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After-Tax 401(k) Contributions

Started by frugal314, February 10, 2019, 05:20:12 PM

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frugal314

In 2019 the maximum an individual can contribute to a traditional 401K plan is $19,000 for individuals 50 and under, and $25,000 for individuals over 50, but the maximum that a person can contribute pre and post tax is $56,0000, see link below:

https://www.goodfinancialcents.com/401k-contribution-limits/

I'd like to know what are the benefits of contributing more than the maximum pre-tax dollars into a 401k?  Why would anyone do this since there are no tax advantages other than perhaps the money growing tax free until withdrawn at retirement?

david123

Quote from: frugal314 on February 10, 2019, 05:20:12 PM
In 2019 the maximum an individual can contribute to a traditional 401K plan is $19,000 for individuals 50 and under, and $25,000 for individuals over 50, but the maximum that a person can contribute pre and post tax is $56,0000, see link below:

https://www.goodfinancialcents.com/401k-contribution-limits/

I'd like to know what are the benefits of contributing more than the maximum pre-tax dollars into a 401k?  Why would anyone do this since there are no tax advantages other than perhaps the money growing tax free until withdrawn at retirement?

There are a couple of other good articles on this subject worth reading:  http://www.jhwfs.com/after-tax-401k-contributions/ and http://www.jhwfs.com/roth-conversion/

The $56,000 you mention isn't just pre-tax - it is the limit of pre-tax 401K, Roth 401K (post tax), post-tax 401k, and employer contributions.  The pre-tax 401k and Roth 401k also have the combined limit of $19,000.  The article I mentioned talks in greater detail, but the post-tax 401k contributions on the surface don't look very appealing.  The money is after tax, grows tax free, but then is taxed as ordinary income (vs. capital gains like a regular investment account).  The main advantage is you can roll your contribution amount (not earnings) to a Roth IRA without tax penalty.  This lets you contribute a larger amount to a Roth IRA than if you did normal contributions or back door contributions and avoid income limits.  The downside is you generally have to wait until you leave your company to do the roll over, and wait 5 years after to withdraw the money tax free.

whitetail

Thanks for those details david123.

I didn't understand the implications for the Roth IRA before.