"post tax 401k"

[jacoavlu]

Thanks - I do have a small loss in after tax 401k.

Trying to understand what the consequences would be if converted in-plan.

after tax basis should be maintained. plan administrator may be able to confirm this for you

[Tom Kazansky]

it should be maintained as a "basis" similar to what happens with backdoor Roth IRA.

if you make $5k nondeductible IRA contribution then convert to Roth a few days later at $4995, the $5 loss becomes basis and carries forward (on the 8606). if the next year you contributed $5k then converted a few days later at $5005, the $5 basis would offset the gain and you would owe no tax

I'm not sure if all 401k plans do this

Thanks - I do have a small loss in after tax 401k.

Trying to understand what the consequences would be if converted in-plan.

[jacoavlu]

What happens if you have a loss on an in plan after-tax roth conversion in a 401K?

For example a $5000 after tax contribution that is converted in plan to Roth at $4995?

I've heard it's a headache dealing with 8606/IRAs/Roth IRAs if you convert a non deductible contribution at a loss, but what happens within a 401K?

it should be maintained as a "basis" similar to what happens with backdoor Roth IRA.

if you make $5k nondeductible IRA contribution then convert to Roth a few days later at $4995, the $5 loss becomes basis and carries forward (on the 8606). if the next year you contributed $5k then converted a few days later at $5005, the $5 basis would offset the gain and you would owe no tax

I'm not sure if all 401k plans do this

[Tom Kazansky]

What happens if you have a loss on an in plan after-tax roth conversion in a 401K?

For example a $5000 after tax contribution that is converted in plan to Roth at $4995?

I've heard it's a headache dealing with 8606/IRAs/Roth IRAs if you convert a non deductible contribution at a loss, but what happens within a 401K?

[G0ld3n]

wow! thanks that offers the proof I needed to understand the statement that taxable > post-tax 401k! I have since changed my after-tax 401k contributions to 0%.

[GasFIRE]

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?

While obviously dependent on the investments contained in the account, look at the returns of a typical holding in this forum, VTI:

https://investor.vanguard.com/etf/profile/performance/vti

Conveniently VG provides an after-tax return table. They calculate the returns based on the highest tax rates for income and capital gains. Unless you’re in the lowest tax bracket, converting all the returns to income in an after-tax 401k is going to cost you $.

[jacoavlu]

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

[G0ld3n]

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?

[jacoavlu]

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

[happydoc90]

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

[jfoxcpacfp]

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.

[JBME]

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

[jacoavlu]

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

[G]

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?

[GasFIRE]

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).

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.