Understanding a Post Tax 401k

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kappy
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Understanding a Post Tax 401k

Post by kappy » Thu May 18, 2017 6:48 pm

I'm trying to understand how a post tax 401k works. After the 2015 IRS ruling that clarified how post tax 401k's can be rolled into a Roth after leaving an employer without paying taxes, are there any major differences between the two? Are dividends in a post tax 401k taxed or not?

retiredjg
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Re: Understanding a Post Tax 401k

Post by retiredjg » Thu May 18, 2017 7:03 pm

Are you talking about after-tax contributions to a 401k? Are you talking about in-service (while still working there) distributions (rollover to Roth IRA)?

I think after tax accounts in 401k have always been able to be rolled into Roth IRA after leaving employment.

You asked "Are there any major differences between the two?" Which two are you asking about?

Dividends would be earnings. Earnings will be taxed. When the earnings are taxed depends on several things. I'm not sure what your question means.

kappy
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Re: Understanding a Post Tax 401k

Post by kappy » Thu May 18, 2017 7:17 pm

Yes, this would be after-tax contributions to my 401k. The reason I ask is that I am maxing my pre-tax 401k based on my salary but my company takes the percentage based on my gross paycheck. I am salaried but can make OT and on weeks that I work OT, I end up contributing more to the 401k than I want (to be on target for $18,000). Sometime towards the end of the year, I will hit the limit but need to keep contributing to get the company match. This is where I want to learn about after-tax contributions.

For after-tax 401k contributions, are dividends taxed that year like a taxable account? Are they taxed when doing a rollover to a Roth (whether in-service or after I leave)?

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Thrifty Femme
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Re: Understanding a Post Tax 401k

Post by Thrifty Femme » Thu May 18, 2017 7:21 pm

Do a search on mega backdoor roth. You are fortunate you have access to an after-tax 401k!

Alan S.
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Re: Understanding a Post Tax 401k

Post by Alan S. » Thu May 18, 2017 9:15 pm

kappy wrote:Yes, this would be after-tax contributions to my 401k.
For after-tax 401k contributions, are dividends taxed that year like a taxable account? Are they taxed when doing a rollover to a Roth (whether in-service or after I leave)?


First, be sure that the plan will match your after tax contributions. They may not.

If you make after tax contributions, they go into a separate sub account within the plan and the earnings on the after tax sub account remain in that account. Therefore, when you are allowed to do a rollout of the after tax balance to your Roth IRA, the amount of your contributions will not be taxable, but the earnings that must accompany them will be taxed since they have not already been taxed.

If you waited too long and the earnings within that sub account built up to a significant amount, you could also do a split rollover where the earnings were directly rolled into your TIRA account and the contributions to your Roth IRA. There would be no taxes due for either of these direct rollovers. However, the pre tax amount now in your TIRA would make your back door Roth conversions partly taxable if you are doing back door Roths.

Some plans now will not allow an in service distribution to your Roth IRA. Instead these plans have a Roth 401k option and require that the rollover be made to the Roth 401k instead of your Roth IRA. A rollover to the Roth 401k would be taxed in the same manner as a rollover to your Roth IRA. The split rollover described above would not be allowed for a rollover to your Roth 401k.

After you leave the company, the plan would have to allow a rollover to your Roth IRA, whether from the after tax sub account or from the Roth 401k account.

kappy
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Re: Understanding a Post Tax 401k

Post by kappy » Fri May 19, 2017 8:42 pm

Thank you. I have started reading up on mega backdoor roths and my plan documents. I currently have a traditional IRA and roth IRA at Vanguard as well as pre-tax 401k with my employer. It would seem this limits me to an in service distribution as I do not want to roll my traditional IRA into the 401k.

I do fully fund my roth IRA every year. Does this affect an in service rollover assuming it's allowed by my 401k plan?

diy60
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Re: Understanding a Post Tax 401k

Post by diy60 » Fri May 19, 2017 9:09 pm

OP, as a previous poster mentioned, you are fortunate to have a 401K plan that allows after tax contributions. You should check if you can do IRR (in service Roth conversion), and how often. My employer's 401K plan allowed 2 in service conversions per year. Unfortunately I didn't learn about this process until this year when I was retiring. If you can do in service conversions, you should max out your pretax, and keep on contributing to your after tax. Convert as frequently as your plan will allow and you will effectively convert your after tax to Roth with very little taxable impact.

retiredjg
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Re: Understanding a Post Tax 401k

Post by retiredjg » Sat May 20, 2017 6:08 am

kappy wrote:I do fully fund my roth IRA every year. Does this affect an in service rollover assuming it's allowed by my 401k plan?

