Overcontribution to 401K

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Ccthealias
Posts: 46
Joined: Fri Dec 29, 2023 7:52 am

Overcontribution to 401K

Post by Ccthealias »

I was looking over at my husband's 401K statement and inadvertently he has been over contributing to his 401K each year. Instead of stopping his contribution after it hits the IRS mix, the company still took it but put it in an after tax bucket. I'm confused by what that means- it's not a Roth contribution. It looks like he has been doing this for a while.

Is there such thing as an after tax 401K that is not Roth? What is the tax implication of that?
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retired@50
Posts: 12431
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Overcontribution to 401K

Post by retired@50 »

Ccthealias wrote: Sun Feb 11, 2024 9:04 am I was looking over at my husband's 401K statement and inadvertently he has been over contributing to his 401K each year. Instead of stopping his contribution after it hits the IRS mix, the company still took it but put it in an after tax bucket. I'm confused by what that means- it's not a Roth contribution. It looks like he has been doing this for a while.

Is there such thing as an after tax 401K that is not Roth? What is the tax implication of that?
It's probably time to get familiar with your husband's 401k plan rules. Request a copy of the summary plan description or the company benefits manual.

This sounds like "step 1" of a mega-backdoor Roth.

See link: https://www.bogleheads.org/wiki/Mega-backdoor_Roth

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
scophreak
Posts: 498
Joined: Tue Jan 12, 2016 12:17 pm

Re: Overcontribution to 401K

Post by scophreak »

Perfectly normal. There's an IRS-imposed limit on pre-tax contributions ($23,000 for 2024) and many plans offer the ability to make after-tax contributions beyond that up to the maximum of $69,000 (2024 limit for combined employee pre-tax + employee post-tax + employer contribution). Depending on your specific 401k plan rules, you may be able to roll these after-tax contributions over to a Roth IRA - this is the often-discussed "Mega Backdoor Roth".

To answer your specific question, after-tax contributions to your 401k are treated similarly to a non-deductible IRA contribution. When withdrawn, the original contribution amount comes out tax-free (as it was already taxed), while any gains are taxed at ordinary income rates. That said, if your 401k plan allows in-service withdrawals, the best option would be to take advantage of the Mega Backdoor Roth option and convert all existing after-tax contributions.
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