Talk:After-tax 401(k)

From Bogleheads
Jump to navigation Jump to search

I am not really comfortable titling this topic "After-tax 401(k)" UNLESS a clear explanation is made that this is a colloquial expression used to describe many qualified retirement savings plans in which the employer has arranged for after-tax contributions that are SUPPLEMENTAL to the "official" 401(k) portion of the plan. Strictly speaking, the additional after-tax contributions between the $17,000 401(k) limit and the $50,000 415(c)(1)(A) limit (in 2012) do NOT go into the 401(k) portion of the savings plan. They go into a supplemental retirement savings plan. Unless we use very clear language here, the unwary reader may erroniously conclude that every employer which offers a traditional 401(k) plan must ALSO offer the supplemental savings plan. To my knowledge that is not true.

It would also be useful to note that the age 50+ "catch-up" contributions increase BOTH the $17,000 401(k) limit as well as the $50,000 415(c)(1)(A) limit. With a little effort I'm sure I could find a direct IRS reference for that. ThePrune 20:57, 15 February 2012 (CST)

I agree with ThePrune. The article assumes an "after-tax" 401(k) account is to be used for a specific purpose. This is confusing, as my after-tax 401(k) contributions are tracked with no specific purpose in mind. There is no further sub-account available.
Please supply credible sources to justify the opinions stated. You are encouraged to continue developing the article, but please bear in mind that content must adhere to the guidelines presented in Basic help.

--LadyGeek 21:18, 15 February 2012 (CST)

Thanks for the feedback. I think a separate topic is appropriate, because the rules on in-service distributions and contribution limits are different and to prevent confusion with Roth 401(k)s. ThePrune, I plan to follow the language on the 401k topic, where it alludes to this through "An employer may also elect..", and then urge the reader to view their SPD. I don't think either topic covers triggering events/SPDs, and would like to contribute. Lastly to your point on strategy vs. account type, I've re-read livesoft's criticisms of using the account for its intended purpose, and plan to borrow many of the bulletpoints.

--Gsmith 16:51, 17 February 2012 (CST)

Reader feedback: More details on losses before rollover. posted this comment on 27 February 2014 (view all feedback).

More details on losses before rollover.

Any thoughts?

Blbarnitz 14:07, 27 February 2014 (CST)

The reference to "rollover" on the page also confuses me. You can setup and make ongoing contributions to an after-tax 401(k) without a rollover. Assuming a rollover has to take place makes the advantages/disadvantages section more confusing for me.

With two users confused, I think the description should not refer to "rollover". The details of rollover handling can be explained later. Maybe "all gains later taxed as ordinary income" would be better? I don't yet have enough courage to edit the main page myself. :)

small_index 31 August 2015

I see what you mean, but I'm not sure how the wording should go. Relax, chill. This is exactly how I started out. All you need is some practice.
Take a look at the left-side menu, under "For wiki editors". I've dumped the contents of the page into the Sandbox - which is exactly what you're looking for. Practice all you want, it's not in the "main" wiki space.
When you're done just copy the contents into the "main" page here. If you get stuck, ask for help (here or in the Bogleheads forum). --LadyGeek 21:26, 1 September 2015 (CDT)

Reader feedback: Doesn't tell you anything ab... posted this comment on 8 August 2014 (view all feedback).

Doesn't tell you anything about tax advantages (why not a regular after-tax account?)

Any thoughts?

Blbarnitz 12:47, 8 August 2014 (CDT)

My thoughts (by small_index):

An after-tax 401(k) can provide tax deferral. A bond's regular income is not taxed until withdrawal. But capital gains and dividends are also deferred, and will be taxed later as ordinary income. So the tax-deferral is a mixed bag.

There's also a potentially beneficial, but potentially risky use for after-tax 401(k). It might be allowable to convert an after-tax 401(k) into a Roth IRA. Vanguard has a way to perform a Roth conversion on an after-tax 401(k), but requires a big legal disclaimer before doing so. The disclaimer indicates the conversion is of uncertain status for the IRS, and Vanguard is not responsible for what happens.

So I would say an after-tax 401(k) allows deferral of ordinary income from bonds, but probably hurts tax treatment of dividends and long-term capital gains. It's uncertain if the IRS approves of a Roth conversion of after-tax 401(k) funds.

small_index 31 August 2015

Reader feedback: You are not explaining what... posted this comment on 8 August 2014 (view all feedback).

You are not explaining what an "after tax 401k" is. You speak of roll-over on the second line; what about new contributions? Are earnings tax-deferred? As in a Roth?

Any thoughts?

Blbarnitz 12:48, 8 August 2014 (CDT)

Reader feedback: Contributions to an after-ta... posted this comment on 8 August 2014 (view all feedback).

Contributions to an after-tax 401(k) are obviously taxed. However, what about earnings? If earnings are also taxed, then what is the difference between an after-tax 401k, and an ordinary brokerage account?

Any thoughts?

Blbarnitz 12:50, 8 August 2014 (CDT)

Earnings are tax deferred. Your contributions form the cost basis, and anything above that will eventually be taxable. But tax benefits for dividends and capital gains are lost when placed in an after-tax 401(k), since they are taxed as ordinary income at withdrawal.

small_index 31 August 2015