2018 401k limit is $55K - do you max it out? Why/why not?

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marcopolo
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Joined: Sat Dec 03, 2016 10:22 am

Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by marcopolo » Tue May 15, 2018 9:12 pm

gundlached wrote:
Tue May 15, 2018 8:57 pm
marcopolo wrote:
Mon May 14, 2018 5:26 pm
2m2037 wrote:
Mon May 14, 2018 5:06 pm
We just realized that the 401k contribution limit is $55K. We always thought it was $18.5K, but just found out that $18.5K is the elective deferral portion but we can choose to contribute to it on a post-tax basis. A bit late to the game... :oops:

Theoretically, if we are able to, should we max out the $55K in a Roth 401K? My only concern is liquidity. Do any of you share this concern, and if so, how and where do you draw the line? 90% of budgeted capital investments into the Roth 401K and 10% into taxable accounts?
While i was working, i maxed out (the cap is adjusted a little bit each year) every year, and then transferred the after-tax contributions to a Roth IRA.
Your plan has to allow something called an "in-service roll out" to be able to do this, so check with the plan administrator. Once it is in the Roth IRA, the same rules apply about accessing principle in Roth (penalty free after 5 years).
I think you have posted confusing info about the rules regarding accessing principal in a roth--contributions can always be accessed penalty and tax free. The 5 year rule applies to withdrawing earnings tax free.
There are different 5 year rules for Roth contributions and Roth conversions. For contributions, the principle can be withdrawn anytime, only the earnings are subject to penalty prior to 5 years, as you stated. For conversions, even the principle is subject to the 5 year rule.

I could be mistaken on this, but I believe an after-tax rollover from 401k plan is considered a conversion for the purposes of the 5 year rule.

EDIT: The 10% penalty for withdrawal within 5 years only applies to any amounts converted that had to be included in your income at the time of the conversion. So, after-tax contributions to 401k rolled to Roth would not be subject to 10% penalty.
Last edited by marcopolo on Wed May 16, 2018 10:52 am, edited 1 time in total.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Soon2BXProgrammer
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Soon2BXProgrammer » Tue May 15, 2018 9:26 pm

Spirit Rider wrote:
Tue May 15, 2018 10:28 am
Soon2BXProgrammer wrote:
Tue May 15, 2018 7:23 am
https://www.irs.gov/newsroom/irs-announ ... 0-for-2018
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $120,000.
If your company has > 20% of employees with compensation > $120K, they can elect to treat only the top 20% of employees as HCEs. This has the effect of raising the HSA limit. I once worked at a startup where eight (8) out of twenty-five (25) employees were VPs or above. Using the top 20%, our "effective" HCE limit was > $200K.
Interesting, thanks for sharing the additional rule, i was unaware about that addition.

yoyo6713
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by yoyo6713 » Tue May 15, 2018 9:35 pm

Funny you should ask since I just got off the phone with Fidelity (our 401K administrator?) this afternoon to confirm a new feature which sounded too good to be true. My employer just added this feature such that we can now contribute after-tax money to our 401K plans (total limit 55K or 60+k if you are over 50). What amazes me (I confirmed with Fidelity) is that on each payday we can call Fidelity to do a in-plan conversion to convert the after-tax portion directly to the Roth-401K. And get this -- There is no limit on how many times you can do the conversion, and since it happens on the same day, the conversion a tax free (no earnings). Once you leave the company the Roth-401K can then be rolled into your Roth-IRA, again tax free of course. The only "hassle" is we have to call them twice a month on the paydays. You do need to watch your after tax contribution rate so that you don't squeeze the max pre-tax contribution (i.e. make sure you max out the pre-tax contribution first since there is employer match). I am setting up a reminder to make these two monthly calls.
Last edited by yoyo6713 on Tue May 15, 2018 9:54 pm, edited 1 time in total.

jacoavlu
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by jacoavlu » Tue May 15, 2018 9:43 pm

Grogs wrote:
Tue May 15, 2018 7:33 pm
Earl Lemongrab wrote:
Tue May 15, 2018 7:20 pm
Grogs wrote:
Tue May 15, 2018 7:05 pm
I'm not at a point yet where I can contribute the 51k or so I would need to hit 55k after the company match.
The 55k includes all of your contributions as well. So if you're putting in 18.5k and getting 4k match, then the remaining is 32.5k.

Understood. I was just saying that right now my total annual investment is 18.5 + 5.5 + 15 = 39k, which is short of the 51k I would need to max the 401k even if it was all going there.
Explain again what’s going into your 401k now? You should at least be deferring $18.5k salary and also contributing whatever else to max out the company match.

jacoavlu
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by jacoavlu » Tue May 15, 2018 9:45 pm

yoyo6713 wrote:
Tue May 15, 2018 9:35 pm
Funny you should ask since I just got off the phone with Fidelity (our 401K administrator?) this afternoon to confirm a new feature which sounded too good to be true. My employer just added this feature such that we can now contribute after-tax money to our 401K plans (total limit 55K or 60+k if you are over 50). What amazes me (I confirmed with Fidelity) is that on each payday we can call Fidelity to do a in-plan conversion to convert the after-tax portion directly to the Roth-401K. And get this -- There is no limit on how many times you can do the conversion, and since it happens on the same day, the conversion a tax free (no earnings). Once you leave the company the Roth-401K can then be rolled into your Roth-IRA, again tax free of course. The only "hassle" is we have to call them twice a month on the paydays. You do need to watch your after tax contribution rate so that you don't squeeze the max pre-tax contribution (i.e. make sure you max out the pre-tax contribution first since there is employer match). I am setting up a reminder to make these two calls.
This is the ideal scenario, beyond salary deferral and company match - after tax contributions and in plan Roth conversions

Lyrrad
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Lyrrad » Tue May 15, 2018 9:47 pm

marcopolo wrote:
Tue May 15, 2018 9:12 pm

There are different 5 year rules for Roth contributions and Roth conversions. For contributions, the principle can be withdrawn anytime, only the earnings are subject to penalty prior to 5 years, as you stated. For conversions, even the principle is subject to the 5 year rule.

I could be mistaken on this, but I believe an after-tax rollover from 401k plan is considered a conversion for the purposes of the 5 year rule.
I was researching this earlier and found this thread useful in working out what monies were subject to penalty and when the penalty would expire: viewtopic.php?t=248371

My understanding is that the amount initially contributed as After-Tax can be withdrawn tax-free, but the gains before being converted to Roth are subject to a 5 year rule.

Example:
No money in Roth IRA to start.
Do a backdoor Roth on May 1, 2015, contributing $5500 to Traditional IRA and converting it.
Contribute $10K to after-tax 401k on July 1, 2015.