No. Contributions are not affected by rollovers and rollovers are not affected by contributions.

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AndrewXnn
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Re: Understanding a Post Tax 401k

Post by AndrewXnn » Sat May 20, 2017 8:01 am

My companies 401K plan allows after tax contributions.
I can look up the total in the plan, how much is in each individual fund and also how much is in pre or after tax categories.

When I reach $18K pretax in a year, the plan stops any further contributions in that category.
I'm over 50, so I can also make catch up contributions.
When I reach $6K catch up pretax, the plan stops any further contributions in that category.
The plan also allow Roth401K contributions, but I have decided against those because
doing so counts towards the $18K pretax limit. (seems strange, but that is what it does).

In the past, when I hit the $18K/$6K limits, I would switch contributions over to after tax.
The limit on after tax is a function of how much has been contributed to other categories.
The total 401K plan contribution limit is $60K for 2017.

However, there is also company also has a match.
The match is a function of how much I save each pay period.
So, to receive the match, a contribution must be made.
The plan warns people to continue after tax contributions after reaching the pre tax limits.
The total company match is about $3.8K.

The company also profit shares and places about $3.8K in the plan each year.
So, my after tax limit is $60K-($18K+$6K+$3.8K+$3.8K) = $28.4K

In the past, I have not reached the total limit, but never thought about it too much either.
I already have a very large taxable account. So, I've decided this year to
try to reach the $60K total limit, but I have to pace it out so continue
receiving company match each pay check.

Can not say that I fully understand the plan.
Feel very fortunate though as not everybody has such a plan.

A few years ago, I noticed that there was about $70K after tax in the 401K plan.
At the time, they allowed that to be rolled over into a Roth, so I did it.
However, they no longer allow people to do that.

kappy
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Re: Understanding a Post Tax 401k

Post by kappy » Sat May 20, 2017 8:06 am

Ok, I finally made it through my plan documents. It allows in-service distributions every 3 months but I am not permitted to make after-tax contributions for another 3 months after a distribution. This is fine as my only contributions would happen towards the end of the year and I'd roll over at the end of the year. The document says any gains will be subject to a mandatory 20% withholding and may be subject to 10% penalty for early distributions. A later section says the 10% penalty does not apply if rolled into an eligible retirement plan. The company match does include after-tax contributions.

If I read this right, it should be fine when I hit the pre-tax limit and continue contributing to after-tax. Then roll over to roth at year end. I'm on track to go slightly over this year so I'll have a chance to try it out with a small amount.

retiredjg
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Re: Understanding a Post Tax 401k

Post by retiredjg » Sat May 20, 2017 8:22 am

Sounds like you are ready to go. :happy

I'd suggest you consider doing the distribution out to Roth IRA in January since your last paycheck may be bumping up on the last day of the year and the contribution may not even post until the following year. There is no rush and no benefit that I know of to getting the distribution done by year's end, so don't cause yourself the stress of rushing when everything is slowed down during the holidays.

You have one further decision. Do you want to roll the earnings to tIRA (no tax) or to Roth IRA (taxable)? Since you are not able to use the ordinary back door for Roth IRA contributions because of the existing tIRA, you could do either one. However, since your earnings are likely to be small, rolling to Roth isn't going to cost much anyway.

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AndrewXnn
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Re: Understanding a Post Tax 401k

Post by AndrewXnn » Sat May 20, 2017 8:57 am

Kappy;

You should check your plan very carefully.
My plan allows distributions too, but no longer allows roll overs or transfers to another IRA or Roth.

captpete
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Re: Understanding a Post Tax 401k

Post by captpete » Sun May 21, 2017 8:09 am

Hello,
I had a 401(K) at a previous employer that allowed what they called "Chaining" , which is simply after tax contributions. When the company was sold I was permitted to transfer the after tax contribution plus any gains made from those contributions to my IRA's. The contribution and the gains could go into the ROTH but I had to pay tax on the gains. I later found out that there was another option at my previous employer a ROTH 401(k) that would have sheltered the after tax contributions completely. The custodian never volunteered this information so you might look into this.

retiredjg
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Re: Understanding a Post Tax 401k

Post by retiredjg » Sun May 21, 2017 8:15 am

captpete wrote: I later found out that there was another option at my previous employer a ROTH 401(k) that would have sheltered the after tax contributions completely.

