After tax 401k contributions

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SlowMovingInvestor
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After tax 401k contributions

Post by SlowMovingInvestor » Mon Nov 04, 2019 5:11 pm

My company 401k plan allows a Roth 401k and allows after tax 401k contributions, but it does not allow transferring contributions from the after tax 'bucket' to the Roth 401k bucket. Nor does it allow in-service rollover to a Roth IRA outside the 401k plan.

So it seems like it doesn't really allow Mega Backdoor Roth IRA -- the earnings would be taxed at my income tax bracket on retirement. If I max my 401k as a Roth, and do a regular backdoor Roth IRA, is there any advantage at all to doing after tax 401k contributions ?

I assume my tax rate in retirement will be roughly the same as today.

Pigeye Brewster
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Re: After tax 401k contributions

Post by Pigeye Brewster » Mon Nov 04, 2019 5:21 pm

SlowMovingInvestor wrote:
Mon Nov 04, 2019 5:11 pm
My company 401k plan allows a Roth 401k and allows after tax 401k contributions, but it does not allow transferring contributions from the after tax 'bucket' to the Roth 401k bucket. Nor does it allow in-service rollover to a Roth IRA outside the 401k plan.

So it seems like it doesn't really allow Mega Backdoor Roth IRA -- the earnings would be taxed at my income tax bracket on retirement. If I max my 401k as a Roth, and do a regular backdoor Roth IRA, is there any advantage at all to doing after tax 401k contributions ?

I assume my tax rate in retirement will be roughly the same as today.
I agree with your conclusion there is little to no advantage.

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1789
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Re: After tax 401k contributions

Post by 1789 » Mon Nov 04, 2019 5:23 pm

What is your tax braket and filling status? With the limited information, it seems after tax 401k is not good at all. Taxable looks better in this case. One question: Is there a reason why you are doing all roth 401k not traditional? Do you have too much money already in traditional 401k?
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Longdog
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Re: After tax 401k contributions

Post by Longdog » Mon Nov 04, 2019 5:37 pm

Could those after tax contributions be rolled over to a Roth IRA when you eventually leave the company? If so, there could be a significant future benefit.
Steve

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SlowMovingInvestor
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Re: After tax 401k contributions

Post by SlowMovingInvestor » Mon Nov 04, 2019 6:01 pm

1789 wrote:
Mon Nov 04, 2019 5:23 pm
What is your tax braket and filling status? With the limited information, it seems after tax 401k is not good at all. Taxable looks better in this case. One question: Is there a reason why you are doing all roth 401k not traditional? Do you have too much money already in traditional 401k?
Tax bracket is around 30% state + Federal. Probably around the same on retirement. Possible it might go up before retirement to around 40 state + Fed.

I prefer Roth 401k because I want to build up a Roth balance which will never be taxed -- it's a sort of way of hedging my bets against future tax increases. I already have a large traditional 401k balance, yes.

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SlowMovingInvestor
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Re: After tax 401k contributions

Post by SlowMovingInvestor » Mon Nov 04, 2019 6:07 pm

Longdog wrote:
Mon Nov 04, 2019 5:37 pm
Could those after tax contributions be rolled over to a Roth IRA when you eventually leave the company? If so, there could be a significant future benefit.
I would assume they could be rolled over, but not sure when I plan to leave. Maybe in the last year before I leave, I could contribute the max to the after tax 401k.

If I were to contribute after tax 401k, should my employer's 401k administrator actually send the earnings on the after tax 401k to a separate account, or do I have keep track of these myself, and on separation, tell them to cut 2 checks for the after tax 401k -- my contributions, which should go to a Roth IRA, and earnings, which should go to a regular IRA.

