After-tax contributions to a retirement plan

[Finance Dave]

DW and I both worked for MegaCorp most of our lives. I left MegaCorp about 5 years ago and have been self-employed with plans to fully FIRE in October of this year. Wife is a couple years older but for purposes of this question let's assume she's same age as me (56 1/2).

Within our MegaCorp retirement plan (there are two parts to it, but let's focus on the Retirement Savings Plan (RSP). This is a defined contribution plan where we put in a % of pay, and the company matches a portion (for part of my career, they were matching with company stock, thus the ESOP (employee stock ownership plan)).

However, here's the key part....we were allowed to contribute on both a pre-tax and after-tax basis. Early in my career tax bracket was low, so I split my contributions about 50/50 between the two categories. Once income went up, I switched to all pre-tax.

Now we're in a position where we have plenty of money, but most of it is in tax-deferred accounts and we're not yet 59 1/2.

Yes, I know we can use rule 72t....but I'd rather avoid that. So I got to digging around in the website on which our RSP data is held. I found out that within my account, I have $176,000 in after-tax money. At this point I'm not sure if it's a combination of money I contributed on an after-tax basis as well as growth on that money or whether it's ONLY my contributions. I need to check further.

If it's both, I realize I'll have to pay taxes on the earnings and if I withdraw funds I may have to take a pro-rata share of the growth. But if it's only the contributions, then it seems I'd be able to take all of it out with no tax implications at all.

So I have a few questions (or feel free to add other comments):

1) Would you think this is a combination of both contributions and growth? (note the second green line that may be the growth on after-tax, which may be the taxable portion if I pull it all out)
2) If it's all contributions, would I be able to take it out prior to 59 1/2?

I will put on my "to do" list to call some people at MegaCorp and ask about this...but wanted to get input from those on this forum.

My plan would be to simply put a portion of this in checking account and use for daily living, then "invest" the rest in a CD or other "safe" investment where I can get it out easily in the next 2-3 years for more living expenses.

Once we reach 59 1/2 things get much easier...so I'm looking for a 3-year solution to get some cash flow while not increasing MAGI to maintain ACA subsidy.

Thanks in advance for your input. I have pasted below the "categories" of funds they show in the account...thought it may help clarify.

 

[Perryinva]

Hopefully you already have a 5year old Roth that those after tax contributions an be rolled in to. Then withdrawal of contributions would be tax free and available right now. My 401k plan sounds similar to yours, and I rolled over the After Tax funds yearly in to a Roth, which included taxable earnings. Since I did it every year, tax on the earnings was easily paid out of pocket so the full amount went to the Roth. If your statement shows $176k in the after tax account it is very like to be contributions plus earnings.

No 401k plan that I’ve heard of allows direct access to any funds, pre or post tax. The most would be the $50k loan limit, which if all tax free, would be default penalty free. (Without a 72t)

 

[Finance Dave]

Hopefully you already have a 5year old Roth that those after tax contributions an be rolled in to. Then withdrawal of contributions would be tax free and available right now. My 401k plan sounds similar to yours, and I rolled over the After Tax funds yearly in to a Roth, which included taxable earnings. Since I did it every year, tax on the earnings was easily paid out of pocket so the full amount went to the Roth. If your statement shows $176k in the after tax account it is very like to be contributions plus earnings.

No 401k plan that I’ve heard of allows direct access to any funds, pre or post tax. The most would be the $50k loan limit, which if all tax free, would be default penalty free. (Without a 72t)

Yes I do have a 5-year old Roth. But if I take Roth withdrawals, don't I also have to take a pro-rata portion of the growth and pay taxes on that? I need to manage MAGI carefully...I suppose I can have the Roth holder run a calculation before I confirm the withdrawal to see how much would be taxable.

According to this article the withdrawals (if under 59 1/2) have a taxable growth component unless you meet one of the requirements shown...I suppose I could use some to pay for medical premiums/expenses.

https://www.schwab.com/public/schwa.../understanding_iras/roth_ira/withdrawal_rules

 

[Finance Dave]

Found this article...

https://www.investopedia.com/articles/retirement/05/aftertaxassets.asp

It seems to say that I would have to take a pro-rata share of even the pre-tax amounts...not just the earnings on the after tax! Wow, that's a real stunner. Am I reading this correctly?