If "sheltered the after tax contributions completely" means you would not have paid tax on the earnings, that is not correct. If you had done an in plan Roth rollover (IRR), the earnings would have been taxed at that time, just like rolling out to Roth IRA.

It's also possible that isn't what you meant at all.

kappy
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Re: Understanding a Post Tax 401k

Post by kappy » Mon May 22, 2017 6:14 pm

I believe what captpete means is that his 401k offers a Roth option for post tax money. This is an easy way to get money into a Roth but not the best way to maximize your tax deferred space if that's what you're trying to do. You can only contribute $18,000 to tax advantaged 401k's. I use 401k for all pre-tax contributions. Then, I fund a Roth IRA which lets me put a $5,500 maximum into a Roth. If I were to use only a 401k, I'd be putting $12,500 into pre-tax and $5,500 into Roth for the $18,000 maximum.

corn18
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Re: Understanding a Post Tax 401k

Post by corn18 » Mon May 22, 2017 6:31 pm

kappy wrote:I believe what captpete means is that his 401k offers a Roth option for post tax money. This is an easy way to get money into a Roth but not the best way to maximize your tax deferred space if that's what you're trying to do. You can only contribute $18,000 to tax advantaged 401k's. I use 401k for all pre-tax contributions. Then, I fund a Roth IRA which lets me put a $5,500 maximum into a Roth. If I were to use only a 401k, I'd be putting $12,500 into pre-tax and $5,500 into Roth for the $18,000 maximum.


I think you are mixing things up that should not be. The Roth IRA contribution does not affect your 401k at all. You can contribute $18k to your 401k AND $5,500 to a Roth IRA (not a Roth 401k). Unless I am misunderstanding what you are calling a Roth.

captpete
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Re: Understanding a Post Tax 401k

Post by captpete » Wed May 24, 2017 8:43 am

Now you got me thinking and I am once again confused about this. I thought the ROTH concept was, Already taxed contributuion grows tax free and the whole thing is distributed tax free. Is this not the case? Or is that just not the case in ROTH 401(K)? But I also don't have that option anymore so it doesn't matter to me. But I am curious. So, does the growth on Roth 401(K) get taxed when I take distribution?
Thanks

retiredjg
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Re: Understanding a Post Tax 401k

Post by retiredjg » Wed May 24, 2017 9:13 am

captpete wrote:Now you got me thinking and I am once again confused about this. I thought the ROTH concept was, Already taxed contributuion grows tax free and the whole thing is distributed tax free. Is this not the case? Or is that just not the case in ROTH 401(K)? But I also don't have that option anymore so it doesn't matter to me. But I am curious. So, does the growth on Roth 401(K) get taxed when I take distribution?
Thanks

If you are talking to me, I think you have it right.

What I meant was...if you convert an after tax account (like the one you had) to Roth 401k (an in-plan Roth Rollover) the earnings in that after tax account would be taxed in the year of the rollover to Roth 401k. Just like it would be taxed if rolled out to Roth IRA, which is apparently what you did.

I thought what you were saying is that if you had done an in-plan rollover to Roth 401k instead of out to Roth IRA, you could have avoided that tax. Maybe you just meant if you had put the money into Roth 401k in the first place, you could have avoided the tax. But you could not do that because you were putting your entire $18k into tax-deferred 401k.

kappy
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Re: Understanding a Post Tax 401k

Post by kappy » Wed May 24, 2017 5:56 pm

corn18, I thought that's what I said but either way, we are in agreement. Pre-tax 401k $18000, Roth IRA $5500.

captpete
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Re: Understanding a Post Tax 401k

Post by captpete » Fri May 26, 2017 7:54 am

retired jg,
Thanks for that. That is what I had in mind as to how it works
Pete

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