Names for various 401(k) contributions ?

November 14, 2014 7:27 AM

At my company, I have a Roth 401(k) (post-tax dollars). The plan also allows "after-tax" contributions as well. (ie beyond the 401(k) limits). What's the name for those after-tax contributions, or what are they classified as, especially when rolling over or taking disbursements ?

(US based, obviously)

Previous employers just cut you off once you hit the 401k limit. So I'd always do the math to make sure I maxed out around December, then I'd get a few extra bucks in my last check of the year (helped pay the Christmas bills).

The current employer continues deducting once you hit the 401k limit, and puts the money in a "after-tax" bucket. My current statement lists 4 contribution totals:
- Traditional 401K (no longer contributing once Roth was offered)
- Roth 401K (actively contributing)
- After-tax contributions (contributing once I hit 401k limit)
- Company match

If I leave the company and want to roll over the accounts, or I retire with the company, what rules govern those after-tax contributions ? ie I'd roll over the roth 401k to a roth rollover/ira account, but the after tax would roll over into what ? A traditional ira rollver account ? And what rules govern disbursements from the after-tax accounts ?

(It took me a long time of digging to realize this is kosher, just most companies do not do the after-tax, they just cut you off at the 401k limit. I think the IRS max contribution limit is $52k, which I'm no where near. From what I've found on the IRS web site, the after-tax contribution is a" if the plan allows" deal. Since so few plans allow it, I'm having trouble finding much information on it.)

posted by k5.user to Work & Money (7 answers total)

I'm assuming that the after-tax contribution is being put into a separate account at whatever broker your company is using? This sounds like just a regular investment account (like you would use to buy stocks/bonds etc outside of a retirement program) and will probably be treated as such in terms of your tax situation. As such you shouldn't have to worry about the normal rollover rules for these assets. That said you should really confirm this with your employer or with the company they are using.
posted by selfnoise at 7:44 AM on November 14, 2014

Here's the recent IRS statement on the 2015 limitations; limit increases to $53,000 in 2015. More discussion here.

I'm not familiar with this but it sounds analogous to the nondeductible IRAs; that is, you are depositing post-tax money and have to pay taxes on the earnings, but only when you withdraw them. The tax advantage is only that you delay paying taxes on the earnings, allowing the untaxed earnings to compound.

The rollover rules look VERY complex.

If you have less than $5,500 extra to deposit and aren't already contributing to a Roth IRA, you should consider instead a backdoor Roth IRA, which has greater tax advantages, allows you to pick your own broker (which will likely have lower fees than your 401(k)), and would probably be simpler to administer since you wouldn't have intermingled 401(k) funds.
posted by Mr.Know-it-some at 7:46 AM on November 14, 2014 [1 favorite]

Response by poster: selfnoise - company is big enough that they run their own retirement/pension plans. I haven't been able to get much information about this part.

Additionally, none of the gains in the plan are reported as income to me (not on w2, no 1099, etc), so it is tax-sheltered as Mr. Know-it-some points out (pay taxes when I withdraw).
posted by k5.user at 8:06 AM on November 14, 2014

Forbes did an article after the new after-tax rollover rules were released by the IRS. I found it a good explanation in plain english of what the IRS statement said.
posted by magnetsphere at 8:07 AM on November 14, 2014 [1 favorite]

Response by poster: So from magnetsphere's link, was a advanced version story, and from reading that, it sounds like "after-tax" (non-roth) contributions can be rolled over into a Roth account ? (am I reading that correctly? ) (because if so, that's good news .. )
posted by k5.user at 8:18 AM on November 14, 2014

What you really want to find out is if your company will do "in-service distributions" that you can rollover into a Roth IRA (on perhaps an annual basis). Your earnings will be taxed upon withdrawal, so if you wait until retirement to withdraw the earnings, the tax hit can be significant. But if you do the rollover annually then you will minimize the amount of earnings that you pay taxes on, and once the money is in your Roth IRA the earnings can grow tax free.
posted by doctord at 9:52 AM on November 14, 2014 [2 favorites]

Yes, it appears from this article that you can roll it over to a Roth: "...the IRS has issued IRS Notice 2014-54, reversing its prior position and acquiescing to taxpayers who wish to roll over their 401(k) funds and proactively allocate their pre-tax amounts to the traditional IRA and the after-tax portion to a (tax-free) Roth conversion.

You would be able to do that after retiring and turning 59 1/2; it does not appear that you would be able to do so upon separation of service unless you were over 55. (And not to push it too much, but in contrast, you can transfer from a traditional nondeductible to Roth IRA immediately through the backdoor Roth.)
posted by Mr.Know-it-some at 11:23 AM on November 14, 2014 [1 favorite]