Really Maxing out our 401(K)

[KRABE]

Friends,

I am aware we(or maybe it is just I) typically view 401(K) as being maxed out at $18000.00 (plus catch up provisions if they apply), however, the max contribution limit is $54,000.00 for 2017. I used to think that was only available for those inventive self-employed individuals who had very large matching or profit sharing contributions to get themselves to that dollar. However, I have recently stumbled across the term Mega backdoor Roth conversion using non-deductible contributions to a 401k. How does this work?

Maybe more importantly if my wife's employer offers the option to make Roth contributions to their 401(k) in addition to traditional contributions, can I without going through all of the paperwork gymnastics of doing a Mega Backdoor Roth conversion can I contribute the balance of the 36000 less employer match on the Roth side?

For example, her 54,000.00 would look like this:

Traditional 401k elective defferal: 18000
Employer Match:4200
Roth 401(k) contribution:13800
Total 401k additions: $54,000.00

Does this work?

 

[Lawrencewendall]

According to IRS, aggregate of all contributions is 18k (plus catch-up)

https://www.irs.gov/retirement-plans/roth-comparison-chart

 

[KRABE]

According to IRS, aggregate of all contributions is 18k (plus catch-up)

https://www.irs.gov/retirement-plans/roth-comparison-chart

I have seen that but it doesn't seem to jive well with: Should You Make Aftertax Contributions to Your 401(k)?

 

[Lawrencewendall]

Q: Are there any big drawbacks to making aftertax 401(k) contributions?
A: It's not a drawback, per se, but not every plan allows for aftertax contributions, so that's the first hurdle.

My plan doesn't allow it. Check yours out.

 

[Ronstar]

I vaguely remember finding that the owners of our company could have made contributions several years ago to our 401k's from profit distributions over and above the typical max out numbers. We didn't pursue it too far - I think the rule required that all partners must participate at the same level.

 

[KRABE]

Q: Are there any big drawbacks to making aftertax 401(k) contributions?
A: It's not a drawback, per se, but not every plan allows for after-tax contributions, so that's the first hurdle.

My plan doesn't allow it. Check yours out.

Given your response, I think you have answered my question.
Q: Does a Roth contribution count toward $18,000 cap (just found the asterisk at the bottom of the site you link. I think that answers the question, though IRS instructions don't always tell the full story.)
A: No, I can't use a Roth contribution to make non-deductible contributions to a 401(k) in excess of the $18,000.

To answer your question, either her employer plan will have the option we are checking or I will create a self-employed 401k for my small business where she is already an employee and figure out a way to max it out to the 54k for both of us. I was really hoping the Roth contribution would work, but apparently, it will not and I will have to figure out a strategy to maximize it on our own if she can't do after tax contributions.

Please correct me recap if you see something wrong:

In recap for my own head, there are 3 different types of 401k contributions, they are as follows:

1: "Traditional" pretax 401(k)contributions
2: "Roth" 401(k) contributions
3: after tax contributions to a 401(k) - not limited to $18,000.

If I wanted to maximize tax deferred account amounts and I was still able to contribute to a standard back door roth, and my company allowed after tax contributions my understanding is it would work like this.
1. 18,000 to pre tax 401(k)
2. 5,500 to back door Roth (because I can get the full amount to roth immediately
3. (30500-less employer match) to after tax contribution to 401k. (question here, does the 5500 back door Roth reduce the 54000 allowed)

In my mind, this would be a pretty good strategy if you were thinking you wouldn't we with the company terrible long and would allow to stuff more into a Roth than I might otherwise be able to.

Please critique.

Thanks in advance.

krabE

 

[Lawrencewendall]

SEP IRA may be of value depending on business income.

https://www.irs.gov/retirement-plan...bution-limits-including-grandfathered-sarseps

 

[Sunset]

If you have a business you can open a solo-401K IRA and solo-401K ROTH.

