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  • "post tax 401k"

    New w2 job offers 401k, can contribute:
    pretax 401k
    roth 401k
    posttax 401k

    I've maxed the 19500 pretax. I'm confused on the difference between roth and posttax - is the roth still part of the 19500 and posttax like a taxable account? any benefit to contributing to that vs separate taxable account?

  • #2
    Originally posted by happydoc90 View Post
    New w2 job offers 401k, can contribute:
    pretax 401k
    roth 401k
    posttax 401k

    I've maxed the 19500 pretax. I'm confused on the difference between roth and posttax - is the roth still part of the 19500 and posttax like a taxable account? any benefit to contributing to that vs separate taxable account?
    the post tax is more commonly referred to as voluntary (non Roth) after tax. research mega backdoor Roth and find out if plan offers in plan Roth conversion of after tax contributions and or in service distributions of same contributions

    separate from 19500 deferral

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    • #3
      Am I correct in that the employer after tax contribution is growing tax free while a taxable account contribution does not? Seems like makes more sense to contribute rest of 58k limit to the after tax contribution in the employer 401k, right?

      Comment


      • #4
        Originally posted by happydoc90 View Post
        Am I correct in that the employer after tax contribution is growing tax free while a taxable account contribution does not? Seems like makes more sense to contribute rest of 58k limit to the after tax contribution in the employer 401k, right?
        the after tax contribution is not employer, it's employee

        any growth of the after tax funds are treated as pretax earnings within the plan

        this is why you would want to do in plan Roth rollover and or distribution of after tax contributions out to Roth IRA as soon as reasonably possible after contribution. bc then the growth is also tax free

        disadvantage vs taxable account is you're losing liquidity / optionality

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        • #5
          My guess that 'post tax' is really a 401a with megabackdoor Roth IRA capabilities.

          Also don't know if there's truly BOTH 401k pretax AND 401k Roth -- there's usually either/or to the 19.5k max. Double check on that.

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          • #6
            Originally posted by StarTrekDoc View Post
            My guess that 'post tax' is really a 401a with megabackdoor Roth IRA capabilities.

            Also don't know if there's truly BOTH 401k pretax AND 401k Roth -- there's usually either/or to the 19.5k max. Double check on that.
            after tax 401k isn't that uncommon, most often seen w large employers / megacorps
            option of both pretax and Roth deferral is common and many / most plans that offer both, would let someone split deferral among both if they wanted.

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            • #7
              Originally posted by happydoc90 View Post
              New w2 job offers 401k, can contribute:
              pretax 401k
              roth 401k
              posttax 401k

              I've maxed the 19500 pretax. I'm confused on the difference between roth and posttax - is the roth still part of the 19500 and posttax like a taxable account? any benefit to contributing to that vs separate taxable account?
              EmployEE elective deferrals can be split between the pretax and Roth 401k up to the max of $19.5K. Need to check Summary Plan Description (SPD) to see if plan allows after tax (non-Roth) contributions
              to be rolled over into the Roth 401k (Inplan Roth Rollover, IRR) or non-hardship in-service withdrawals that’s rolled over into your Roth IRA. If not, any growth is treated as pre-tax as noted by jacoavlu and likely has to stay in the plan until you separate. Then you can roll over after-tax contributions to your Roth IRA and earnings to either Roth IRA (income tax due) or tIRA (continue tax deferral).

              Originally posted by happydoc90 View Post
              Am I correct in that the employer after tax contribution is growing tax free while a taxable account contribution does not? Seems like makes more sense to contribute rest of 58k limit to the after tax contribution in the employer 401k, right?
              After-tax grows tax free but growth will be subject to income tax whereas a taxable account’s growth should be mostly capital gains that can be controlled with low turnover.

              Comment


              • #8
                Originally posted by jacoavlu View Post

                after tax 401k isn't that uncommon, most often seen w large employers / megacorps
                option of both pretax and Roth deferral is common and many / most plans that offer both, would let someone split deferral among both if they wanted.
                I don't know about common/uncommon, but we have all of that through Fido. May or may not end up being a good idea, but this year I started doing a Roth 401k. The rest of my space has thus far been filled with profit sharing. As I anticipate a lower income in 2021, I will see at the end of the year if a) I have space for after tax contributions and b) current law will allow Roth conversions.

                An interesting aside that just occurred to me...would there still be value in aftertax 401k that is not converted. Specifically, if the money would otherwise go to taxable, in the 401k, it would have ERISA protection, yes?

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                • #9
                  Originally posted by G View Post

                  I don't know about common/uncommon, but we have all of that through Fido. May or may not end up being a good idea, but this year I started doing a Roth 401k. The rest of my space has thus far been filled with profit sharing. As I anticipate a lower income in 2021, I will see at the end of the year if a) I have space for after tax contributions and b) current law will allow Roth conversions.

                  An interesting aside that just occurred to me...would there still be value in aftertax 401k that is not converted. Specifically, if the money would otherwise go to taxable, in the 401k, it would have ERISA protection, yes?
                  more protection yes, but trading LTCG / step in basis at death / liquidity, for future taxation of same gains at ordinary income rates would be a tough sell for me. i guess that depends how much you value the erisa protection

                  Comment


                  • #10
                    I believe it's true and you'll get the ERISA protection but considering you'll be taxed on those after-tax gains at ordinary rates rather than capital gains, and the probability that you won't be sued above policy limits if you also have umbrella, it's still better to do taxable I think than after-tax if the after-tax eventually will be pulled out and you pay ordinary income tax on it

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                    • #11
                      Originally posted by G View Post

                      An interesting aside that just occurred to me...would there still be value in aftertax 401k that is not converted. Specifically, if the money would otherwise go to taxable, in the 401k, it would have ERISA protection, yes?
                      This option would be at the bottom of the tax choice list for me. Actually, might come just before contributing to an annual non-deductible TIRA if bd Roth’s are axed.
                      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                      • #12
                        why would not converting after tax 401k contributions be worse than contributing to a taxable account?

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                        • #13
                          Originally posted by happydoc90 View Post
                          why would not converting after tax 401k contributions be worse than contributing to a taxable account?
                          same taxation up front - post tax dollars

                          taxable - gains are taxed at capital gains rate. step up basis at death. liquidity - sell and use cash if needed

                          after tax in 401k - gains are taxed at ordinary income rate at time of distribution. no step up basis at death. locked up in the plan until eligible for distribution

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                          • #14
                            But for taxable you’re continually paying taxes on the dividends and distributions, while you don’t pay those if it were in an after tax 401k. Do you still think you end up paying less taxes in the taxable account?

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                            • #15
                              Originally posted by G0ld3n View Post
                              But for taxable you’re continually paying taxes on the dividends and distributions, while you don’t pay those if it were in an after tax 401k. Do you still think you end up paying less taxes in the taxable account?
                              of course there is tax drag in a taxable account (depending on what youre investing in)

                              the mathematically correct answer is unknowable bc it would require knowing the future

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