Scenario A:
Convert $11K from After-tax to Roth 401k on August 1, 2015.
Withdraw $5500 from Roth IRA before January 1, 2020: No taxes, no penalty.
Withdraw money from Roth 401k: Withdrawals are pro-rata between contribution (no taxes, no penalty), gains before being converted (no taxes, penalty if withdrawn before January 1, 2020), and gains (taxes, penalty if not qualified).

Scenario B:
Convert $11K from After-tax to Roth IRA on August 1, 2015.
Withdraw $5500 from Roth IRA before January 1, 2020: $1000 subject to 10% penalty. Remainder: No taxes, no penalty. Can withdraw a total of $16500 without taxes, though first $1000 subject to penalty.


Personally, I've been keeping track of all my Roth contributions and conversions, since when my Roth 401k conversions are rolled into my Roth IRA they'll be combined with any backdoor conversions I did the same year. I understand that my withdrawals will be in the order of 1) Contributions, 2) Conversions within each year starting with the oldest conversion year, with (a) taxable conversions first (subject to 10% penalty if not 5 years old), followed by (b) nontaxable conversions. Then 3) Earnings are withdrawn, subject to tax and penalty if not qualified.

Slacker
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Slacker » Tue May 15, 2018 10:39 pm

bayview wrote:
Mon May 14, 2018 9:35 pm
Slacker wrote:
Mon May 14, 2018 6:05 pm
We do not go beyond 18.5K in our 401K(s).
1. Employer doesn't allow it.
2. Employer doesn't have in-service roll over.
3. OPM/TSP will tell you that they just follow the IRS rules for 401K, but clearly they do not follow the entirety of the rules.
Yep. Cheer up, eventually you can hit $24k/year!

Frankly, we’ve never had the income to save significantly more. This is one of those threads where a popcorn-eating emoji would be useful.
We might not actually ever hit $24k/yr. We were planning to retire at 50-52 but it looks like we are on track to retire at around 47-49 so far.

We wouldn't be able to hit the max caps either, but it sure would be nice to take everything we put in taxable accounts and have it in a Mega-Backdoor Roth instead.

marcopolo
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by marcopolo » Tue May 15, 2018 11:09 pm

Lyrrad wrote:
Tue May 15, 2018 9:47 pm
marcopolo wrote:
Tue May 15, 2018 9:12 pm

There are different 5 year rules for Roth contributions and Roth conversions. For contributions, the principle can be withdrawn anytime, only the earnings are subject to penalty prior to 5 years, as you stated. For conversions, even the principle is subject to the 5 year rule.

I could be mistaken on this, but I believe an after-tax rollover from 401k plan is considered a conversion for the purposes of the 5 year rule.
I was researching this earlier and found this thread useful in working out what monies were subject to penalty and when the penalty would expire: viewtopic.php?t=248371

My understanding is that the amount initially contributed as After-Tax can be withdrawn tax-free, but the gains before being converted to Roth are subject to a 5 year rule.

Example:
No money in Roth IRA to start.
Do a backdoor Roth on May 1, 2015, contributing $5500 to Traditional IRA and converting it.
Contribute $10K to after-tax 401k on July 1, 2015.

Scenario A:
Convert $11K from After-tax to Roth 401k on August 1, 2015.
Withdraw $5500 from Roth IRA before January 1, 2020: No taxes, no penalty.
Withdraw money from Roth 401k: Withdrawals are pro-rata between contribution (no taxes, no penalty), gains before being converted (no taxes, penalty if withdrawn before January 1, 2020), and gains (taxes, penalty if not qualified).

Scenario B:
Convert $11K from After-tax to Roth IRA on August 1, 2015.
Withdraw $5500 from Roth IRA before January 1, 2020: $1000 subject to 10% penalty. Remainder: No taxes, no penalty. Can withdraw a total of $16500 without taxes, though first $1000 subject to penalty.


Personally, I've been keeping track of all my Roth contributions and conversions, since when my Roth 401k conversions are rolled into my Roth IRA they'll be combined with any backdoor conversions I did the same year. I understand that my withdrawals will be in the order of 1) Contributions, 2) Conversions within each year starting with the oldest conversion year, with (a) taxable conversions first (subject to 10% penalty if not 5 years old), followed by (b) nontaxable conversions. Then 3) Earnings are withdrawn, subject to tax and penalty if not qualified.
I looked a little closer at Pub 590. The rollover from the 401k is subject to the 5-year rule, but only portions that are taxable at the time of the conversion are subject to the 10% penalty. So, i guess effectively, the 5 year rule does not matter if you are only rolling over after-tax contributions (and not their earnings). I stand corrected. Fortunately, my misunderstanding has not hurt me in any way since i plan to let my Roth continue to grow for some time.

Here is the language from Pub 590:

Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount).
Once in a while you get shown the light, in the strangest of places if you look at it right.

joeblow
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by joeblow » Tue May 15, 2018 11:20 pm

Do you? Yes. $18.5K pre tax + company match + whatever is left over to the cap into post tax...post tax portion, and any gain, is rolled over into a roth IRA once a year.

Why? All tax advantaged accounts are maxed. This allows us to maximize the annual contributions to a roth IRA beyond the $11K. If we need money for kids' college expenses we can use the money, if not we'll enjoy it in retirement.

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Earl Lemongrab
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Earl Lemongrab » Tue May 15, 2018 11:33 pm

Mega Backdoor is definitely great if you have it available. I consider this the most useful thing I have ever read on Bogleheads. I wish I had known about it earlier of course, but the list of things I didn't know even a few years before I got serious in 2007 is pretty long.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

wootwoot
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by wootwoot » Wed May 16, 2018 12:59 am

Most 401k plans still don't allow after tax contributions after the pre-tax cap is hit. I just changed employers and was hoping my new 401k had this feature but it does not.

Grogs
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Grogs » Wed May 16, 2018 5:08 am

jacoavlu wrote:
Tue May 15, 2018 9:43 pm
Grogs wrote:
Tue May 15, 2018 7:33 pm
Earl Lemongrab wrote:
Tue May 15, 2018 7:20 pm
Grogs wrote:
Tue May 15, 2018 7:05 pm
I'm not at a point yet where I can contribute the 51k or so I would need to hit 55k after the company match.
The 55k includes all of your contributions as well. So if you're putting in 18.5k and getting 4k match, then the remaining is 32.5k.

Understood. I was just saying that right now my total annual investment is 18.5 + 5.5 + 15 = 39k, which is short of the 51k I would need to max the 401k even if it was all going there.
Explain again what’s going into your 401k now? You should at least be deferring $18.5k salary and also contributing whatever else to max out the company match.
Right now it's the 18.5k into pretax, plus a company match of about 4k. That's all the match that's available.

