Should we take advantage of after tax 401k?
by Jfet » Fri Mar 21, 2014 8:32 pm
We have a goal of retiring in the near future but I recently found out about after tax 401k contributions.
The plan actually says: "The after-tax (non-Roth) annual deferral limit has been increased to $20,000 (previously it was capped at 7%). This limit is above and beyond the pre-tax/Roth limit of $17,500. In addition to being able to save $20,000 per year on an after-tax basis, you may also elect a Roth-in-Plan
conversion, which allows you to convert certain Plan balances (including after-tax) to Roth within the Plan, providing potential long-term tax benefits."
Does this mean the company actually will handle a sort of $20,000 back door Roth 401K conversion for you each year?
If we already have a >$500,000 401K balance, would this still make sense? We will be going from a top tax bracket to a near zero bracket in a few years so I hesitate to pay any extra tax now, but if it is truly like the backdoor Roth...
Posts: 986
Joined: 21 Dec 2010
__________________________________________
Re: Should we take advantage of after tax 401k?
by Alan S. » Fri Mar 21, 2014 9:01 pm
The quoted paragraph conspicuously avoids mention of an option to distribute these funds out of the plan as a rollover to your Roth IRA. But even if you do not have that option, an in plan Roth rollover (aka conversion) is preferable to after tax savings. In your high current bracket with much lower brackets in the near future, you should max out your pre tax 401k contributions (17,500 plus any catch up) before making additional contributions. But if you can afford to make the additional contributions after maxing out the pre tax option, go ahead and make the after tax contributions and do in plan Roth rollovers with some frequency to avoid any earnings buildup in the after tax account before the rollover.
Posts: 3026
Joined: 16 May 2011
Location: Prescott, AZ
Re: Should we take advantage of after tax 401k?
by placeholder » Fri Mar 21, 2014 9:16 pm
If the choices in the plan are very good then an in plan conversion is about as good as a rollover to a Roth IRA but if not then really look into the latter.
Posts: 1125
Joined: 6 Aug 2013
__________________________________________
Re: Should we take advantage of after tax 401k?
by Jfet » Sat Mar 22, 2014 8:10 am
Thanks, I will look into it closer. I just didn't want the situation where the money gets taxed twice (going in and coming out).
We do have the cashflow to make the extra contribution but I am a little bit concerned with having too much in tax deferred and not enough in taxable (yes I know about 72T but unsure if we are going to do that). I will have to do some projections.
Posts: 986
Joined: 21 Dec 2010
__________________________________________
Re: Should we take advantage of after tax 401k?
by killjoy2012 » Sat Mar 22, 2014 8:23 am
My company also allows after tax contributions, and I was assured, upon separation from the company, that all of those contributions + gains could be directly rolled into a Roth IRA. I could also do partials while still working there, but the vesting/holding rules made it sound like it was more trouble than it would be worth. There was no mention of rolling it into a Roth 401k though... the money had to essentially be move out of the 401k program, either by separating from the company, or limited in-service extractions.
Posts: 199
Joined: 26 Sep 2012
__________________________________________
Re: Should we take advantage of after tax 401k?
by island » Sat Mar 22, 2014 11:02 am
Jfet wrote:Thanks, I will look into it closer. I just didn't want the situation where the money gets taxed twice (going in and coming out).
We do have the cashflow to make the extra contribution but I am a little bit concerned with having too much in tax deferred and not enough in taxable (yes I know about 72T but unsure if we are going to do that). I will have to do some projections.
I've also thought about doing after tax contributions to my 401K and how the taxation works.
I imagine withdrawal being more complicated due to needing to separate what was already taxed from what wasn't?
Would I be creating a tax bomb when time for RMDs?
Plus at withdrawal the gains would not be taxed at a favorable rate so am I better off to put that $ in a tax efficient fund in a taxable account?
I don't have answers to those questions yet, so for now I've gone with a taxable account and some ibonds.
Posts: 384
Joined: 23 Jul 2013
__________________________________________
Re: Should we take advantage of after tax 401k?
by trees » Sat Mar 22, 2014 11:53 am
If you have the in-plan conversion available (which it sounds like you do), its absolutely worth it. At this point it's not a choice between tax deferred or not, but simple whether you want gains on your post tax money to be taxed in the future (taxable) or not (after tax-tax w/ conversion to Roth). It doesn't result in any additional taxation now, as long as you do the conversion immediately before growth happens.
Posts: 34
Joined: 15 Feb 2011
__________________________________________
Re: Should we take advantage of after tax 401k?
by trees » Sat Mar 22, 2014 11:59 am
island wrote:I've also thought about doing after tax contributions to my 401K and how the taxation works.
I imagine withdrawal being more complicated due to needing to separate what was already taxed from what wasn't?
Would I be creating a tax bomb when time for RMDs?
Plus at withdrawal the gains would not be taxed at a favorable rate so am I better off to put that $ in a tax efficient fund in a taxable account?
I don't have answers to those questions yet, so for now I've gone with a taxable account and some ibonds.
If you stop at after tax contribution s, it's rarely worth it. However, if you do the in-plan conversion mentioned by the OP, you end up with a normal Roth 401k - there is no additional taxation, and when you leave the company this can be rolled to a Roth IRA with no RMD.
Posts: 34
Joined: 15 Feb 2011
__________________________________________
Re: Should we take advantage of after tax 401k?
by retiredjg » Sun Mar 23, 2014 10:47 am
Jfet wrote:We do have the cashflow to make the extra contribution but I am a little bit concerned with having too much in tax deferred and not enough in taxable (yes I know about 72T but unsure if we are going to do that). I will have to do some projections.
But this money would not be going into a tax-deferred account. It would be going into an after tax account, then rolled to either Roth IRA or Roth 401k.
If it goes directly to Roth IRA, there is no need for 72t that I can see.
If, instead, the money got rolled to Roth 401k (in plan conversion), I don't know what happens. I know that it can be rolled to Roth IRA, but I'm not sure what happens to the 5 year rules which I believe are associated with Roth 401k.
Link to Asking Portfolio Questions
Posts: 16169
Joined: 10 Jan 2008
__________________________________________
0 comments:
Post a Comment