Lets say your wife works for your company:
She can contribute $18K (plus catch up if applies), and your company can contribute up to 25% of net earnings. The total of all contributions can be around $54K per yr.

No need to back-door anything.

Vanguard charges only $20/yr for each fund you have, so if you have Wellington fund for example as the only one, it's just $20/yr.

Here is an overview:
https://investor.vanguard.com/what-we-offer/small-business/individual-401k

at the bottom is a link to calculate values:
https://personal.vanguard.com/us/SbsCalculatorController

 

[KRABE]

I run into additional complexity because she has a 401k at work, and I have a simple IRA at work. I am trying to change that to a 401k for contribution limit reasons. As I mentioned I have a side hustle, but frankly, I manage the net income to ensure it is never overly profitable, and due to the nature of the business is not very profitable at the moment. I am anticipating a really good year in 2018 from my primary hustle and want to have all of my ducks in a row to maximize the amounts going into two tax deferred accounts between the two of us.

Within my side hustle, I probably can create an income spike by taking income and delaying paying expenses enough to give me a bump to take advantage of some of the 25% income limitations but I would prefer not to, especially in a year that I am already going to have super high income, generate an income bump in my side hustle because then I really am just going backwards even after taking the max retirement contributions allowable, given the several tax brackets higher that I would be in.

So if I do a 25% of my earnings towards my wife, I would need to bump income up another $120,000. Probably do-able but if I will already be in the top bracket for 2018, (an unusual occurrence, and one I hope I can repeat but doubt I will be able to for some time) generating another 100k worth of income doesn't seem like a wise move, even if I can get rid of 50% of it through 401k contributions for myself and my wife.

 

[Hermit]

I have after tax money in my 401k from contributions above $18k. The only way l can get it out is to roll the 401k to an IRA. If l do that I can put the after tax money in a Roth or take the cash tax free and spend it frivolusly.

 

[dallas27]

According to IRS, aggregate of all contributions is 18k (plus catch-up)



https://www.irs.gov/retirement-plans/roth-comparison-chart

Bull, employers can add about double what the employee can add. I do it every year for myself and wife. Essentially a 200% match on the 18k

 

[NgineER]

You can contribute maximum $18k + catch-up between tax deferred and Roth 401k.
Employer match/contribution is on top of that.
After tax contribution is on top of that, limited by your employer.
Total maximum is the $54k.
IRA contributions do not count.

I do after tax contributions every month. My employer limits this to 9% of my salary. Immediately after the contribution I roll this over to a Roth IRA to have the whole contribution be tax free and not have any gains that would be taxable.

 

[Penny6]

For clarity- pre tax personal contribution 18k to 401k + company contribution + post tax 401k contribution if company allows can be < or = to 54k/yr

 

[Penny6]

What is the benifit of contributing post tax income to the 401k if you turn around and convert it to an IRA or is the conversion happening at a later time when the funds are needed?

 

[KRABE]

You can contribute maximum $18k + catch-up between tax deferred and Roth 401k.
Employer match/contribution is on top of that.
After tax contribution is on top of that, limited by your employer.
Total maximum is the $54k.
IRA contributions do not count.

I do after tax contributions every month. My employer limits this to 9% of my salary. Immediately after the contribution I roll this over to a Roth IRA to have the whole contribution be tax free and not have any gains that would be taxable.

THank you for the concise answer to my question.

I was under the impression that you couldn't immediately roll that out to a Roth IRA and that the gains and losses had to be allocated to the amount rolled out if you did in accordance with IRS Notice 14-54.

Penny, the benefit of rolling it to a Roth IRA is you can put more into a Roth IRA that way than through a standard backdoor IRA. If you leave nondeductible accounts alone and allow them to grow you are taxed on the growth just like a traditional ira, unless they are rolled into a Roth IRA so the goal is to get them into a Roth IRA as soon as you can so as to avoid having to pay any tax on the growth or the conversion.