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corn18
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by corn18 » Wed May 16, 2018 5:50 am

marcopolo wrote:
Tue May 15, 2018 11:09 pm
Lyrrad wrote:
Tue May 15, 2018 9:47 pm
marcopolo wrote:
Tue May 15, 2018 9:12 pm

There are different 5 year rules for Roth contributions and Roth conversions. For contributions, the principle can be withdrawn anytime, only the earnings are subject to penalty prior to 5 years, as you stated. For conversions, even the principle is subject to the 5 year rule.

I could be mistaken on this, but I believe an after-tax rollover from 401k plan is considered a conversion for the purposes of the 5 year rule.
I was researching this earlier and found this thread useful in working out what monies were subject to penalty and when the penalty would expire: viewtopic.php?t=248371

My understanding is that the amount initially contributed as After-Tax can be withdrawn tax-free, but the gains before being converted to Roth are subject to a 5 year rule.

Example:
No money in Roth IRA to start.
Do a backdoor Roth on May 1, 2015, contributing $5500 to Traditional IRA and converting it.
Contribute $10K to after-tax 401k on July 1, 2015.

Scenario A:
Convert $11K from After-tax to Roth 401k on August 1, 2015.
Withdraw $5500 from Roth IRA before January 1, 2020: No taxes, no penalty.
Withdraw money from Roth 401k: Withdrawals are pro-rata between contribution (no taxes, no penalty), gains before being converted (no taxes, penalty if withdrawn before January 1, 2020), and gains (taxes, penalty if not qualified).

Scenario B:
Convert $11K from After-tax to Roth IRA on August 1, 2015.
Withdraw $5500 from Roth IRA before January 1, 2020: $1000 subject to 10% penalty. Remainder: No taxes, no penalty. Can withdraw a total of $16500 without taxes, though first $1000 subject to penalty.


Personally, I've been keeping track of all my Roth contributions and conversions, since when my Roth 401k conversions are rolled into my Roth IRA they'll be combined with any backdoor conversions I did the same year. I understand that my withdrawals will be in the order of 1) Contributions, 2) Conversions within each year starting with the oldest conversion year, with (a) taxable conversions first (subject to 10% penalty if not 5 years old), followed by (b) nontaxable conversions. Then 3) Earnings are withdrawn, subject to tax and penalty if not qualified.
I looked a little closer at Pub 590. The rollover from the 401k is subject to the 5-year rule, but only portions that are taxable at the time of the conversion are subject to the 10% penalty. So, i guess effectively, the 5 year rule does not matter if you are only rolling over after-tax contributions (and not their earnings). I stand corrected. Fortunately, my misunderstanding has not hurt me in any way since i plan to let my Roth continue to grow for some time.

Here is the language from Pub 590:

Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount).
Maybe this helps:

2014 - Roth IRA opened, no contributions
2015 - 11,000 non-taxable conversion, 603.29 taxable conversion (earnings before backdoor) [starts 5 year clock]
2016 - 21,852.70 non-taxable conversion, 71.08 taxable conversion (earnings before backdoor)
2017 - 24,144,.49 non-taxable conversion, 1,128.62 taxable conversion (earnings before backdoor)
2018 - 26,454.48 non-taxable conversion, 0.00 taxable conversion (earnings before backdoor)

I read the IRS rules and this is what I think are the ordering rules (age 52, <5 years)

1. Withdraw 603.29 tax free and pay 10% penalty on 603.29
2. Withdraw 11,000 tax and penalty free
3. Withdraw 71.08 tax free and pay 10% penalty on 71.08
4. Withdraw 21,852.70 tax and penalty free
5. Withdraw 1,128.62 tax free and pay 10% penalty on 1,128.62
6. Withdraw 24,144.49 tax and penalty free
7. Withdraw 26,454.48 tax and penalty free
8. Withdraw any earnings and pay tax and 10% penalty

You must withdraw in this order. You cannot withdraw #2 first. So it is important when doing backdoor Roth's to keep track of all activity and try to minimize earnings before conversion.

So, at age 52 and all conversions <5 years, I could pull out all my money less earnings and would have to pay 10% penalty on all of the taxable conversions (1,802.99). I can live with that.

core4portfolio
Posts: 219
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by core4portfolio » Wed May 16, 2018 5:54 am

tmcc wrote:
Mon May 14, 2018 5:29 pm
why contribute after tax to a 401k if there is no deduction favorability or FIT wage reduction? :shock:

just save the equivalent after tax money to a brokerage......... right? am I missing something obvious?
Added to willthrill81 point, some super low cost index funds like institutional funds are present only in 401k and it takes years to reach that eligible balance for average person
Allocation : 80/20 (80% TSM, 20% TBM) | Need to learn fishing sooner

tampaite
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by tampaite » Wed May 16, 2018 7:42 am

2m2037 wrote:
Mon May 14, 2018 5:06 pm
We just realized that the 401k contribution limit is $55K. We always thought it was $18.5K, but just found out that $18.5K is the elective deferral portion but we can choose to contribute to it on a post-tax basis. A bit late to the game... :oops:

Theoretically, if we are able to, should we max out the $55K in a Roth 401K? My only concern is liquidity. Do any of you share this concern, and if so, how and where do you draw the line? 90% of budgeted capital investments into the Roth 401K and 10% into taxable accounts?
I thought most employers forbid employees from contributing more than the max($18.5k for 2018) - am I missing something?

BlueMind
Posts: 2
Joined: Wed Feb 28, 2018 1:13 pm

Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by BlueMind » Wed May 16, 2018 7:48 am

I worked on improving my employer's 401k to allow for: (a) after tax contributions up to the combined maximum amount ($55k), and (b) in-service withdrawals.

With those two features, I am able to take advantage of the mega-back door roth. I.E. after maxing out my pre-tax 401k contribution, I contribute on an after tax basis, then immediately withdraw those funds into my Roth IRA.

This allows me to participate in a Roth IRA even though our income would prohibit us from directly contributing to a roth.

My order of operations for funneling savings/investment is: 401k > HSA > Mega Back Door Roth > After Tax Investments.

THY4373
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by THY4373 » Wed May 16, 2018 8:19 am

My plan allows both after-tax (non-Roth) contributions and in-service withdrawals and in-plan rollover to Roth 401k (this is more recent). I have been maxing out contributions for a number of years. When I have been unable to completely max out from current income I will use some cash from re-balancing my taxable accounts. I did not max out a couple of years ago while going through an amicable divorce but otherwise have and plan to continue to do so for at least another four years. Once my son gets to college I may have to back off some (given those costs). Other than my travel hobby I keep my costs low to max my savings. I do it because I want to be able to retire in my mid to late 50s.