Spirit Rider
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Re: After tax 401k contributions

Post by Spirit Rider » Mon Nov 04, 2019 6:44 pm

The plan is responsible for "separately accounting" for employee after-tax contributions and taxable earnings, not the employee.

sarabayo
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Re: After tax 401k contributions

Post by sarabayo » Mon Nov 04, 2019 6:55 pm

SlowMovingInvestor wrote:
Mon Nov 04, 2019 6:07 pm
If I were to contribute after tax 401k, should my employer's 401k administrator actually send the earnings on the after tax 401k to a separate account, or do I have keep track of these myself, and on separation, tell them to cut 2 checks for the after tax 401k -- my contributions, which should go to a Roth IRA, and earnings, which should go to a regular IRA.
Minor point, but you don't have to do the rollover immediately on separation, though it's in your best interest to do it as soon as possible.

jyoung
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Re: After tax 401k contributions

Post by jyoung » Mon Nov 04, 2019 7:04 pm

My plan will continue the company match up to the combined IRS limit so long as I continue contributing to the after tax option after 19k. Fortunately, they also allow in plan Roth conversions so that's not an issue for me. But even if they didn't, I'd probably still contribute at least the minimum to get the match.

retiredjg
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Re: After tax 401k contributions

Post by retiredjg » Mon Nov 04, 2019 7:09 pm

When the "mega back door" started to become more common, the general feeling around here was that it was not worth contributing to an after-tax account if you could not roll it to Roth pretty quickly.

Then tfb did his own study on it and came to a conclusion that was somewhat different from what people thought.

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

I have not read this lately, but as I recall, he determined there was a benefit if you could roll to Roth at 5 years. He did not look at time periods greater than 5 years...which means the benefit could be even longer.

Are you within 5 or so years from retirement?
Last edited by retiredjg on Mon Nov 04, 2019 7:10 pm, edited 1 time in total.

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JoMoney
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Re: After tax 401k contributions

Post by JoMoney » Mon Nov 04, 2019 7:10 pm

Yes, there are still advantages to putting after-tax money into 401k

-You could potentially roll-over the after-tax contributions to a Roth after you leave the current employer.
-Money in a 401k has strong protections from judgments.
-Some assets like bonds and REITs don't have "qualified dividends" so if they're in a taxable account it will be at your highest bracket rate.
-You can trade/rebalance investments in the 401k without a taxable event
-Depending on future tax rates, and your withdrawal rate, tax on your future withdrawals could at an even lower rate than that of qualified dividends rate while you're still earning other income.
-If you're currently in a state that taxes income, and move to one that doesn't (or doesn't tax 401k income)
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Compound
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Re: After tax 401k contributions

Post by Compound » Mon Nov 04, 2019 8:02 pm

jyoung wrote:
Mon Nov 04, 2019 7:04 pm
My plan will continue the company match up to the combined IRS limit so long as I continue contributing to the after tax option after 19k. Fortunately, they also allow in plan Roth conversions so that's not an issue for me. But even if they didn't, I'd probably still contribute at least the minimum to get the match.
Bold added above by me
My plan also has this feature so I take advantage of getting the match. Unfortunately, I don’t have the in-service Roth rollover option available, so I’m stuck with after tax funds generating earnings for the foreseeable future.

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SlowMovingInvestor
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Re: After tax 401k contributions

Post by SlowMovingInvestor » Thu Nov 07, 2019 5:45 pm

Compound wrote:
Mon Nov 04, 2019 8:02 pm
jyoung wrote:
Mon Nov 04, 2019 7:04 pm
My plan will continue the company match up to the combined IRS limit so long as I continue contributing to the after tax option after 19k. Fortunately, they also allow in plan Roth conversions so that's not an issue for me. But even if they didn't, I'd probably still contribute at least the minimum to get the match.
Bold added above by me
My plan also has this feature so I take advantage of getting the match. Unfortunately, I don’t have the in-service Roth rollover option available, so I’m stuck with after tax funds generating earnings for the foreseeable future.
Thanks for all the comments ! [ I am below 59.5, if that matters]

From what I can make out about my plan (the benefits folks are not particularly knowledgeable).

1) My plan doesn't generate matches for after tax contributions

2) My plan doesn't allow transfer from after tax 401k to Roth 401k in plan.

3) My plan doesn't allow in service rollover.

I don't see any benefits from contributing (the other benefits cited by JoMoney don't really hold for me). Indeed, I don't understand why a company would set up a plan that allows after tax 401 contrbutions, but not allow transfer from after tax 401k to Roth 401k in plan. The back end provider is Aon Hewitt, who I assume has the technology to handle transfer from after tax 401k to Roth 401k in plan so there should be no reason for my company to not allow it.

retiredjg
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Re: After tax 401k contributions

Post by retiredjg » Thu Nov 07, 2019 5:49 pm

If you don't expect to work there long, I think the contribution is probably worth it.

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