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Old 12-24-2007, 08:49 AM   #21
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Were the earnings on these extra post tax contributions deferred until withdrawal just like the earnings on the pretax contribuitons?

Yes, that is the advantage of the contribution.
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Old 12-24-2007, 11:03 AM   #22
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......................As for after tax in 401(k), I really hate that. You will be taxed at ordinary rates on the gains, not at the lower cap gains tax rates. You need a little extra bookkeeping for when you begin withdrawals or a rollovers. You need extra bookkeeping if the owner of the assets dies because heirs are gonna get taxed on the gains at their ordinary rates and not get a tax-free step-up basis. Also, no tax-loss harvesting. And you lose flexibility on when you make withdrawals. And you probably end up paying higher expense ratios on the funds inside the 401(k) than you do outside the 401(k)............................
In my case I rolled my pretax 401(k) portion into an IRA and keep my bonds in the now all after tax 401(k). Since bonds are taxed at ordinary rates, anyway, this lets me avoid the difference with capital gains in 401(k) vs taxable account. Supposedly bond fund is zero ER in this fund.
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Old 12-24-2007, 11:16 AM   #23
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My 401k allowed after-tax(AT) contributions for a several years prior to my FIRE. Using a "save every raise" scheme, I just kept bumping up my savings rate. As mentioned above, you can WD the contributions at any time, the earnings stay as tax-deffered. At retirement, you choose whether you roll the AT contributions into IRA or just WD them. If you roll into IRA, your eventual IRA WDs are taxed proportionally to the fraction of the pure IRA divided by the whole IRA. That preserves the already taxed status of the AF contributions. It is not a big deal, you just owe tax on most of your IRA WD, instead of all of the WD.

Example: You have $200,000 IRA from all earlier employment. You retire from current employer with a 401k of $250,000 tax-deferred plus $50,000 AT contributions. You roll it all into the IRA, $500,000 total. Your first WD is $20,000. Your taxable income is $20,000 times (450,000 divided by 500,000). You owe tax on 95% of the IRA WD.

The advantage is all in the quality and expenses of first the 401k investments then the IRA investments, or lack thereof. Another consideration is using the AT contributions to pay for the annual, partial Roth conversion of the big IRA. That is what I'm doing with my AT money that I didn't roll into the IRA. Yes, I am guilty of mental accounting.
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Old 12-24-2007, 11:59 AM   #24
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Certainly an easier solution that futzing around with non deductable IRAs (which require a lot of paperwork to keep straight)
I'm not necessarily recommending non-deductible IRA's, but I have contributed to them in prior years and the paperwork is a breeze. Each year you contribute, you fill out a form 8606 with your fed income taxes which takes about five mins (if you stop for coffee during the process). Form 8606 is nothing more than an extremely simple running total of the non-deductible amounts you've contributed over the years. At mandatory distribution time, you don't have to pay tax on the portion of the withdrawal that was already taxed.

Again, I'm not recommending non-deductible IRA's, but if you want to do one, don't let the paperwork stop you. It's easy. I think financial product sales people push the idea of the paperwork being complicated as part of their pitch to put their products, and their services, in your portfolio.
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Old 12-24-2007, 12:06 PM   #25
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Yeah, the paperwork is easy. I did it. But you have to keep copies of every year you filed the form. Indefinitely (or at least it seems so!) That part is a real pain.

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Old 12-24-2007, 12:25 PM   #26
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Yeah, the paperwork is easy. I did it. But you have to keep copies of every year you filed the form. Indefinitely (or at least it seems so!) That part is a real pain.

Audrey
Everythings relative I guess. It's simple and quick to fill out the forms and each year only refers back to the prior year's form.....not all prior years forms, so keeping copies beyond the copies you'd keep of taxes anyway is unneccessary.

My only point is....... if someone calculated that doing non-deductible IRA's was smart for them financially, but didn't do them because they thought the paperwork was a big pita, that would be a huge mistake! The paperwork isn't a huge pita.
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After tax contribution limits:
Old 01-09-2008, 04:09 PM   #27
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After tax contribution limits:

In addition to the pre-tax or tax-deferred contributions you can make to your 401k plan, your plan may also allow employees to make after tax-contributions. When after-tax contributions are added to pre-tax contributions, this becomes your total 401k contribution - which also has a limit.
In 2008, the total that can be contributed to a 401k plan is $46,000 or 100% of your compensation - whichever is less. In 2009, this total 401k contribution limit will be indexed to inflation and can move up in $1,000 increments. In 2007, the total that could be contributed was $45,000.
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