Also if you don't know if you plan allows this in addition to calling in I suggest you read your plan document (the detailed one that is like over a 100 pages). When I called in I was told my plan did not allow this but then I read the plan document and I called back and asked very explicit and detailed questions with reference to the plan document which seemed to indicate this should be allowed. The front-line CSR said he'd have to ask the back office experts who confirmed I was correct.
Last edited by THY4373 on Wed May 16, 2018 3:03 pm, edited 1 time in total.

bradpevans
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by bradpevans » Wed May 16, 2018 8:25 am

jumppilot wrote:
Mon May 14, 2018 7:34 pm
I contribute the max pre-tax then contribute after tax. At the end of the year I convert it to Roth.

Goal is to hit 415(c) limits every year.
You may wish to roll sooner / contribute in high % and convert quickly. Any gains inside the after-tax bucket typically end up on the 401k side.
This means they will be taxed as ordinary income coming out, rather than as tax-free from the Roth side. Admittedly, a good problem to have. I *think* you may also have the option to direct the gains into the Roth, and you will owe the taxes come April 15th.

gundlached
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by gundlached » Wed May 16, 2018 10:01 am

marcopolo wrote:
Tue May 15, 2018 9:12 pm
gundlached wrote:
Tue May 15, 2018 8:57 pm
marcopolo wrote:
Mon May 14, 2018 5:26 pm
2m2037 wrote:
Mon May 14, 2018 5:06 pm
We just realized that the 401k contribution limit is $55K. We always thought it was $18.5K, but just found out that $18.5K is the elective deferral portion but we can choose to contribute to it on a post-tax basis. A bit late to the game... :oops:

Theoretically, if we are able to, should we max out the $55K in a Roth 401K? My only concern is liquidity. Do any of you share this concern, and if so, how and where do you draw the line? 90% of budgeted capital investments into the Roth 401K and 10% into taxable accounts?
While i was working, i maxed out (the cap is adjusted a little bit each year) every year, and then transferred the after-tax contributions to a Roth IRA.
Your plan has to allow something called an "in-service roll out" to be able to do this, so check with the plan administrator. Once it is in the Roth IRA, the same rules apply about accessing principle in Roth (penalty free after 5 years).
I think you have posted confusing info about the rules regarding accessing principal in a roth--contributions can always be accessed penalty and tax free. The 5 year rule applies to withdrawing earnings tax free.
There are different 5 year rules for Roth contributions and Roth conversions. For contributions, the principle can be withdrawn anytime, only the earnings are subject to penalty prior to 5 years, as you stated. For conversions, even the principle is subject to the 5 year rule.

I could be mistaken on this, but I believe an after-tax rollover from 401k plan is considered a conversion for the purposes of the 5 year rule.
I had thought that the penalty only applied to monies you pay taxes on at the time of the Roth conversion, and that one can direct the tax-deferred earnings to a traditional IRA. Anyone out there know for certain? I am interested to know and cannot find a definitive answer with a search.

wrongfunds
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by wrongfunds » Wed May 16, 2018 10:01 am

Did I read this right? OP has NOT maxed out their tax deferred space? What could be rational reason for that? I guess if a family has so much excess money to save, then I can understand they might decide to forgo the tax defer part and just pay the tax on it right now but even then I would think taking the bird in hand is better than hoping for two in the bushes.

I have never understood the thinking whereby people want to pay their future taxes right now whether they will be obligated later or not in future.

Spirit Rider
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Spirit Rider » Wed May 16, 2018 10:03 am

bradpevans wrote:
Wed May 16, 2018 8:25 am
You may wish to roll sooner / contribute in high % and convert quickly. Any gains inside the after-tax bucket typically end up on the 401k side.
Your intent is correct, but it is important to be precise when talking about employee after-tax contributions. After-tax contributions and pre-tax earnings are both separately accounted for as in an after-tax "account". I do not know what you mean by "end up on the 401k side." They do not go into the traditional pre-tax account.
This means they will be taxed as ordinary income coming out, rather than as tax-free from the Roth side. Admittedly, a good problem to have. I *think* you may also have the option to direct the gains into the Roth, and you will owe the taxes come April 15th.
What do you mean by the "Roth Side. After-tax earnings are pre-tax, whereas designated Roth contribution earnings are tax-free when qualified.

Here again, what do mean by "direct the gains into the Roth". After-tax earnings are always pre-tax. If your plan has adopted In-plan Roth Rollover (IRR) and allowed that for after-tax accounts. You can rollover both the after-tax contributions and earnings to the Roth designated account.

Yukon
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Yukon » Wed May 16, 2018 10:09 am

Our small business has a 401k with Employee Fiduciary. They offer after tax contribution and in service rollover but do not recommend it in our Safe Harbor plan unless it was a SOLO 401k plan. The HCE contributions will be returned due to ACP testing, unfortunately. Helpful explanation, here.

https://www.employeefiduciary.com/401k- ... tributions
Don't Work Forever.

marcopolo
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by marcopolo » Wed May 16, 2018 10:48 am

gundlached wrote:
Wed May 16, 2018 10:01 am
marcopolo wrote:
Tue May 15, 2018 9:12 pm


There are different 5 year rules for Roth contributions and Roth conversions. For contributions, the principle can be withdrawn anytime, only the earnings are subject to penalty prior to 5 years, as you stated. For conversions, even the principle is subject to the 5 year rule.

I could be mistaken on this, but I believe an after-tax rollover from 401k plan is considered a conversion for the purposes of the 5 year rule.
I had thought that the penalty only applied to monies you pay taxes on at the time of the Roth conversion, and that one can direct the tax-deferred earnings to a traditional IRA. Anyone out there know for certain? I am interested to know and cannot find a definitive answer with a search.
You are correct. I updated that in a later post (i also edited my original post to make this clearer):

I looked a little closer at Pub 590. The rollover from the 401k is subject to the 5-year rule, but only portions that are taxable at the time of the conversion are subject to the 10% penalty. So, i guess effectively, the 5 year rule does not matter if you are only rolling over after-tax contributions (and not their earnings). I stand corrected. Fortunately, my misunderstanding has not hurt me in any way since i plan to let my Roth continue to grow for some time.

Here is the language from Pub 590:

Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount).
Once in a while you get shown the light, in the strangest of places if you look at it right.

bradpevans
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by bradpevans » Wed May 16, 2018 2:30 pm

Spirit Rider wrote:
Wed May 16, 2018 10:03 am
bradpevans wrote:
Wed May 16, 2018 8:25 am
You may wish to roll sooner / contribute in high % and convert quickly. Any gains inside the after-tax bucket typically end up on the 401k side.
Your intent is correct, but it is important to be precise when talking about employee after-tax contributions. After-tax contributions and pre-tax earnings are both separately accounted for as in an after-tax "account". I do not know what you mean by "end up on the 401k side." They do not go into the traditional pre-tax account.
This means they will be taxed as ordinary income coming out, rather than as tax-free from the Roth side. Admittedly, a good problem to have. I *think* you may also have the option to direct the gains into the Roth, and you will owe the taxes come April 15th.
What do you mean by the "Roth Side. After-tax earnings are pre-tax, whereas designated Roth contribution earnings are tax-free when qualified.

