Here’s what your 401(k) would now look like: Since all pre-tax contributions and all growth within the 401(k) will be taxed, here’s all the money that would be subject to tax once you decide to tap into the account: As you can see, you don’t really have tax-free gains on the after-tax contributions, you have tax-deferred gains instead (because you eventually have to pay tax on the money).
Let’s take a look at a better way to handle after-tax contributions (i.e. Assume the same scenario but rather than leave everything in the 401(k) to grow, you instead immediately rollover your entire balance to two separate IRAs using an in-service withdrawal on January 1st, 2018.
For example, if someone maxes out their 401(k) in 2018 and their employer contributes ,500, the after-tax contribution limit would be ,000 (,000 – ,500 – ,500 = ,000).
The IRS has stated that when transferring money from you 401(k) into your IRAs, you are able to divert the pre-tax portion of your 401(k) and all the investment growth to your Traditional IRA and the after-tax portion to your Roth IRA, without paying any tax.
This is a big deal for people who can make in-service distributions (i.e.
401(k)-to-IRA transfers while still employed) or those of us who plan to leave our full-time employer soon because this will allow us to dramatically boost our Roth IRA contributions!
If you are already maxing out your pre-tax 401(k) contributions (see this post for why I believe a pre-tax contributions are better than Roth contributions for early retirees) and are also maxing out your IRA, you should check with your 401(k) custodian to see if you can start making after-tax contributions as well.
Before we dive into the details, some background info is required first.Such benefits include private tools, advanced technology, and an individual approach to every single Top Offers' partner.We believe that all our partners must receive solid care, support and assistance.Depending on how much your employer contributes to your retirement account, you could potentially contribute up to ,500 extra into your 401(k) every year with after-tax contributions.The total 401(k) contribution limit for 2018 is ,000 so to figure out how much in after-tax contributions you could make, simply subtract your pre-tax/Roth contributions and your employer contributions from ,000.