gauss
Thinks s/he gets paid by the post
- Joined
- Aug 17, 2011
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- 3,615
Really, can you elaborate a bit more? I think any excess contribuitions are treated like a normal IRA, but I can check on that. Im assuming thats the gist of this. Are there any limits to this?
Kevin;
My 401(k) administrator is Fidelity. I can send you a copy of the plan document via PM if you like.
IRS limits pretax contributions to about $16.5k per year or so (in 2011).
There is a second IRS limit, that's discussed less, on total contributions (including pretax, after tax, employer match etc) that is around $49k per year. I believe it is referred to as the section 415 limit on Defined Contribution plans.
Our plan allows us to send up to 50% of salary to the 401(k).
I have been doing all pretax contributions for most of my career so, since 2010, I started doing all After Tax and then saving the max of 50% but being sure not to exceed the $49,000 per year limit.
The plan also also allows in-service withdrawals (ie you don't have to quit your job to take $ out of your 401(k))
I make a withdrawal once or twice a year and then roll the money over to my traditional IRA.
Once the money is in my traditional IRA, I do a Roth conversion with the same IRA custodian (Vanguard).
When tax time rolls around, I get 2 1099-R's one from Fidelity for my 401(k) withdrawal/rollover and one from Vanguard for the IRA Roth conversion. At this point, the only tax that is due is on the growth of the principal between the time it was invested in the 401(k) and the time the Roth conversion is executed.
If your plan allows this and you are interested in looking into it further, there is one BIG issue that you need to be aware of. In general when you make these withdrawals, the withdrawals may be considered pro-rated between your Pre-Tax contributions and your After-Tax contributions. You don't want to find this out after the fact when you are doing your taxes!
The trick is to make sure that you isolate your basis. Do a Google search on "isolating the basis" and "'Roth conversions" to get the details/requirements to sequence these transactions the first year to do this properly. You might want to work with a financial professional who is fluent in this technique. (I did a lot of homework the first year before I did this myself back in 2009 before the income limits were lifted for Roth conversions in 2010 -- more homework than most are probably willing to do)
On the other hand, if you wanted to do a Roth conversion of all your Pre-tax contributions and pay the appropriate tax (probably on the order of $100k in your case) , then this would not be an issue.