Here again, what do mean by "direct the gains into the Roth". After-tax earnings are always pre-tax. If your plan has adopted In-plan Roth Rollover (IRR) and allowed that for after-tax accounts. You can rollover both the after-tax contributions and earnings to the Roth designated account.
Thanks for the corrections.

In my case I have (pre-tax) 401k, after tax 401k, rollover IRA and Roth IRA, and my plan allows me to move the after tax 401k money into Roth IRA. But only the contributions go into the Roth, the "gains" go to my rollover IRA (not 401 as i had written).

When I moved the funds, i had ~$200 gain that went into my rollover IRA, so that will be taxed as ordinary income.
Had i moved it to Roth IRA immediately, that would never have been taxed. But I incur a $20 charge every time
i move funds from after tax 401k to Roth IRA, so its a balance.

@spirit - please let me know if i have this correct

Spirit Rider
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Spirit Rider » Wed May 16, 2018 2:57 pm

bradpevans wrote:
Wed May 16, 2018 2:30 pm
In my case I have (pre-tax) 401k, after tax 401k, rollover IRA and Roth IRA, and my plan allows me to move the after tax 401k money into Roth IRA. But only the contributions go into the Roth, the "gains" go to my rollover IRA (not 401 as i had written).

When I moved the funds, i had ~$200 gain that went into my rollover IRA, so that will be taxed as ordinary income.
Had i moved it to Roth IRA immediately, that would never have been taxed. But I incur a $20 charge every time
i move funds from after tax 401k to Roth IRA, so its a balance.
This is correct as long as you are referring to the earnings going to the rollover IRA will be taxed "when withdrawn or converted to a Roth". A split rollover itself is a tax-free event.

2m2037
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by 2m2037 » Wed May 16, 2018 3:39 pm

wrongfunds wrote:
Wed May 16, 2018 10:01 am
Did I read this right? OP has NOT maxed out their tax deferred space? What could be rational reason for that? I guess if a family has so much excess money to save, then I can understand they might decide to forgo the tax defer part and just pay the tax on it right now but even then I would think taking the bird in hand is better than hoping for two in the bushes.

I have never understood the thinking whereby people want to pay their future taxes right now whether they will be obligated later or not in future.
I might be missing a point or two here... again disclaimer: we are new to the whole 401K and deferring taxes issue as we moved to the US a few years ago, and only discovered BH mid last year.

A rational reason could be that we wind up reaching our desired NW at 50 years of age and we decide that we can call it a day with our 9-5 jobs and pursue other interests. What would happen if we cannot access majority of our NW without incurring a 10% penalty? Wouldn't we be better off at that point not having directed so much funds into tax-advantaged accounts?

BusterMcTaco
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by BusterMcTaco » Wed May 16, 2018 3:40 pm

Stormbringer wrote:
Tue May 15, 2018 11:19 am
Since the employer portion is limited to 25% of compensation, it forces me to take a higher salary than I otherwise would, so there are some additional payroll taxes. Overall though it really brings down my tax bill and puts me in a good position for retirement.
I suppose the math on this depends on your tax bracket and whether you almost capped out social security taxes anyway, but paying 15.3% to defer 20% is almost certainly a losing strategy. Now, if it's only an extra 2.9%, then sure... That probably makes sense in a medium to high tax bracket. Now balance it all with the new section 199A deduction and you've got some fun math to optimize!

novemberrain
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by novemberrain » Wed May 16, 2018 3:48 pm

yogesh wrote:
Mon May 14, 2018 9:49 pm
I max out both pretax and after-tax 401k with payroll deductions as if it’s not my money to spend today. Like withheld taxes at paycheck ...
- Pretax 401K: $18,500 IRS contribution limit
- Or Roth 401K: $18,500 contribution limit
- Employer match: x% of employee contributions
- After-tax: $25,000 with quarterly inplan rollover
Tremendously helpful in increasing tax advantaged space!
@yogesh

Assume your 25k after tax contribution grows 10x to $250k when you retire, you will be taxed on the gain ($225k) as ordinary income tax rate which is around 35% say.

But if you put that same $25k in taxable brokerage account and it grows to same $250k, your gains will be taxed at long term cap gains rate which is around 20%.

So isn't putting the $25k into 401k a bad idea ? Am i missing something ?

novemberrain
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by novemberrain » Wed May 16, 2018 3:51 pm

2m2037 wrote:
Mon May 14, 2018 5:06 pm
We just realized that the 401k contribution limit is $55K. We always thought it was $18.5K, but just found out that $18.5K is the elective deferral portion but we can choose to contribute to it on a post-tax basis. A bit late to the game... :oops:

Theoretically, if we are able to, should we max out the $55K in a Roth 401K? My only concern is liquidity. Do any of you share this concern, and if so, how and where do you draw the line? 90% of budgeted capital investments into the Roth 401K and 10% into taxable accounts?
I am talking about the $55k - $18.5k = $36.5k

Assume your $36.5k after tax contribution grows 10x to $365k when you retire, you will be taxed on the gain ($365k - $36.5k) as ordinary income tax rate which is around 35% say.

But if you put that same $36.5k in taxable brokerage account and it grows to same $365k, your gains will be taxed at long term cap gains rate which is around 20%.

So isn't putting the $36.5k into 401k a bad idea ? Am i missing something ?

Spirit Rider
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Spirit Rider » Wed May 16, 2018 4:13 pm

novemberrain wrote:
Wed May 16, 2018 3:48 pm
Assume your 25k after tax contribution grows 10x to $250k when you retire, you will be taxed on the gain ($225k) as ordinary income tax rate which is around 35% say.

But if you put that same $25k in taxable brokerage account and it grows to same $250k, your gains will be taxed at long term cap gains rate which is around 20%.

So isn't putting the $25k into 401k a bad idea ? Am i missing something?
novemberrain wrote:
Wed May 16, 2018 3:51 pm
I am talking about the $55k - $18.5k = $36.5k

Assume your $36.5k after tax contribution grows 10x to $365k when you retire, you will be taxed on the gain ($365k - $36.5k) as ordinary income tax rate which is around 35% say.

But if you put that same $36.5k in taxable brokerage account and it grows to same $365k, your gains will be taxed at long term cap gains rate which is around 20%.

