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After-tax contributions to 401k?
Old 12-23-2007, 12:01 PM   #1
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After-tax contributions to 401k?

Okay, we have been maxing out all our possibilities: DH's 401k, my 403b (can only put in income from that small job, so that's only about 3k), and Roths. Our additional savings/investments are starting to cause us some taxable headaches with cap gains distributions and dividends.

Right now less than 30% of our total market investments are sheltered, and more than 70% are not. Even at 15% long term gains rates, we are starting to run into some hefty tax issues this year. So we are investigating ways to deal with this going forward. I guess there are several tactics to deal with this: Tax-managed funds, deferred annuities, and additional, after-tax contributions to 401k.

I wouldn't have thought of annuities after all the guff they get around here, but my dad said he has some, I think through Vanguard, solely for the tax sheltering. He does not ever plan on annuitizing them, can just withdraw from them (probably won't) or pass on to heirs. Is this ever worth doing? Or is dad mistaken?

And I never hear anyone talking about making after-tax 401k contributions, and also don't find much discussion about it elsewhere online, so I was wondering if it is worth doing. The 401k is with T Rowe Price, and has reasonable choices and expenses, but we couldn't have the same great funds that are the cause of all this trouble in the first place. It seems the plan would allow us to shelter an extra 30k/yr.

Any suggestions for us? Thanks in advance.
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Old 12-23-2007, 12:10 PM   #2
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Originally Posted by igsoy View Post
........................... And I never hear anyone talking about making after-tax 401k contributions, and also don't find much discussion about it elsewhere online, so I was wondering if it is worth doing. The 401k is with T Rowe Price, and has reasonable choices and expenses, but we couldn't have the same great funds that are the cause of all this trouble in the first place. It seems the plan would allow us to shelter an extra 30k/yr.

Any suggestions for us? Thanks in advance.
For the last 5 years or so before I retired I put as much into my 401(k) after tax as pretax. Maybe my logic was faulty, but I had good investment choices and was not eligible for a Roth. When I start to draw down my portfolio, I can withdraw tax free cash for a number of years and peel the taxable gains into my rollover IRA, if I understand correctly.
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Old 12-23-2007, 12:45 PM   #3
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Being that you have only 30% of your assets sheltered, I suggest you maximize the before tax 401k/403b. When you finally retire, you'll have more flexibility at balancing your tax rate -- pulling out enough to take advantage of the lower brackets.

Also, your maximum contribution 401ks are for the total contribution. You can't max out the before tax and then do a Roth 401k with after tax money. It's $20,500 total for over 50's into any type of 401k.

You can each have a Roth IRA that you can put in after tax money. Over 50's will get to put in $6K if taxable income is below ~$160K.
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Old 12-23-2007, 01:02 PM   #4
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Being that you have only 30% of your assets sheltered, I suggest you maximize the before tax 401k/403b. When you finally retire, you'll have more flexibility at balancing your tax rate -- pulling out enough to take advantage of the lower brackets.

Also, your maximum contribution 401ks are for the total contribution. You can't max out the before tax and then do a Roth 401k with after tax money. It's $20,500 total for over 50's into any type of 401k.

You can each have a Roth IRA that you can put in after tax money. Over 50's will get to put in $6K if taxable income is below ~$160K.
2B, I'm not talking about additional money in Roth 401k, I am talking about after-tax contributions to the same 401k account. We already do max out everything already: 15500 401k for him, 5000 (next year)roth ira for him, 3k 403b for me(that's all I earn at that job) plus 5000 roth ira for me. His company 401k has a way for you to put in extra after-tax money, so I was just wondering if this was worthwhile or what are the drawbacks because it doesn't get much discussion as far as I can tell.
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Old 12-23-2007, 01:12 PM   #5
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2B, I'm not talking about additional money in Roth 401k, I am talking about after-tax contributions to the same 401k account.
I don't think after tax contributions are allowed. Or, at least while I was working, I was advised that I could not do that. $20,500 current limit. No additional beyond that, even if after tax.

