Treatment of After-Tax 401k Contributions
by jcman01 » Sat Jan 18, 2014 8:39 pm
At some point during the year (although I haven't noticed it in a few years), some of my 401k deductions to Vanguard were classified as After-Tax. Does this mean that when I withdraw from my 401k, they'll be lumped in with my Pre-Tax? Isn't that double-taxation, in effect? I can understand the earnings on the After-Tax being taxable, but not the After-Tax deductions themselves.
Am I overthinking this? I have always wondered this, but as I get older, it matters more 
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Re: Treatment of After-Tax 401k Contributions
by sesq » Sat Jan 18, 2014 9:18 pm
You have basis in your after tax contributions. So that will reduce the taxable income when you withdraw it. You may be able to withdraw the basis first (can't remember), but even if you have to spread it out you won't be double taxed.
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Re: Treatment of After-Tax 401k Contributions
by dbr » Sat Jan 18, 2014 9:22 pm
I have a 401K that went through all sorts of gyrations with the plan, the employer, the contributions, yadda, yadda - short story I also have some after tax money in the 401K.
I believe we can be quite assured that when it comes to distributions all of this gets sorted out. The record keeping is with the 401k custodian. Had the same sequence of contributions happened in an IRA you would have kept it all straight by filing a form 8806 (or something like that) with the IRS every year, but not with a 401K.
As posted above, it may be an option to withdraw only the after tax basis tax free (of course), but there would still be tax on the earnings. I'll be questioning the custodian at some point about this.
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Re: Treatment of After-Tax 401k Contributions
by livesoft » Sat Jan 18, 2014 9:25 pm
I feel that after-tax contributions to a 401(k) are a really really bad idea unless they get almost immediately converted to a Roth IRA.
The reason is that the gains on those contributions will be taxed at ordinary income tax rates when the money is withdrawn from the 401(k) instead of at the more favorable Roth rate of 0% or the more favorable long-term capital gains tax rate which could be as low as 0%.
Of course, maybe one's withdrawals from a 401(k) will not be taxed, but that requires special tax planning as well, so it is easier to not create the problem to begin with.
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: Treatment of After-Tax 401k Contributions
by dbr » Sat Jan 18, 2014 9:37 pm
livesoft wrote:I feel that after-tax contributions to a 401(k) are a really really bad idea unless they get almost immediately converted to a Roth IRA.
The reason is that the gains on those contributions will be taxed at ordinary income tax rates when the money is withdrawn from the 401(k) instead of at the more favorable Roth rate of 0% or the more favorable long-term capital gains tax rate which could be as low as 0%.
Of course, maybe one's withdrawals from a 401(k) will not be taxed, but that requires special tax planning as well, so it is easier to not create the problem to begin with.
I wasn't planning on doing a Roth conversion of 1.2% of the balance in my 401K. Your point is taken for other situations. Also, yes, we terminated a 403b plan once that held about 0.5% of our wealth at the time.
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Re: Treatment of After-Tax 401k Contributions
by livesoft » Sat Jan 18, 2014 9:41 pm
But what about the OP's after-tax 401(k) contributions? 
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: Treatment of After-Tax 401k Contributions
by JW Nearly Retired » Sat Jan 18, 2014 9:47 pm
If my 401k is any guide, the after-tax contributions plus their earnings form a sub-account that will be the first money that comes out when withdrawals/RMDs are made from the 401k. That means the need to account for the after-tax component will most likely disappear in a few years.
It's not a problem.
JW
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Re: Treatment of After-Tax 401k Contributions
by JoMoney » Sat Jan 18, 2014 9:57 pm
The 401(k) administrator should keep track of how much "after tax" money was contributed.
If you roll the 401(k) into a traditional IRA you will have to file form 8606 with your taxes to report the amount of after-tax money in your IRA (the form is not complicated, I do it with Turbo-Tax online).
When you go to withdraw from the IRA a portion of the money will come from both pre-tax and after-tax. You will not have to pay taxes again on the portion that was already taxed (as long as you account for it properly), but you will owe taxes on any earnings from it.
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Re: Treatment of After-Tax 401k Contributions
by Sidney » Sat Jan 18, 2014 10:04 pm
or you may be able to isolate the basis and roll it to a ROTH, with the pre-tax money and all earnings going to a TIRA.
I always wanted to be a procrastinator.
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Re: Treatment of After-Tax 401k Contributions
by JW Nearly Retired » Sat Jan 18, 2014 10:06 pm
JoMoney wrote:The 401(k) administrator should keep track of how much "after tax" money was contributed.
If you roll the 401(k) into a traditional IRA you will have to file form 8606 with your taxes to report the amount of after-tax money in your IRA (the form is not complicated, I do it with Turbo-Tax online).
When you go to withdraw from the IRA a portion of the money will come from both pre-tax and after-tax. You will not have to pay taxes again on the portion that was already taxed (as long as you account for it properly), but you will owe taxes on any earnings from it.
If you leave it in the 401k the after-tax sub-account money comes out first. I think, but not certain, that if you roll it all over to an IRA then it all gets homogenized and all subsequent withdrawals will be a mix of pre-/post-taxed contribution money and earnings. You don't pay taxes again on the post-tax contributions, but the accounting is forever.
Someone please correct me if I'm wrong about this. It's one of the reasons I'm leaving my 401k money where it is.
JW
Retired Summer 2013
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Re: Treatment of After-Tax 401k Contributions
by dbr » Sat Jan 18, 2014 10:46 pm
I did a little more reading on the web (danger, there be dragons). I think the ability to separately withdraw or roll-over after tax 401K depends on whether the contribution was pre-1987 or post-1986. Post 1986 amounts in 401Ks are distributed pro-rated with before tax contributions. Pre-1987 contributions do not have to be prorated. That means when I take a 401K withdrawal or rollover a percent or so of the withdrawal will not be taxable as my little increment is post 1986.. All of this is to be correctly reported on the 1099 from the plan custodian. I'll call them and ask sometime.
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