Benefit of after tax 401k contribution?

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notmyhand
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Benefit of after tax 401k contribution?

Post by notmyhand » Mon Mar 05, 2018 7:12 pm

My 401k plan allows for after tax 401k contributions but does not allow for in-service rollovers (aka mega backdoor roth). What would be the benefit of contributing to an after tax 401k? I don't get a benefit now and earnings still get taxed correct? Any reason to do this and not a taxable account?

Thank you

MotoTrojan
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Re: Benefit of after tax 401k contribution?

Post by MotoTrojan » Mon Mar 05, 2018 7:30 pm

notmyhand wrote:
Mon Mar 05, 2018 7:12 pm
My 401k plan allows for after tax 401k contributions but does not allow for in-service rollovers (aka mega backdoor roth). What would be the benefit of contributing to an after tax 401k? I don't get a benefit now and earnings still get taxed correct? Any reason to do this and not a taxable account?

Thank you
Similar to a non-deductible IRA, I would assume this prevents dividend-growth from having a tax-drag, and would also allow tax-free transactions if you are rebalancing or trading.

Also similar to a non-deductible IRA, I would assume taxable still wins out in the average investors situation, due to LTCG tax being lower.

ThriftyPhD
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Re: Benefit of after tax 401k contribution?

Post by ThriftyPhD » Mon Mar 05, 2018 7:35 pm

If you're going to leave that employer soon, then you could roll it out to a Roth after separation.

decapod10
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Re: Benefit of after tax 401k contribution?

Post by decapod10 » Mon Mar 05, 2018 7:42 pm

notmyhand wrote:
Mon Mar 05, 2018 7:12 pm
My 401k plan allows for after tax 401k contributions but does not allow for in-service rollovers (aka mega backdoor roth). What would be the benefit of contributing to an after tax 401k? I don't get a benefit now and earnings still get taxed correct? Any reason to do this and not a taxable account?

Thank you
After tax 401k contributions are bad unless you can figure out a way to get them into a Roth account of some kind. You're correct that you get taxed on the way in, you get taxed on the way out, and it is taxed at ordinary income rates. It is tax deferred, but the negatives outweigh the positives.

So, generally no, there is no reason to do this over a taxable account if you can't convert it to a Roth.

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Earl Lemongrab
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Re: Benefit of after tax 401k contribution?

Post by Earl Lemongrab » Mon Mar 05, 2018 8:02 pm

decapod10 wrote:
Mon Mar 05, 2018 7:42 pm
After tax 401k contributions are bad unless you can figure out a way to get them into a Roth account of some kind.
Oh, I don't think it's so bad. Remember that a 401(k) will likely have fixed income. I'd be will to carry some after-tax with the plan to roll it over on job change.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

livesoft
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Re: Benefit of after tax 401k contribution?

Post by livesoft » Mon Mar 05, 2018 8:05 pm

I also think it is bad. You get no tax deduction for the contribution and the gains get taxed at ordinary income tax rates. And you get the early withdrawal penalties and a limited set of investment choices.

It would be better to go with a taxable account if you cannot get things into a Roth before they have too many gains.
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Spirit Rider
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Re: Benefit of after tax nough401k contribution?

Post by Spirit Rider » Mon Mar 05, 2018 8:14 pm

Like a nondeductible IRA, after-tax 401k contributions that you can not rollover to a Roth IRA can possibly have a use.

For example, when you do not have enough space in your tax advantaged accounts for the tax inefficient portion of your asset allocation. This typically only happens when your taxable assets significantly exceed your tax-advantaged assets and/or your asset allocation requires it.

decapod10
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Re: Benefit of after tax nough401k contribution?

Post by decapod10 » Mon Mar 05, 2018 8:32 pm

Spirit Rider wrote:
Mon Mar 05, 2018 8:14 pm
Like a nondeductible IRA, after-tax 401k contributions that you can not rollover to a Roth IRA can possibly have a use.

For example, when you do not have enough space in your tax advantaged accounts for the tax inefficient portion of your asset allocation. This typically only happens when your taxable assets significantly exceed your tax-advantaged assets and/or your asset allocation requires it.
I suppose that's true.

I guess something else to consider:
If you have $1,000,000 portfolio with 60% stocks and 40% bonds. $900,000 in tax advantaged space. Would you rather:

A) Tax-advantaged = $400k in bonds and $500k in stock, Taxable = $100k stocks

B) Tax-advantaged = $600k stocks, $300k bonds; After tax 401k = $100k bonds

?

