Post-Tax 401k Contributions
by azb » Sat Mar 01, 2014 10:42 am
I could use some help thinking through the following issue: as a partner at my firm, in addition to contributing $23,000 pretax into my 401k, I am also allowed to contribute an additional amount on a post-tax basis. (In about 2 years, I will qualify for more generous pretax treatment, but that's not true now. The issue is whether I take advantage of this or put the extra funds in a taxable account as well. I am in the 39.5% tax bracket now, and expect my retirement income would put me in the 33% bracket once I retire. Like a good Boglehead, in either case, the money would be invested in Vanguard index funds. I am inclined to use the taxable account option because I can benefit from the lower capital tax treatment when I use the funds at retirement, but want to see if others have a different view.
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Re: Post-Tax 401k Contributions
by JW Nearly Retired » Sat Mar 01, 2014 11:12 am
The key questions are (1) does this 401k allow you to make in-plan rollovers of the after-tax sub-account money? and (2) do you already have a large TIRA of any kind? If the answer to these is yes for 1 and no for 2, then you can start rolling out the 401k after-tax money account money to an TIRA yearly and immediately converting it to a Roth (paying tax only on growth of that money during the one year). You can get an extra $25k/year into your Roth that way.
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Re: Post-Tax 401k Contributions
by retiredjg » Sat Mar 01, 2014 12:03 pm
I'll disagree on part of JW's reply. I agree with the part about being able to roll the money out on a regular basis - you don't want it sitting around making money that you will pay tax on.
The presence of a tIRA does not matter because you can roll the after-tax money directly to Roth, paying tax only on the earnings that have occurred. You do not have to roll to tIRA and then convert to Roth (which would bring all the tIRA into the calculation - which you definitely want to avoid).
I am inclined to use the taxable account option because I can benefit from the lower capital tax treatment when I use the funds at retirement, but want to see if others have a different view.
You are looking at this part wrong. If the money goes to taxable, the earnings are taxed when you sell. If the money goes to Roth (via the after-tax account), the earnings won't be taxed when you use the money.
After-tax plans vary. Ask your HR people about the details.
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Re: Post-Tax 401k Contributions
by JW Nearly Retired » Sat Mar 01, 2014 12:22 pm
retiredjg wrote:I'll disagree on part of JW's reply. I agree with the part about being able to roll the money out on a regular basis - you don't want it sitting around making money that you will pay tax on.
The presence of a tIRA does not matter because you can roll the after-tax money directly to Roth, paying tax only on the earnings that have occurred. You do not have to roll to tIRA and then convert to Roth (which would bring all the tIRA into the calculation - which you definitely want to avoid).
Yep............ senior moment. Rolling directly to a Roth is exactly what I did myself last year. 
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Re: Post-Tax 401k Contributions
by retiredjg » Sat Mar 01, 2014 12:45 pm
JW Nearly Retired wrote:Yep............ senior moment. Rolling directly to a Roth is exactly what I did myself last year. 
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Re: Post-Tax 401k Contributions
by azb » Sat Mar 01, 2014 1:36 pm
I'm glad that I posted my question. This in-plan Roth conversion is very interesting. Just to be clear on what you are suggesting: whether I can do this is dependent on whether my plan will allow me to transfer my post-tax contributions into a Roth 401k. If I do so, I only pay tax on the small gain that I had in the post-tax account. You are not talking about a rollover outside of the 401k into a Roth IRA.
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Re: Post-Tax 401k Contributions
by azb » Sat Mar 01, 2014 1:45 pm
In further researching this, I found the following Ameriprise article: http://cdn.ameriprisecontent.com/cds/al ... 589130.pdf
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Re: Post-Tax 401k Contributions
by retiredjg » Sat Mar 01, 2014 1:47 pm
azb wrote:I'm glad that I posted my question. This in-plan Roth conversion is very interesting. Just to be clear on what you are suggesting: whether I can do this is dependent on whether my plan will allow me to transfer my post-tax contributions into a Roth 401k. If I do so, I only pay tax on the small gain that I had in the post-tax account. You are not talking about a rollover outside of the 401k into a Roth IRA.
No. An in-plan Roth conversion is something entirely different and involves the $23,000 you can contribute each year. You definitely do not want to do this in your tax bracket.
Yes, we are talking about rolling the after tax money (the money in addition to your $23k a year) to a Roth IRA a couple of times a year. The real name of this maneuver is "qualified rollover contribution" (to your Roth IRA). This allows you to get a lot of money into Roth. The money is going to be taxed anyway so it might as well go to Roth IRA.
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Re: Post-Tax 401k Contributions
by Boglenaut » Sat Mar 01, 2014 1:54 pm
retiredjg wrote:
JW Nearly Retired wrote:Yep............ senior moment. Rolling directly to a Roth is exactly what I did myself last year. 
JW
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The magic of multiple eyes. This forum wouldn't work without it. 
Good catch. It gave me a scare.
I just found out I can do this and my tax accountant gave me the OK and the plan administrator is OK with it too. My plan's rules: I can do only 1 roll-over while in-service or I lose my match for 6 months. I also have to keep the money in the 401K for 2 years. I am also limited to $49,125 while in service. So I have to plan ahead and do probability guessing of how long I will be with my employer. But I wish I knew about this years ago -- a lot of free money got by me!
I cannot do in-plan Roth conversion.
Last edited by Boglenaut on Sat Mar 01, 2014 1:58 pm, edited 1 time in total.
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Re: Post-Tax 401k Contributions
by JW Nearly Retired » Sat Mar 01, 2014 1:57 pm
azb wrote:I'm glad that I posted my question. This in-plan Roth conversion is very interesting. Just to be clear on what you are suggesting: whether I can do this is dependent on whether my plan will allow me to transfer my post-tax contributions into a Roth 401k. If I do so, I only pay tax on the small gain that I had in the post-tax account. You are not talking about a rollover outside of the 401k into a Roth IRA.
Apologies, I was talking about an in-service 401k rollover to an outside Roth IRA.
The link I hastily found was not that.
See this one viewtopic.php?t=69063
also tfb posts and others in viewtopic.php?t=88230
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