Perhaps I was given wrong info. Maybe it was just my company's policy? Anyone know for sure based on current info?
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Old 12-23-2007, 01:16 PM   #6
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I had heard of this before, but never really found details. In my searching I came across this CnnMoney article which refers to a woman who is ineligible for a Roth because of high income, and the Expert recommends a way around it:

Ask the Expert: Is a non-deductible IRA worth having? - Sep. 14, 2007

I don't like to make decisions based on one source of info, so thought I'd ask around. Oh, apparently, not all 401k administators allow this in their plans, so that explains some people being told you could not do that.
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Old 12-23-2007, 01:27 PM   #7
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I don't think after tax contributions are allowed. Or, at least while I was working, I was advised that I could not do that. $20,500 current limit. No additional beyond that, even if after tax.

Perhaps I was given wrong info. Maybe it was just my company's policy? Anyone know for sure based on current info?
I believe the limit for me was about $40,000 total per / post tax in my 401(k) at Megacorp
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Old 12-23-2007, 01:29 PM   #8
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Originally Posted by igsoy View Post
I had heard of this before, but never really found details. In my searching I came across this CnnMoney article which refers to a woman who is ineligible for a Roth because of high income, and the Expert recommends a way around it:

Ask the Expert: Is a non-deductible IRA worth having? - Sep. 14, 2007

I don't like to make decisions based on one source of info, so thought I'd ask around. Oh, apparently, not all 401k administators allow this in their plans, so that explains some people being told you could not do that.

OK thanks. That clears it up. The article clearly says you CANNOT contribute more than $20,500 to your 401k, even if the amounts beyond $20,500 are after tax dollars.

Edited: I guess I'll add again, based on travelover's post, unless this is something that is company plan specific. It sure wasn't allowed where I worked and I can't find anything on the web about it.

What the article is talking about is funding non-deductible contributory IRA's within the IRA contribution limit. That is, is it worthwhile to fund an IRA if your income is too high for a Roth IRA and too high for your contributory IRA to be deductible.

In regard to your tax situation, don't let the tail wag the dog. LT capital gains taxes are at an attractive 15% now. Think about that and where LT capital gain rates could be going with the inevitable tax increases coming up. How much do you really want to delay paying taxes on gains now at the expense of paying taxes on those gains at ordinary income rates later? You have to make your own assumptions and draw your own conclusions.

The biggest investment mistakes I've made in my investing career have all been associated with putting tax reduction ahead of investment returns.

Just some food for thought.
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Old 12-23-2007, 01:34 PM   #9
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I believe the limit for me was about $40,000 total per / post tax in my 401(k) at Megacorp
Were the earnings on these extra post tax contributions deferred until withdrawal just like the earnings on the pretax contribuitons?
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Old 12-23-2007, 01:34 PM   #10
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I thought the $15,500 for under 50 years old was the federal limit. I haven't seen anything that allows employers to increase that pre tax or after tax. Last year someone at work tried to put more than the limit in and he was givin the money back because it exceeded the federal limit.
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Old 12-23-2007, 01:45 PM   #11
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OK thanks. That clears it up. The article clearly says you CANNOT contribute more than $20,500 to your 401k, even if the amounts beyond $20,500 are after tax dollars.
As far as I can see, the article doesn't say that anywhere, it only even mentions 401ks as an aside about rollovers re: after tax contributions to your 401k, if you have made any.

I ran into some obscure discussion thread and one more on Bogleheads forum where they were discussing rollovers or withdrawals and how there could be some accounting headaches when pre-tax and after-tax were mixed in the same account. But aside from that I haven't been able to find much discussion about it. I am glad to hear from travelover that I am not crazy for thinking this.

Wanted to thank youbet for bringing up some alternate food for thought about the future tax issues, my thinking was that the 30 years of tax deferment might be worth more than the ordinary rates on the gains 30 yrs from now.
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Old 12-23-2007, 01:51 PM   #12
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Maybe it was just my company's policy? Anyone know for sure based on current info?
When I/wife worked (different companies), I could contribute above the federal limit on my 401k. She could not. Both 401k's had Fidelity as administrator, so it was the "rule of the company".

I contributed post-tax to my 401k, and had these contributions broken out and put in a MM account when I rolled my 401k to an IRA. Of course, the gains (taxable) were sent to the IRA and will continue to be invested for the future. The "above the line" contributions will fund my first 1-2 years of retirement (which I started in May of this year). Worked well for me and delays my "tapping" my rollover IRA.

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Old 12-23-2007, 01:56 PM   #13
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I am confused about your tax issues. The 401(k) with 30% of total portfolio could be 100% fixed income. The taxable accounts with 70% equities could be very tax efficient funds, so no tax issues. If you have any fixed income in in taxable, you could have muni bonds funds.

