth contribution in excess of $19k, and not withdrawn after April 15 next year, such double taxing possibility is eliminated. No real IRS guidance exists in this case as to what the taxpayer is expected to do in such cases. I suspect the money will remain as Roth contributions in the plan and non taxable at withdrawal.
Perhaps not illegal as in "go to jail, go directly to jail" illegal, but one ignores federal regulations at one's peril. The removal of excess contribution, should one be in that situation, seems the best course.

The "back door" is already spoken for, but it seems unlikely there is a "side door" that would allow one to overcontribute to a Roth 401k and have withdrawals of all contributions and gains be tax and penalty free. :wink:

lakpr
Posts: 2501
Joined: Fri Mar 18, 2011 9:59 am

Re: 401(k) front loading: pre-tax, Roth, after-tax and match

Post by lakpr » Thu Oct 10, 2019 12:39 pm

FiveK wrote:
Thu Oct 10, 2019 12:25 pm
The "back door" is already spoken for, but it seems unlikely there is a "side door" that would allow one to overcontribute to a Roth 401k and have withdrawals of all contributions and gains be tax and penalty free. :wink:
Well, this excess contribution is not something that can be done at a single employer; if the plan allows excess contributions, and does not take steps to fix it from happening again, the plan itself could be disqualified. I think this "side door" would even be only a possibility when someone is switching employers. Such person also has to be in high tax bracket, enough to max out the $19k limit before switching to the new employer and again contribute to the 401k.

Post Reply