So isn't putting the $36.5k into 401k a bad idea ? Am i missing something?
Yes, you are totally missing the point. The after-tax contributions are rolled over to a Roth IRA tax-free and grow tax-free. So the earnings are not taxed at 24%/32% or even 15%/20%, the are tax-free.

The small amount of the earnings (if any) are either converted to the Roth and taxable then for additional tax-free earnings or rolled over to a traditional IRA tax-free subject to taxes at withdrawal.

novemberrain
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by novemberrain » Wed May 16, 2018 4:39 pm

Spirit Rider wrote:
Wed May 16, 2018 4:13 pm
Yes, you are totally missing the point. The after-tax contributions are rolled over to a Roth IRA tax-free and grow tax-free. So the earnings are not taxed at 24%/32% or even 15%/20%, the are tax-free.

The small amount of the earnings (if any) are either converted to the Roth and taxable then for additional tax-free earnings or rolled over to a traditional IRA tax-free subject to taxes at withdrawal.
Thanks.
The after-tax contributions are rolled over to a Roth IRA tax-free and grow tax-free.
Is this the Mega backdoor ? I am not familiar with it I must admit. If it is not the backdoor, please let me know how one would convert the after-tax contributions to a Roth IRA. Thanks

Pigeye Brewster
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Pigeye Brewster » Wed May 16, 2018 4:42 pm

Earl Lemongrab wrote:
Tue May 15, 2018 11:33 pm
Mega Backdoor is definitely great if you have it available. I consider this the most useful thing I have ever read on Bogleheads. I wish I had known about it earlier...
I agree 100% with this.

wrongfunds
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by wrongfunds » Wed May 16, 2018 4:51 pm

A rational reason could be that we wind up reaching our desired NW at 50 years of age and we decide that we can call it a day with our 9-5 jobs and pursue other interests. What would happen if we cannot access majority of our NW without incurring a 10% penalty? Wouldn't we be better off at that point not having directed so much funds into tax-advantaged accounts?
I don't believe the math works for that hypothetical case. Indeed, if you could reach your desired NW *without* using the tax deferred space, then you could have put the money in the tax deferred space and you would not be *needing* to take that out until 59. Just run some numbers with the caveat about the maximum that you could defer there and what is your target number at 50 years of age. Essentially, not being able to access the deferred portion would not be a factor.

The point is your non-deferred will have to dwarf the deferred portion. By sacrificing the deferred part, you would have left "free" money on the table. I am also assuming that for you maxing out $55K is not a problem at all that you actually have lot more money to save towards retirement i.e. you have very large income but very meager expenses.

I am not sure if this is clear or not. The concept is hard and I am certainly not explaining it well but I am hoping somebody else will do a better job.

Lyrrad
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Lyrrad » Wed May 16, 2018 6:47 pm

novemberrain wrote:
Wed May 16, 2018 4:39 pm
The after-tax contributions are rolled over to a Roth IRA tax-free and grow tax-free.
Is this the Mega backdoor ? I am not familiar with it I must admit. If it is not the backdoor, please let me know how one would convert the after-tax contributions to a Roth IRA. Thanks
Yeah, it's the Mega backdoor. See the Bogleheads wiki article about this. It's not available in most 401k plans. It requires the plan to allow after-tax contributions, and ideally allow in service rollovers to either Roth 401k or Roth IRA (or both). The details on how to perform a rollover differ by plan. Some plans don't allow in service rollovers, or restrict when they can be done. My employer's plan allows Roth 401k in plan rollovers to be done online, but Roth IRA rollovers need to be done by phone.

I assume that many companies don't offer this option due to the administrative cost and the possibility that these contributions will cause the plan to fail non-discrimination testing if non-HCEs don't contribute enough compared with HCEs.

jumppilot
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by jumppilot » Wed May 16, 2018 11:49 pm

Spirit Rider wrote:
Wed May 16, 2018 10:03 am
bradpevans wrote:
Wed May 16, 2018 8:25 am
You may wish to roll sooner / contribute in high % and convert quickly. Any gains inside the after-tax bucket typically end up on the 401k side.
Your intent is correct, but it is important to be precise when talking about employee after-tax contributions. After-tax contributions and pre-tax earnings are both separately accounted for as in an after-tax "account". I do not know what you mean by "end up on the 401k side." They do not go into the traditional pre-tax account.
This means they will be taxed as ordinary income coming out, rather than as tax-free from the Roth side. Admittedly, a good problem to have. I *think* you may also have the option to direct the gains into the Roth, and you will owe the taxes come April 15th.
What do you mean by the "Roth Side. After-tax earnings are pre-tax, whereas designated Roth contribution earnings are tax-free when qualified.

Here again, what do mean by "direct the gains into the Roth". After-tax earnings are always pre-tax. If your plan has adopted In-plan Roth Rollover (IRR) and allowed that for after-tax accounts. You can rollover both the after-tax contributions and earnings to the Roth designated account.
When I reach my pre-tax limit, I start contributing post-tax. When I call Schwab to convert it to Roth, they send me a tax form that shows what the gains were. I use that form when I prepare my taxes.

To put it simply, I already paid taxes on the amount I contributed - I must also pay taxes on whatever gains the after-tax money produced prior to converting it. Once that's done, smooth sailing tax wise.

Stormbringer
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Stormbringer » Thu May 17, 2018 5:52 am

BusterMcTaco wrote:
Wed May 16, 2018 3:40 pm
Stormbringer wrote:
Tue May 15, 2018 11:19 am
Since the employer portion is limited to 25% of compensation, it forces me to take a higher salary than I otherwise would, so there are some additional payroll taxes. Overall though it really brings down my tax bill and puts me in a good position for retirement.
I suppose the math on this depends on your tax bracket and whether you almost capped out social security taxes anyway, but paying 15.3% to defer 20% is almost certainly a losing strategy. Now, if it's only an extra 2.9%, then sure... That probably makes sense in a medium to high tax bracket. Now balance it all with the new section 199A deduction and you've got some fun math to optimize!
To contribute the maximum to a Solo 401k you need to draw a salary of $146,000. As the employee you contribute $18,500, and the business constributes 25% of $146,000 ($36,500) for a total of $55,000.

Social Security cuts off at $128,400, so the whole 15.3% doesn't apply to any amount above that. Also, I've been in the 35% tax bracket (without the 401k it would have been the 39.6% bracket last year), so I think the math works out.