 

[Johanson]

THank you for the concise answer to my question.

I was under the impression that you couldn't immediately roll that out to a Roth IRA and that the gains and losses had to be allocated to the amount rolled out if you did in accordance with IRS Notice 14-54.

Penny, the benefit of rolling it to a Roth IRA is you can put more into a Roth IRA that way than through a standard backdoor IRA. If you leave nondeductible accounts alone and allow them to grow you are taxed on the growth just like a traditional ira, unless they are rolled into a Roth IRA so the goal is to get them into a Roth IRA as soon as you can so as to avoid having to pay any tax on the growth or the conversion.

I was told by a representative of my company's 401K that I could take the after tax portion of my 401K and roll it into a Roth IRA at any time. They told me this after I called to see if I could roll the Roth 401K portion into a Roth IRA while I am still working there. They said I couldn't until I reach 59 1/2 or quit/retire.

My question is, it was my understanding that one can take the after tax out of a 401K but it has to be in the same proportion as the pre tax dollars, which, at my age, would incur the 10% penalty and I don't want to take any of the pre tax out anyway. So, can one legally just take the after tax portion of their 401K and roll it into a Roth IRA any time they want without incurring any penalty?

 

[exnavynuke]

I was told by a representative of my company's 401K that I could take the after tax portion of my 401K and roll it into a Roth IRA at any time. They told me this after I called to see if I could roll the Roth 401K portion into a Roth IRA while I am still working there. They said I couldn't until I reach 59 1/2 or quit/retire.

My question is, it was my understanding that one can take the after tax out of a 401K but it has to be in the same proportion as the pre tax dollars, which, at my age, would incur the 10% penalty and I don't want to take any of the pre tax out anyway. So, can one legally just take the after tax portion of their 401K and roll it into a Roth IRA any time they want without incurring any penalty?

The IRS says you can't. It's both are rolling over or nothing.

https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans

Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?

No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:
pretax amounts to a traditional IRA or another eligible retirement plan, and
after-tax amounts to a Roth IRA.

 

[KRABE]

I was told by a representative of my company's 401K that I could take the after tax portion of my 401K and roll it into a Roth IRA at any time. They told me this after I called to see if I could roll the Roth 401K portion into a Roth IRA while I am still working there. They said I couldn't until I reach 59 1/2 or quit/retire.

Thanks.

My question is, it was my understanding that one can take the after tax out of a 401K but it has to be in the same proportion as the pre tax dollars, which, at my age, would incur the 10% penalty and I don't want to take any of the pre tax out anyway. So, can one legally just take the after tax portion of their 401K and roll it into a Roth IRA any time they want without incurring any penalty?

That is my understanding as well and I think what the IRS notice states. So I am curious if NginEr gets back to us.

 

[Big_Hitter]

You can contribute maximum $18k + catch-up between tax deferred and Roth 401k.
Employer match/contribution is on top of that.
After tax contribution is on top of that, limited by your employer.
Total maximum is the $54k.
IRA contributions do not count.

I do after tax contributions every month. My employer limits this to 9% of my salary. Immediately after the contribution I roll this over to a Roth IRA to have the whole contribution be tax free and not have any gains that would be taxable.

the $6K catch up is on top of the $54K so the real maximum for us old farts is $60K

 

[KRABE]

Does anyone know of any limit to the non-deductible portion besides the cant exceed 54/60k? Is it tied to profit in the business?

For example: My wife maxes out her 18000 through her work (that way I don't have to pay her that much out of my business) and then she make non-deductible contributions up to the 54k total through the 401(k) I setup. All of the money in that 401k would be after tax and that way I could roll the full value out to an Roth IRA every year without any 10% penalty.

Does this make sense, or what am I missing?

