New 401k - Did I finally get one compatible with Backdoor Roth?

[therethere]

I've always read about the lucky ones that can contribute after-tax to their 401k above the 18k limit (I can never think of the appropriate name). I'm fairly certain my 401k does not have that option. DH just started a new job and in setting up his account I was poking through some of the documents. Did we finally get a 401k plan compatible with the extra contributions I've always read about?! If so, anything I should be aware of to navigate this? The company match is 6% on 8% contributions on a per pay period basis. So I imagine I must always be able to have 8% towards the pre-tax portion. That's about it. This is what the "Plan Contributions" section says. If I'm reading it correctly I can put up to 30k towards the after tax portion. 53k-18k(401k)-5k(match)

Am I right? Can I contribute more than 18k?
Any strategies both for 2016 and a full year of work in 2017?
Should I prioritize maxing a Roth IRA or the after tax 401k?
How does a 401k based on percentage of salary get affected by overtime?


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    You may save from 1% to 50% of your pay, in 1% increments, on a before-tax basis, after-tax basis, or combination of both up to 50%, subject to the annual maximum IRS contribution limit per year.
    You may change your contribution rate at any time.
    Contributions will be automatically deducted from your paycheck.
    If you reach the before-tax annual limit, in most cases, your contribution will switch to after-tax. Your before-tax contribution election will automatically resume at the beginning of the next year.
    If you want to stop contributing or restart contributions, you may do so at any time.
    If you do not have an investment election of file, your money will automatically be invested in the Target Date Fund that is closest to your expected year of retirement.
    Any changes you make to your contribution percentages will usually take effect within two pay periods, depending on when you make the change.
    You may change your contribution rate at any time.
    Contributions will be automatically deducted from your paycheck.
    If you reach the before-tax annual limit, in most cases, your contribution will switch to after-tax. Your before-tax contribution election will automatically resume at the beginning of the next year.
    If you want to stop contributing or restart contributions, you may do so at any time.
    If you do not have an investment election of file, your money will automatically be invested in the Target Date Fund that is closest to your expected year of retirement.
    Any changes you make to your contribution percentages will usually take effect within two pay periods, depending on when you make the change.


IRS Limit       2016
Before-tax Annual Elective Deferral Limit      $18,000
Catch-Up Contributions Allowed      $6,000
Maximum IRS annual total contribution to your account (including your before-tax and after-tax contributions, as well as any company matching contributions     $53,000    
Annual Compensation Limit      $265,000    
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[therethere]

Also.... After-tax Withdrawals* can be taken from your after-tax money at any time. Taxes are not withheld from the contributions portion of the withdrawal. Taxes are withheld from the investment earnings portion of the withdrawal. There is no suspension of company matching contributions.

Looks like I can check off the "in-service withdrawals" box too.

[TheStachery]

Am I right? Can I contribute more than 18k?
unless you're over 50, 18k is the limit on 401k.  If he had a 401k at an old job and contributed and plans to contribute to a new plan, you need to make sure the combined total is not over 18k.


Should I prioritize maxing a Roth IRA or the after tax 401k?
Your 401k may have a roth option.  I personally max out 18k, and I use a traditional 401k to offset my income tax as a high income earner.

How does a 401k based on percentage of salary get affected by overtime? 
I assume it still a percentage of the total paycheck, so more overtime, more goes to the 401k.

[Mother Fussbudget]

From Bogelheads:

"Traditional and Roth accounts share a employee contribution limit up to $18,000 per person... 
However, Section 415(c)(1)(A) limits total contributions to defined contribution plans to $53,000 in 2015 and 2016. The limit for an after-tax 401(k) is the difference between the amount already contributed by the employer and employee, and the Section 415 limit."

Your plan seems to indicate you can have both pre-tax and after-tax contributions to your 401K.  The max contribution limits are as shown above.  401K plans can be rolled over when you leave your job - pre-tax dollars can be rolled into a T-IRA, and after-tax dollars can be rolled into a Roth-IRA.   

So I think the answer to your original question is:  Yes!
(see also:  http://www.madfientist.com/after-tax-contributions/)

[seattlecyclone]

Looks promising. After-tax contributions and in-service withdrawals of the after-tax money are the two big features to look for.

[therethere]

Hum... Now I've got to rethink my money strategy, especially for the rest of 2016.  In an ideal world we'd reel in the spending so we can take full advantage of it but pretty sure that's not going to happen. Ah another semi-complicated strategy to make me feel poor while earning a good salary.

I'm sure I will have tons of questions soon as I research it more. On the surface it sounds really good, but realistically if we only withdrew money after we retire or took a few years off we'd pay 0% on capital gains from our brokerage account anyway. And the tax savings on quarterly dividends would be minimal. I have to decide if its worth the effort. I don't really see a downside though except if we procrastinate on the rollovers and get taxed on the gains.

Can the amount diverted by a Mega Backdoor Roth be withdrawn without penalty the same as regular Roth IRA contributions?

[seattlecyclone]

Can the amount diverted by a Mega Backdoor Roth be withdrawn without penalty the same as regular Roth IRA contributions?

Essentially, yes. These amounts are considered "conversions" which are withdrawn after regular contributions. The amount that you paid tax on at the time of the conversion is subject to a penalty if withdrawn within five years, the rest is not. So if you put $10k in the after-tax 401(k) and it grows to $11k before you get around to moving it to your Roth IRA, you would owe $100 (10% of the $1,000 pre-conversion growth) to withdraw your $11,000 within five years. After five years, the penalty goes away. The sooner you make the Roth conversion, the less time the money has to grow and be subject to taxes when you convert it.

[Dezrah]

Hum... Now I've got to rethink my money strategy, especially for the rest of 2016.  In an ideal world we'd reel in the spending so we can take full advantage of it but pretty sure that's not going to happen. Ah another semi-complicated strategy to make me feel poor while earning a good salary.

I can relate.  I was actually relieved when I found out my company's plan wouldn't allow it because it allowed me to continue saving for a house without feeling like I was missing something.  Now my husband's employer is offering a 401k for the first time starting in August and we'll be putting in 71% of his paycheck to max it out.  Good thing we like our apartment.

I know this is the best thing we can do with our money for now, but I feel more stress and pressure saving now than when we had loans to pay.  Mustachian problems, amirite?

[therethere]

I know this is the best thing we can do with our money for now, but I feel more stress and pressure saving now than when we had loans to pay.  Mustachian problems, amirite?
[/quote]

^ This x1000! I've paid off an extreme amount of student loans but I feel so much more pressure now trying to save money to max out tax-advantaged accounts than I did when I had nearly 3k a month in loan payments!

I'm always saying we can't afford to buy a house. How could anyone save for a house when they are saving 50k+ a year in retirement? DH thinks I'm insane already. Wait until he hears I want to stash 50% of his paycheck in retirement accounts indefinitely....

[Paul der Krake]

Who's the 401(k) custodian?

In my experience, talking to HR is a waste of time as they will just read off the 401(k) page on wikipedia. Their job is to guide Joe Schmoe who is thinking of contributing 4% this year, not kickass mustachians who are pushing the boundaries of the plan. Try to get a hold of a knowledgeable rep at the company that actually administers the plan. Before doing my mega backdoor roth, I spent a good 45 minutes with a Fidelity rep going over every aspect of the plan.

Run scenarios around contribution amounts, employment termination, vesting of employer contribution, ability to rollover certain funds but not others, etc. Do not enter complicated financial montages until you understand every wrinkle of your company's plan.