"Pro-Rata Treatment of Distributions
If your qualified plan or 403(b) account or Traditional IRA includes after-tax amounts, distributions usually include a pro-rata amount of your pretax and after-tax balance. For this purpose, all of your Traditional, SEP and SIMPLE IRAs are treated as one account. For instance, assume that you made an average of $20,000 in after-tax contributions to your Traditional IRA over the years and your Traditional IRA also includes pretax assets of $180,000, attributed to rollover of pretax assets and deductible contributions. Distributions from your IRA will include a pro-rata amount of pretax and after-tax assets. Let's look at an example using these numbers."

 

[bingybear]

Found this article...

https://www.investopedia.com/articles/retirement/05/aftertaxassets.asp

It seems to say that I would have to take a pro-rata share of even the pre-tax amounts...not just the earnings on the after tax! Wow, that's a real stunner. Am I reading this correctly?

"Pro-Rata Treatment of Distributions
If your qualified plan or 403(b) account or Traditional IRA includes after-tax amounts, distributions usually include a pro-rata amount of your pretax and after-tax balance. For this purpose, all of your Traditional, SEP and SIMPLE IRAs are treated as one account. For instance, assume that you made an average of $20,000 in after-tax contributions to your Traditional IRA over the years and your Traditional IRA also includes pretax assets of $180,000, attributed to rollover of pretax assets and deductible contributions. Distributions from your IRA will include a pro-rata amount of pretax and after-tax assets. Let's look at an example using these numbers."

yep, withdraws from a TIRA including roth conversions would require prorated pre/post tax portions.

When not yet 59.5 and you do a roth conversion, the conversion amount starts its own 5 year waiting period that is independent of the initial contribution.

I've heard that when rolling from 401k the pre/post tax parts can be roll to TIRA/RIRA, but this rule came after I already had tax mixed accounts. So I have not used it. I'm not sure what your RSP is technically... 401k, 403b, 457

 

[Ready2Go]

I’m in the business. This feature used to be fairly common in the early days of defined contribution plans. It tailed off when pre-tax deferrals started. Then disappeared (virtually) when Roth started. You can normally take after-tax as an in-service withdrawal at any time without penalty. As you have learned, you must take a prorated portion of the earnings....unless you contributed it before 1987.

 

[travelover]

It is not clear to me if your after tax is still in a 401(k) or it it has been mixed into an IRA. From my 401(k), I was able to move my pre-tax and earnings into an IRA and my after-tax into a Roth.

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

Can I roll over my after-tax contributions to a Roth IRA and the earnings on my after-tax contributions to a traditional IRA?

Yes. Earnings associated with after-tax contributions are pretax amounts in your account. Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings. Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.
Prior distribution rules

Prior to the 2014 guidance, each distribution from a participant’s account contained a pro rata share of both the pretax and after-tax amounts. For example, if a participant’s account was 80% pretax, then each distribution or rollover was made up of 80% pretax and 20% after-tax. A transfer of pretax amounts to one destination and after-tax amounts to another could have been done through a 60-day rollover, but the distribution was subject to mandatory 20% withholding on the pretax amounts.

 

[NgineER]

It is most likely s mix of contributions and gains.

If the pre and after tax contributions are held in separate accounts within the plan then you have to pay taxes on earnings, but you would not have to withdraw pre tax money.

 

[pjigar]

FWIW I track after tax contributions using W2 sent by my employer. It lists exact amount.

 

[gauss]

I’m in the business. This feature used to be fairly common in the early days of defined contribution plans. It tailed off when pre-tax deferrals started. Then disappeared (virtually) when Roth started. You can normally take after-tax as an in-service withdrawal at any time without penalty. As you have learned, you must take a prorated portion of the earnings....unless you contributed it before 1987.

+1
This is an important distinction. Contributions made prior to 1987 can be distributed tax free with no pro-rata rules applying. For contributions after 1986 the pro-rata rules will apply.

The spreadsheet that you show gives a hint to this on the bottom line.

Please note that there are techniques involving rollovers to and from IRAS that can be used to segregate your basis even for post 1986 contributions.
This will allow you to get tax-free access to your contributions while allowing continued tax-deferral of the growth.

A great resource for this is fairmark.com while researching/searching on the term "isolating the basis".


-gauss