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).

When tax-efficient after-tax investing is available, why bother with the after-tax contributions to a 401(k)? It just seems to me that it will make you pay more taxes and complicate life.
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Old 12-23-2007, 01:58 PM   #14
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As far as I can see, the article doesn't say that anywhere, it only even mentions 401ks as an aside about rollovers re: after tax contributions to your 401k, if you have made any.

.
Right. The article is not about after tax contributions to 401k's. It's about non-deductible contributions to IRA's after you max your 401k.

Ref tax postpone vs. investment decisions...... Do your own research. Tax postponement can be a very valuable tool. But, depending on how long until you start withdrawals and what the tax tables and rules look like then, it may not pay to defer taxes. Of course, da gubmint won't tell us now what they'll do then!
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Old 12-23-2007, 02:02 PM   #15
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Okay, we have been maxing out all our possibilities: DH's 401k, my 403b (can only put in income from that small job, so that's only about 3k), and Roths. Our additional savings/investments are starting to cause us some taxable headaches with cap gains distributions and dividends....

And I never hear anyone talking about making after-tax 401k contributions, and also don't find much discussion about it elsewhere online, so I was wondering if it is worth doing.
Well, to the extent the cap gains are long-term, they and the dividends are taxed at 15% (at least for this year and probably for 2008), whereas when these are put in tax-deferred accounts, these would be taxed at your marginal rate when you withdraw.

Frankly I think anyone looking at FIRE should have a good chunk of assets in taxable accounts anyway. For one thing, at least for now you can take advantage of preferred rates on dividends and LTCG, *and* you can more easily manage your retirement income to stay in lower tax brackets by withdrawing money already taxed (and in Roths) when you reach a point when more TIRA/401k distributions would kick you into a higher tax bracket.
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Old 12-23-2007, 02:02 PM   #16
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It just seems to me that it will make you pay more taxes and complicate life.
Not at all - I'm at the 10% rate in retirement (and I didn't have to worry about tracking any gains year to year). Additionally, since it came out of my paycheck when I worked (as a 401K contribution), it was completely "automatic".

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Old 12-23-2007, 02:04 PM   #17
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I am confused about your tax issues. The 401(k) with 30% of total portfolio could be 100% fixed income. The taxable accounts with 70% equities could be very tax efficient funds, so no tax issues. If you have any fixed income in in taxable, you could have muni bonds funds.
As far as the fixed income goes, that is the farthest thing from our mind as we are age 39 and 40. And many of the international funds which are causing us the gains issues are not going to be tax efficient with all the trading around they do.

I agree, the accounting complications are a concern, I just haven't really worked out the pros and cons, yet. So everyone that gives me contrarian opinions to consider, it is appreciated.
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Old 12-23-2007, 02:23 PM   #18
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igsoy....

I think we have a terminology thing going on here. I just reread your first post. Just substitute "non-ductible IRA" where you have "after tax 401k'" and we're on the same page!

With about 30 years until you must begin withdrawals from your deferred accounts, I'd sure consider making non-dedeductible IRA contributions. That's a lot of time for earnings to compound tax deferred.

But, again, you have to make your own assumptions about current taxes vs. future taxes.
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Old 12-23-2007, 02:54 PM   #19
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As far as the fixed income goes, that is the farthest thing from our mind as we are age 39 and 40. And many of the international funds which are causing us the gains issues are not going to be tax efficient with all the trading around they do.
With the advent of ETFs and real total international stock index funds such as VFWIX and VEU, I expect that foreign investing will become much more tax efficient than it has been in the past. We were also the recipient of huge distributions from our small cap international fund. We do not reinvest distributions, so that money went into a small cap international ETF.

But if you got no fixed income, then why aren't those international funds in your tax-advantaged accounts? Anyways, with a little bit of thought, we are making our taxable portfolio extremely tax efficient.
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Old 12-24-2007, 05:01 AM   #20
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[quote=LOL!;592548]With the advent of ETFs and real total international stock index funds such as VFWIX and VEU, I expect that foreign investing will become much more tax efficient than it has been in the past. [quote]

It is definitely worth checking out Vanguards Tax Managed International (VTGMX). It beats the EAFE index and its five year returns were 23.71% pre tax and 23.46% AFTER TAX with similar results for 3 years.

Certainly an easier solution that futzing around with non deductable IRAs (which require a lot of paperwork to keep straight)
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