 

[Big_Hitter]

^^ 401k, 401m, and after-tax contributions to a qualified plan are subject to the yearly 415c limit of $54K. The 402g limit of $18K is an individual limit.

is she an employee of yours? if not how is she contributing to a qualified plan you set up?

my advice would be to talk to a tax attorney or cpa; I'm neither, ymmv

 

[KRABE]

Big_hitter: thank you for the 415(c) reference that is what I was not finding.

 

[NgineER]

The language in the IRS link is naturally not completely clear...

"Many savers have made after-tax contributions to a 401(k) or other defined contribution retirement plan. If your account balance contains both pretax and after-tax amounts, any distribution will generally include a pro rata share of both."
This article discusses it in some more detail.
http://www.bankrate.com/investing/ira/after-tax-401k-rollover-to-roth-ira-okd/?pid=msn2

I cannot, per my plan administrator roll over any money in my pre-tax 401k account or the Roth 401k account, only my after-tax 401k account. I don't know if it is because the after tax contributions reside in a separate account within my 401k or not, but when I request my aftertax roll over each month, I am able to roll it over.

Any earnings I have in my account are taxed, but does not incur the penalty as it is rolled over directly to a Roth account.

I would suggest you try to roll a small after tax contribution over from your account and see what happens.

I have gone through two tax filing cycles since I started doing this, and my tax program has not protested either.

I can't remember right now, but I think the rollover is also reported on a 1099-R, but I'm not entirely sure at this time.

 

[Johanson]

The language in the IRS link is naturally not completely clear...

"Many savers have made after-tax contributions to a 401(k) or other defined contribution retirement plan. If your account balance contains both pretax and after-tax amounts, any distribution will generally include a pro rata share of both."
This article discusses it in some more detail.
New IRS rules on after-tax 401(k) rollover to Roth IRA

I cannot, per my plan administrator roll over any money in my pre-tax 401k account or the Roth 401k account, only my after-tax 401k account. I don't know if it is because the after tax contributions reside in a separate account within my 401k or not, but when I request my aftertax roll over each month, I am able to roll it over.

Any earnings I have in my account are taxed, but does not incur the penalty as it is rolled over directly to a Roth account.

I would suggest you try to roll a small after tax contribution over from your account and see what happens.

I have gone through two tax filing cycles since I started doing this, and my tax program has not protested either.

I can't remember right now, but I think the rollover is also reported on a 1099-R, but I'm not entirely sure at this time.

What's funny about my after tax 401K account is that I did a hardship withdrawal in 1992 to buy my house but somehow $4.11 was left in the account. It's now worth $22.70. My plan charges $20 for any partial withdrawal. But, I might start adding to it if it makes sense for me so I really want concrete information on this.

I just had another thought. Because I've neither added nor subtracted to the after tax account since 1992, I'm guessing 22.7/4.11 is my rate of return over that period. Am I wrong? The monies from the pre-tax, Roth, and after-tax are all commingled and always have been, but are accounted for separately.

 

[Softy]

To be able to do a Mega Backdoor Roth Conversion your 401(k) plan must allow both post-tax contributions and ”in-service withdrawals”. This strategy is a phenomenal way to get potentially huge Roth IRA contributions since rollovers are not subject to the annual contribution limit of $5,500, but unfortunately the strategy is irrelevant to most people because it is very rare for 401(k) plans to allow in-service withdrawals (this is not a hardship withdrawal). The in-service withdrawals allow you to take a distribution while you are still working (in-service) and before you are 59 1/2 years old of the post-tax contributions and any associated gains which are segregated from your pre-tax and Roth 401(k) balances. The distribution of you post-tax contributions are then rolled into a Roth IRA and any gains must be rolled into a traditional IRA to avoid tax and penalty. The plan also sets the post-tax contribution limits (up to the IRS combined limit of $54,000). My company offers this, but caps post-tax contributions at 10% of pay. Interestingly enough, I could not find anyone at my company taking advantage of this until I started doing it and was able to convince a couple of others. Many people at my company exceed the income limits to contribute to Roth IRAs which is my understanding why the company has made it available in the plan.