You're absolutely right about the 199A deduction, which makes this much more complicated. I'm actually waiting to see the IRA guidance on this to determine how much of my income qualifies for the deduction. My largest source of income is my business that has no employees other than me, but it is "engineering" (software) so I'm hoping to squeak through on that basis, but we'll see.
"Compound interest is the most powerful force in the universe." - Albert Einstein

lazydavid
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by lazydavid » Thu May 17, 2018 8:02 am

Nope I'm not allowed to come anywhere close to any of the 401k limits. Thanks to the combination of better-than-expected bonuses last year and the switch to a discretionary PTO policy resulting in a payout of our accrued PTO time, my wife and I are both HCEs this year (based on 2017). They did institute a safe harbor plan this year, but since it wasn't in place on January 1, the old rules apply until next year. So our contributions are being capped starting with the current pay period, and we'll only be able to defer about $28k total (between us) vs. $37k last year. And the added kicker is we'll probably get a substantial amount of the $28k returned at the end of the year also. :(

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Portfolio7
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Portfolio7 » Thu May 17, 2018 12:17 pm

Nope, I suspect we're something of an outlier on this thread. We used to when we started saving. Now we contribute the minumum to match, but it's pretty good - we contribute 6% and our employers 7% for 13% total. It should still be enough to get us at least 80% income replacement by the time we retire, assuming SS at 75% payout. Maybe over 100%. We're more focused on paying down debt this next decade; we've business loans as well as medical debt that we want to get off the books.
An investment in knowledge pays the best interest.

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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Engineer250 » Thu May 17, 2018 12:43 pm

bayview wrote:
Mon May 14, 2018 9:35 pm
Yep. Cheer up, eventually you can hit $24k/year!

Frankly, we’ve never had the income to save significantly more. This is one of those threads where a popcorn-eating emoji would be useful.
This will be the first year I can actually contribute the pre-tax max ($18.5k). I'm doing an additional 2% into after tax as a pilot program to see if everything works okay. I'm allowed one in-service withdrawal per year. So I'll call/contact my 401k in Nov/Dec to see if that all works as advertised.

Honestly, I'm just excited to max out the pre-tax for the first time. It's hard to imagine ever getting to a point where I could max the whole thing out. Especially with two people working and two 401ks.
Where the tides of fortune take us, no man can know.

novemberrain
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by novemberrain » Thu May 17, 2018 1:48 pm

Lyrrad wrote:
Wed May 16, 2018 6:47 pm

Yeah, it's the Mega backdoor. See the Bogleheads wiki article about this. It's not available in most 401k plans. It requires the plan to allow after-tax contributions, and ideally allow in service rollovers to either Roth 401k or Roth IRA (or both). The details on how to perform a rollover differ by plan. Some plans don't allow in service rollovers, or restrict when they can be done. My employer's plan allows Roth 401k in plan rollovers to be done online, but Roth IRA rollovers need to be done by phone.

I assume that many companies don't offer this option due to the administrative cost and the possibility that these contributions will cause the plan to fail non-discrimination testing if non-HCEs don't contribute enough compared with HCEs.

Thanks. I checked and my 401k doesn't offer me ability to put post tax money into 401k. One follow up question.

For someone without the ability for a Mega Backdoor, does it still make sense to put post tax money into 401k ?

'Thank you.

MathWizard
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by MathWizard » Thu May 17, 2018 2:41 pm

Our plan has its own limits a little lower than $55K.
I max out mine, and my wife will nearly max out hers as well.


We've only recently been able to, since we paid off the house and
our kids are just out of college.

We also maxed our ROTHs. This accounts for just under 50% of
gross income, so it would be a stretch to make it to $55K.

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willthrill81
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by willthrill81 » Thu May 17, 2018 2:54 pm

novemberrain wrote:
Thu May 17, 2018 1:48 pm
Lyrrad wrote:
Wed May 16, 2018 6:47 pm

Yeah, it's the Mega backdoor. See the Bogleheads wiki article about this. It's not available in most 401k plans. It requires the plan to allow after-tax contributions, and ideally allow in service rollovers to either Roth 401k or Roth IRA (or both). The details on how to perform a rollover differ by plan. Some plans don't allow in service rollovers, or restrict when they can be done. My employer's plan allows Roth 401k in plan rollovers to be done online, but Roth IRA rollovers need to be done by phone.

I assume that many companies don't offer this option due to the administrative cost and the possibility that these contributions will cause the plan to fail non-discrimination testing if non-HCEs don't contribute enough compared with HCEs.

Thanks. I checked and my 401k doesn't offer me ability to put post tax money into 401k. One follow up question.

For someone without the ability for a Mega Backdoor, does it still make sense to put post tax money into 401k ?

'Thank you.
You still have the advantage of tax-free growth, unlike a taxable (brokerage) account. However, the money pulled from a 401k will be treated as taxable income and probably taxed at a higher rate than if it were taxed as capital gains in a taxable account. You could run some projections to see which would leave you with the most after-tax dollars, but my guess is that it will be relatively close.

I'd probably choose a taxable account over a 401k with post tax money for the sake of accessibility should the need arise. You can do anything you want with a taxable account (e.g. invest in what you want, pull the money when you want), unlike a 401k.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Grogs
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Grogs » Thu May 17, 2018 4:47 pm

novemberrain wrote:
Thu May 17, 2018 1:48 pm
Lyrrad wrote:
Wed May 16, 2018 6:47 pm

Yeah, it's the Mega backdoor. See the Bogleheads wiki article about this. It's not available in most 401k plans. It requires the plan to allow after-tax contributions, and ideally allow in service rollovers to either Roth 401k or Roth IRA (or both). The details on how to perform a rollover differ by plan. Some plans don't allow in service rollovers, or restrict when they can be done. My employer's plan allows Roth 401k in plan rollovers to be done online, but Roth IRA rollovers need to be done by phone.

I assume that many companies don't offer this option due to the administrative cost and the possibility that these contributions will cause the plan to fail non-discrimination testing if non-HCEs don't contribute enough compared with HCEs.

Thanks. I checked and my 401k doesn't offer me ability to put post tax money into 401k. One follow up question.

For someone without the ability for a Mega Backdoor, does it still make sense to put post tax money into 401k ?

'Thank you.
It could be an advantage if you think you'll be leaving the company or reaching 59.5 years old in a few years. When you do, you can roll the after tax contributions into a Roth IRA and the rest into a traditional IRA. Then, if you transfer to a new company you could potentially roll the traditional IRA into the new 401k plan. The Finance Buff has a good article on it. He recommends going with the after tax 401k route over a regular taxable account if you expect to be able to roll it over in 5 years or less.

https://thefinancebuff.com/after-tax-40 ... ution.html

bayview
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by bayview » Thu May 17, 2018 6:09 pm

Engineer250 wrote:
Thu May 17, 2018 12:43 pm
bayview wrote:
Mon May 14, 2018 9:35 pm
Yep. Cheer up, eventually you can hit $24k/year!