I'm not really sure. If you're in the "bonds go in taxable" camp, then I suppose option B looks reasonably appealing.

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Earl Lemongrab
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Re: Benefit of after tax 401k contribution?

Post by Earl Lemongrab » Mon Mar 05, 2018 11:49 pm

livesoft wrote:
Mon Mar 05, 2018 8:05 pm
I also think it is bad. You get no tax deduction for the contribution and the gains get taxed at ordinary income tax rates. And you get the early withdrawal penalties and a limited set of investment choices.

It would be better to go with a taxable account if you cannot get things into a Roth before they have too many gains.
But bonds or REIT will mostly be fully taxed anyway. So using after-tax for that isn't bad. That's why a lot of people like I-bonds. Also no deduction but expands tax-deferred space.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

retiredjg
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Re: Benefit of after tax 401k contribution?

Post by retiredjg » Tue Mar 06, 2018 7:02 am

notmyhand wrote:
Mon Mar 05, 2018 7:12 pm
My 401k plan allows for after tax 401k contributions but does not allow for in-service rollovers (aka mega backdoor roth). What would be the benefit of contributing to an after tax 401k? I don't get a benefit now and earnings still get taxed correct? Any reason to do this and not a taxable account?

Thank you
Sometimes a plan will allow you to do an in plan Roth rollover (IRRx - roll the money into Roth 401k) but not roll out to Roth iRA. If your plan allows the IRR, I believe that is better than putting the money into a taxable account.

If retiring/changing jobs within 5 years or so, I believe the after tax account is fine. If you are staying forever, I think taxable is probably better.

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

Grt2bOutdoors
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Re: Benefit of after tax 401k contribution?

Post by Grt2bOutdoors » Tue Mar 06, 2018 7:19 am

Saving money is not bad! I repeat, saving money is never a bad thing! Using an after tax component may not be optimal if you are unable to roll it to a Roth IRA from a tax perspective. However, some folks lack the discipline to save outside of an automated payroll savings scheme, if that is the case then by all means use that option to save for retirement.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Re: Benefit of after tax 401k contribution?

Post by Grt2bOutdoors » Tue Mar 06, 2018 7:22 am

Earl Lemongrab wrote:
Mon Mar 05, 2018 11:49 pm
livesoft wrote:
Mon Mar 05, 2018 8:05 pm
I also think it is bad. You get no tax deduction for the contribution and the gains get taxed at ordinary income tax rates. And you get the early withdrawal penalties and a limited set of investment choices.

It would be better to go with a taxable account if you cannot get things into a Roth before they have too many gains.
But bonds or REIT will mostly be fully taxed anyway. So using after-tax for that isn't bad. That's why a lot of people like I-bonds. Also no deduction but expands tax-deferred space.
Yes, I bonds that may or may not pay a reasonable rate of return versus other options - the last few years have been particularly lean times for that savings component.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

livesoft
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Re: Benefit of after tax 401k contribution?

Post by livesoft » Tue Mar 06, 2018 7:28 am

Earl Lemongrab wrote:
Mon Mar 05, 2018 11:49 pm
livesoft wrote:
Mon Mar 05, 2018 8:05 pm
I also think it is bad. You get no tax deduction for the contribution and the gains get taxed at ordinary income tax rates. And you get the early withdrawal penalties and a limited set of investment choices.

It would be better to go with a taxable account if you cannot get things into a Roth before they have too many gains.
But bonds or REIT will mostly be fully taxed anyway. So using after-tax for that isn't bad. That's why a lot of people like I-bonds. Also no deduction but expands tax-deferred space.
So what? One can use bonds or REITs in the before-tax space and equities in their taxable account instead of using after-tax 401(k) contributions. I doubt most people need to expand tax-deferred space anyways.
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Bacchus01
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Re: Benefit of after tax 401k contribution?

Post by Bacchus01 » Tue Mar 06, 2018 8:10 am

Access to institutional class shares can be a big advantage

danaht
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Re: Benefit of after tax 401k contribution?

Post by danaht » Tue Mar 06, 2018 8:37 am

When you leave your employer - you can usually rollover the after tax contributions to a Roth, and all the earnings it generated to a rollover IRA. So - it's a huge benefit. I wish I had this option in my 401k!

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