After-tax 401(k)

An , also known as a Mega Backdoor Roth IRA, is a type of deferred 401(k) subaccount, with different rules from traditional and Roth 401(k) accounts. They are typically used in strategies to rollover money to Roth IRAs far in excess of normal contribution limits.

Advantages

 * Subject to much higher contribution limits than traditional 401(k)s (up to $54,000 in 2017, $55,000 in 2018)
 * If funds are rolled into a Roth IRA soon after contribution, gains (and tax on them) will be minimal. Further growth in the Roth IRA is tax free (subject to the usual Roth IRA restrictions).
 * Some 401(k)s allow for in-service distributions, allowing employees to roll over funds during employment without a triggering event.
 * Protection from creditors under ERISA.

Disadvantages

 * Death, for monies waiting for rollover, the inheritor is left with a non-deductible IRA with very complicated paperwork.
 * Gains before rollover are taxed as ordinary income.
 * Losses before rollover, "basis" could be lost if you don't leave a few pennies in the account.
 * Management Risk: the rules can be changed without warning.
 * Management Fee/Check writing fees may be high enough to eat into savings.
 * Trustee Risk: You may receive two 1099-R's every year, one for the rollover and one for the gains. This increases the chance for error.
 * Legislative Risk: hopefully you could complete the rollover before the benefits were ended.
 * Additional paperwork: many accountants aren't aware of the documentation requirements.
 * Company fails nondiscrimination tests, resulting in a return of contributions. See Highly compensated employee.

After-Tax 401(k) limits
Traditional and Roth accounts share a employee contribution limit up to $18,000 per person for 2016 and $18,500 for 2018. However, Section 415(c)(1)(A) limits total contributions to defined contribution plans to $54,000 in 2016 and $55,000 in 2018. The limit for an after-tax 401(k) is the difference between the amount already contributed by the employer and employee, and the Section 415 limit.

Earnings on after-tax contributions
Earnings associated with after-tax contributions are pretax amounts. Distribution of these earnings is therefore taxable as ordinary income. To avoid taxable income, the earnings may be rolled over into a traditional IRA.

The plan provider should distribute the contributions and earnings separately (one check for earnings, one check for contributions). Each distribution can then be rolled over into the appropriate account.

Some plan providers may not offer this choice (one check for both earnings and contributions). If this is the case, request a single check payable to yourself. The plan must withhold 20% of the earnings (the pre tax portion of the check), so your net check is a little less than the distribution.

Then, do a 60 day rollover of the gross pretax amount (the earnings) to your traditional IRA. Do this first.

Once complete, then roll the after tax amount (making up the withheld amount from your other funds) into your Roth IRA.

There is no tax on the distribution. Report it as a rollover on Form 1040 lines 16a and 16b just like you would a direct rollover. Remember to claim credit for the withholding that will show on the 1099-R.

Also consider that the earnings may be so small that it makes more sense to do a direct rollover of the entire amount to your Roth IRA and pay taxes on the earnings.