Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
After Tax IRA contributions
Old 08-06-2016, 10:16 AM   #1
Recycles dryer sheets
Taxman59's Avatar
 
Join Date: Sep 2014
Posts: 464
After Tax IRA contributions

My oldest son asked me a question about the after tax contributions to a 401K. He makes about $120k, and his savings plan is to put about 50K into savings a year , (not including the employer $7k match). He has a Roth IRA and about a years worth of after tax savings (plus funds for a ring and a house). He is 26 years old and single (though that may change in a couple of years). He is going to put $18k into the ROTH 401k, max his HSA and continue to add to his after tax account. He wants to put about $10-20k into the 401k as an after tax contribution. He understands that the contribution can be rolled out to a ROTH IRA when he leaves, and the earnings are part of the regular 401k.

His question is this - When he withdraws the earnings on the after-tax 401k, they will be taxed as ordinary income at ordinary rates. Is he better off just increasing the after-tax account and paying taxes currently on any earnings , but at the cap gain and dividend rates or is the deferral worth the potential extra taxes? Is there some breakeven point ?

Any help on this is appreciated.
__________________

__________________
Taxman59 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-06-2016, 10:51 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,697
For the real answer, fairmark.com (retirement forum) and watch for Alan S.

My impression is that the earnings go with the contributions when you rollover over to Roth IRA. However there are timing issues as to when you can remove the earnings w/o paying taxes and penalty. If you can wait until the earnings are qualified, then the Roth 401K is better than the after tax account.

edit to add: remember this link? http://fairmark.com/retirement/roth-...roth-accounts/
__________________

__________________
kaneohe is offline   Reply With Quote
Old 08-06-2016, 11:10 AM   #3
Thinks s/he gets paid by the post
 
Join Date: Nov 2011
Posts: 2,076
"Retirees Owe Taxes, Ha!" accounts work best for those who expect to be in a higher tax bracket after retiring. Many big savers find themselves in that group. Unless you convert them soon to Roth, avoid non-deductible contribs to tIRAs because their earnings will be taxed at typically higher ordinary income rates.
__________________
GrayHare is offline   Reply With Quote
Old 08-06-2016, 03:22 PM   #4
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 1,603
We typically max out the after-tax 401k each year (~50k) and then roll the after-tax contributions (and any required pro-rated growth) over to a Roth IRA in the same year or so. Basically we want to roll over the contributions before too much growth occurs within the 401k.

We have to pay taxes on the growth when the funds are rolled over (due to 1099-R) issued by 401k company.



Our plans allow some in-service distributions which makes this possible. Pre-Tax 401k contributions are required by the IRS to be locked up until you leave or turn 59 1/2 but the after tax contributions are not restricted by the IRS - and in our case, not by our particular plan either.

Is there a web based interface for the 401k plan? Can you withdrawal anything yet? (outside of "hardship distributions"). If he get access to his after-tax contributions before he leaves employer then the original question may be moot.

We also still have significant balances in tax-deferred 401ks that we are Roth converting now (age 51) until age 70 (ie social security start).

-gauss
__________________
gauss is online now   Reply With Quote
Old 08-06-2016, 09:45 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,697
Quote:
Originally Posted by Taxman59 View Post
My oldest son asked me a question about the AFTER TAX contributions to a 401K. ........................... He is going to put $18k into the ROTH 401k, .................... He wants to put about $10-20k into the 401k as an AFTER TAX contribution. He understands that the contribution can be rolled out to a ROTH IRA when he leaves, and the earnings are part of the regular 401k.

His question is this - When he withdraws the earnings on the AFTER TAX 401k, ..........................
You wll need to clarify whether you are talking about a ROTH 401K or AFTER TAX contributions to a normal 401K. They are not the same thing. I counted 3 AFTER TAX but only 1 ROTH so now I'm thinking you meant AFTER TAX. My answer above was for a ROTH 401K. The title is also a bit confusing....it talks about IRA , not 401K.
__________________
kaneohe is offline   Reply With Quote
Old 08-06-2016, 11:21 PM   #6
Recycles dryer sheets
 
Join Date: Nov 2014
Posts: 145
Leveraging the 401k plan's after-tax non-Roth bucket is a good way to setup what's is sometimes referred to as a "mega backdoor Roth IRA." Ideally the company plan also allows for in-service distributions of this bucket so it can be rollover converted to Roth IRA frequently and not have to wait til departure of service. Some plans also allow for periodic rollover conversions into the Roth 401k bucket of the plan. Since tax has to be paid on all gains above the after-tax contributions, some folks also keep the after-tax in a money market fund or equivalent to minimize gains and effectively turn the after-tax bucket into a holding tank for getting the funds into a Roth account. This is more effective if one can execute the rollover conversion while employed (aka in-service).

If DS' plan doesn't allow for in-service distributions of the after-tax bucket, it is worthwhile reconsidering the strategy as it may be a while before DS departs employment which could build up sizeable gains, particularly if the after-tax is invested and not sitting in a money market fund.

BTW, taking advantage of the "mega backdoor Roth IRA" does not preclude also executing a normal "backdoor Roth IRA." DW and I are doing both.

Your son sounds like he's on a great track for ER! Nice work, Taxman59!!
__________________
The kids used to call me Captain Slow; now they also use Captain Cheap. I tell them, "Talk to the portfolio!"
growerVon is offline   Reply With Quote
Old 08-07-2016, 06:21 PM   #7
Recycles dryer sheets
Taxman59's Avatar
 
Join Date: Sep 2014
Posts: 464
Quote:
Originally Posted by kaneohe View Post
You wll need to clarify whether you are talking about a ROTH 401K or AFTER TAX contributions to a normal 401K. They are not the same thing. I counted 3 AFTER TAX but only 1 ROTH so now I'm thinking you meant AFTER TAX. My answer above was for a ROTH 401K. The title is also a bit confusing....it talks about IRA , not 401K.
Sorry for the confusion, He is going to make the ROTH 401k contribution to the plan. In addition, he wants to make an After Tax contribution to the plan of about $10-20k. You are right, I typed in the IRA instead of 401k .

I went to the Fairmark site, and they basically say that he should roll over the After-Tax $$ to a ROTH IRA on a regular basis if they have sub accounts for the after tax money.

Thanks for the help!
__________________
Taxman59 is offline   Reply With Quote
Old 08-07-2016, 08:42 PM   #8
Recycles dryer sheets
 
Join Date: Nov 2013
Posts: 270
I contribute pre-tax to the max in my 401k. I also contribute the monthly max to my after tax-401k. The maximum for my Mega is 9%. I roll that over every month to a Roth 401k, so that I don't have any earnings to pay taxes on.

I'd encourage your DS to look at what he could do to drop down from the 28% tax bracket. Contributing the max pre tax gets him closer to that goal. I myself thinks that it is better to mix both traditional and Roth accounts, so that you balance the tax burden.

YMMV


Sent from my iPhone using Early Retirement Forum
__________________

__________________
NgineER is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
After tax 401k contributions ronocnikral FIRE and Money 3 06-21-2010 12:29 PM
Pros and Cons of After Tax 401K Contributions TooFrugal FIRE and Money 25 12-16-2009 06:28 PM
After-tax contributions to 401k? igsoy FIRE and Money 26 01-09-2008 03:09 PM
Recovery of After-Tax Employee Contributions Leonidas FIRE and Money 0 02-07-2007 07:56 PM
after-tax contributions to 401K - pros/cons? simple girl FIRE and Money 14 10-12-2006 01:27 PM

 

 
All times are GMT -6. The time now is 07:35 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.