Frankly, we’ve never had the income to save significantly more. This is one of those threads where a popcorn-eating emoji would be useful.
This will be the first year I can actually contribute the pre-tax max ($18.5k). I'm doing an additional 2% into after tax as a pilot program to see if everything works okay. I'm allowed one in-service withdrawal per year. So I'll call/contact my 401k in Nov/Dec to see if that all works as advertised.

Honestly, I'm just excited to max out the pre-tax for the first time. It's hard to imagine ever getting to a point where I could max the whole thing out. Especially with two people working and two 401ks.
Good for you; that is great!! :beer That’s a very exciting time in your financial growth.

If I can give any advice to those on these forums who are making maybe $65-80k per year (I’ve heard from them, I know they are out there, and that I’m not alone), it’s this: start Roth contributions sooner than later, and fund them relentlessly. If you can afford $18k for your 401k, look long and hard at your tax situation to see if you can reduce that contribution by $5,500 and fund your Roth with the difference instead, biting the bullet on the taxes. Don’t let the immediate tax tail wag the ultimate retirement finances dog.

Even though you might not be in a lower tax bracket in retirement, if a substantial portion of your cash flow will be Social Security, it will be painful to see RMD’s from a tIRA or 401k forcing you into taxation on that SS income. You won’t have an extra mill or two to play with. Do some modeling and what-if’ing. The scenarios discussed here on BH are often irrelevant for many retirees and perhaps not in your best interests. (Yes, I’ll be doing a lot of Roth conversions in the next few years.)

At any rate, that’s my only real investing regret, now 16 paychecks away from retirement. Woo-hoo!
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

WhiteMaxima
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by WhiteMaxima » Thu May 17, 2018 6:14 pm

I maxed out last year. I end loosing company match for a whole month. the 2017 max is 53000, that's total sum of pre aft and comapany match. I will never repeat my mistake again. I lost couple of thousand company match. I would rather contribute less than max then loosing company match.

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cockersx3
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by cockersx3 » Thu May 17, 2018 6:50 pm

2m2037 wrote:
Mon May 14, 2018 5:06 pm
We just realized that the 401k contribution limit is $55K. We always thought it was $18.5K, but just found out that $18.5K is the elective deferral portion but we can choose to contribute to it on a post-tax basis. A bit late to the game... :oops:

Theoretically, if we are able to, should we max out the $55K in a Roth 401K? My only concern is liquidity. Do any of you share this concern, and if so, how and where do you draw the line? 90% of budgeted capital investments into the Roth 401K and 10% into taxable accounts?
Yes - I contribute the $18.5K pre-tax, and I also add whatever additional I can post-tax (on top of my employer match, which goes in pre-tax) to hit the $55K annual limit. My 401k is a safe-harbor plan, which I assume is why I've never been told that my contributions are restricted because of my income. Our 401K also allows us to do in-service rollovers, up to four times year. I usually end up contacting Fidelity about once a year to roll over the funds to a Roth IRA I have with them ( ie the "mega backdoor Roth").

By the way - would not have ever known about this without reading BH's and related financial blogs. Ditto with my wife maxing out both her 457 and 403(b) plans as a teacher - didn't even know you could do that before reading about it. :sharebeer

Grogs
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Grogs » Thu May 17, 2018 8:20 pm

Engineer250 wrote:
Thu May 17, 2018 12:43 pm
bayview wrote:
Mon May 14, 2018 9:35 pm
Yep. Cheer up, eventually you can hit $24k/year!

Frankly, we’ve never had the income to save significantly more. This is one of those threads where a popcorn-eating emoji would be useful.
This will be the first year I can actually contribute the pre-tax max ($18.5k). I'm doing an additional 2% into after tax as a pilot program to see if everything works okay. I'm allowed one in-service withdrawal per year. So I'll call/contact my 401k in Nov/Dec to see if that all works as advertised.

Honestly, I'm just excited to max out the pre-tax for the first time. It's hard to imagine ever getting to a point where I could max the whole thing out. Especially with two people working and two 401ks.
I'm thinking I'll do something similar to your pilot program. I normally lower my monthly contributions to pretax 401k by 1% mid year to avoid spilling too much into the after tax. I'm thinking I'll just leave it where it is instead of lowering it. That will put about $500-1000 into the after tax account for my last paycheck. Then I'll do a backdoor in January and see how it goes. The amount is so small that even if I screw up completely and have to pay tax it won't matter much. If everything goes well I'll consider contributing more heavily to the after tax next year.

Spirit Rider
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Spirit Rider » Thu May 17, 2018 9:22 pm

cockersx3 wrote:
Thu May 17, 2018 6:50 pm
My 401k is a safe-harbor plan, which I assume is why I've never been told that my contributions are restricted because of my income. Our 401K also allows us to do in-service rollovers, up to four times year. I usually end up contacting Fidelity about once a year to roll over the funds to a Roth IRA I have with them ( ie the "mega backdoor Roth".
Even in a Safe Harbor 401k plan, ACP testing is still required for employee after-tax contributions. Only HCEs (> $120K or top 20%) will possibly be restricted with testing failure. So you are not an HCE, your contribution percentage was not subject to limitation or the plan did not fail testing.

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JoMoney
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by JoMoney » Fri May 18, 2018 3:52 am

Yes, I max it out.
Under my employers plan, I have the option to withdraw my after-tax amount should I change my mind. It would come with a pro-rata amount of earnings that could be subject to a 10% penalty, but I don't expect I'll be withdrawing it. I also have the option to roll it into a Roth account that would be tax free should I choose to do that. The money in the account has protections from creditors, it has easy transfer on death outside of probate, and even though qualified dividends from stocks would qualify for a lower tax rate in a traditional taxable brokerage account there is no such benefit for bonds, REITs, etc... if I decide to change my allocations or change which funds I use there is no taxable event from making those changes on funds within the account so this space is quite valuable and I think it's worthwhile to take advantage of it to the maximum I can.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Portfolio7
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Re: 2018 401k limit is $55K - do you max it out? Why/why not?

Post by Portfolio7 » Fri May 18, 2018 9:15 am

WhiteMaxima wrote:
Thu May 17, 2018 6:14 pm
I maxed out last year. I end loosing company match for a whole month. the 2017 max is 53000, that's total sum of pre aft and comapany match. I will never repeat my mistake again. I lost couple of thousand company match. I would rather contribute less than max then loosing company match.
I used to have to deal with that when my employer did monthly matching. One way to handle it is to do your projections. You know your monthly contribution, plus you know the monthly matching. Contribute enough so that, with matching, you come in right at or slightly below the limit. If you do this 5 minute analysis in July and then check it in November, it's pretty straightforward: you can contribute the max AND get full matching.
An investment in knowledge pays the best interest.

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