Author Topic: making contributions to 401k over the 18k  (Read 3860 times)

vivophoenix

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making contributions to 401k over the 18k
« on: April 04, 2016, 12:22:30 PM »
I know I can do this. But I do not understand the advantages, or if I should be doing this. BUt i want to lower my taxes/maximize everything I can.

I have maxed my IRA from this year and last year,
I have maxed HSA
I am slated to max the pre tax 401k this year.


help?
« Last Edit: April 04, 2016, 12:25:02 PM by vivophoenix »

deeshen13

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Re: making contributions to 401k over the 18k
« Reply #1 on: April 04, 2016, 12:46:40 PM »
I'm curious about this too.  I stumble upon rumblings about a 53k limit somewhere?

I also have done, pre-tax 401 to 18k, HSA max, Roth max.

Tjat

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Re: making contributions to 401k over the 18k
« Reply #2 on: April 04, 2016, 12:47:12 PM »
You can... they would be "After-tax" if your plan allows it. The only tax advantage this could bring is if you can make in-service distributions on the after-tax amount, in which case you can roll over in to a Roth IRA ("Mega-Backdoor" Roth). Your annual limits are 53K (including the 18K).

The Madfientist has details, but googling will return a bogleheads thread about it as well.
http://www.madfientist.com/after-tax-contributions/

seattlecyclone

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Re: making contributions to 401k over the 18k
« Reply #3 on: April 04, 2016, 12:51:20 PM »
The tax code sets up a total limit of $53k for 401(k) contributions. This includes the $18k that can be pre-tax or Roth, and whatever pre-tax money your employer might decide to contribute. Whatever amount is left over after all that must be done as non-Roth after-tax funds. Since these are after-tax contributions you'll still pay tax on the full amount this year. When you withdraw the money you'll pay tax at your regular marginal rate on the growth; it will grow tax-deferred until that time.

On their own, these after-tax contributions aren't all that great. Compared to a taxable account, it's better because the dividends and capital gains can be reinvested tax-deferred. But the tax rate you'll pay on this eventual growth is higher than the long-term capital gains rate.

Where the after-tax contributions really start to make sense is when you convert them into a Roth account shortly after contributing. That way they can grow tax-free after the conversion. This maneuver is also known as a "mega backdoor Roth."

Note that your employer is not required to allow you to contribute after-tax funds up to the $53k limit, or to make the in-service withdrawals that are a prerequisite to the Roth conversion step. You'll have to check the plan documentation to see if this is allowed in your specific case.

vivophoenix

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Re: making contributions to 401k over the 18k
« Reply #4 on: April 04, 2016, 01:16:54 PM »
so i guess the real question is:

should I be doing a mega backdoor Roth if this turns out to be an option for me, or should i just put my extra money in a taxable savings account?

StreetCat

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Re: making contributions to 401k over the 18k
« Reply #5 on: April 04, 2016, 02:13:33 PM »
so i guess the real question is:

should I be doing a mega backdoor Roth if this turns out to be an option for me, or should i just put my extra money in a taxable savings account?
Sometimes there may be reasons to choose taxable savings over mega backdoor Roth (such as needing to use the money in the very near future), but I'd say in most cases it makes sense to go with mega backdoor Roth, since you'll not have to pay tax on it again, and in many states IRA money is also protected from creditors, lawsuits, etc.  You can withdraw money from Roth IRA before retirement without penalty - there are ways to do that.  Start with this link: http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I think others have already mentioned this, but the summary of limits for 2016 (the limits are higher if you are beyond a certain age):
  • Employee contribution to Traditional401k + Roth401k cannot exceed 18000
  • Employee + Employer contribution to Traditional401k + Roth401k + AfterTax401k cannot exceed 53000

maco

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Re: making contributions to 401k over the 18k
« Reply #6 on: April 05, 2016, 07:52:07 AM »
I'm curious about this too.  I stumble upon rumblings about a 53k limit somewhere?

I also have done, pre-tax 401 to 18k, HSA max, Roth max.
That 53 is the combination of your 18 and a potential employer match of $35k.

shuffler

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Re: making contributions to 401k over the 18k
« Reply #7 on: April 05, 2016, 05:15:22 PM »
That 53 is the combination of your 18 and a potential employer match of $35k.
Not only the $18k pre-tax, plus employer-match, but the limit also includes post-tax contributions.

For example, I contribute the full $18k pre-tax, plus my employer's ~$6k match, plus I do another $20k of after-tax contributions that I subsequently roll over to a Roth 401k.  The full set of contributions ($18k + $6k + $20k= $44k) must be below the $53k limit.

I would do even more than the $20k of post-tax-then-roll-over contributions, and thereby run right up to the $53k limit, but my employer's plan limits post-tax contributions to $20k/year.  The $20k limitation is sort of a bummer, but I'm grateful that the plan allows it at all.

vhalros

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Re: making contributions to 401k over the 18k
« Reply #8 on: April 05, 2016, 07:43:07 PM »
When exactly should one do the roll over from after-tax 401k to Roth? Once a year? Or do a small roll over every pay period?

seattlecyclone

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Re: making contributions to 401k over the 18k
« Reply #9 on: April 05, 2016, 07:47:32 PM »
It's really up to you. My 401(k) lets me do this conversion with a few clicks on the website so I do them fairly frequently. You'll have to weigh the time and effort of doing the paperwork against the potential benefit of paying a bit less tax on accumulated gains when you do the Roth conversion.

maco

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Re: making contributions to 401k over the 18k
« Reply #10 on: April 06, 2016, 08:35:19 AM »
That 53 is the combination of your 18 and a potential employer match of $35k.
Not only the $18k pre-tax, plus employer-match, but the limit also includes post-tax contributions.

For example, I contribute the full $18k pre-tax, plus my employer's ~$6k match, plus I do another $20k of after-tax contributions that I subsequently roll over to a Roth 401k.  The full set of contributions ($18k + $6k + $20k= $44k) must be below the $53k limit.

I would do even more than the $20k of post-tax-then-roll-over contributions, and thereby run right up to the $53k limit, but my employer's plan limits post-tax contributions to $20k/year.  The $20k limitation is sort of a bummer, but I'm grateful that the plan allows it at all.
Rolling over to Roth IRA should be an option too, maybe? I'm pondering how to get the 5 years of ladder lag time filled out.

seattlecyclone

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Re: making contributions to 401k over the 18k
« Reply #11 on: April 06, 2016, 12:24:44 PM »
I think it depends on the plan whether to allow in-plan Roth conversions or Roth IRA conversions or both. This shouldn't materially affect your ladder "lag time." When you leave your job you can roll the Roth 401(k) into a Roth IRA and your basis in that Roth 401(k) will be considered the same as Roth IRA contributions when you withdraw.