In December 2012, after Mr. Sam had maxed out his 401k, I noticed that he was still contributing to his 401k in something called an "after-tax option."
We both thought the "after-tax option" was his Roth 401k option. I was certain that he couldn't go beyond the contribution limit of $17,000 between his regular 401k and his Roth 401k. And, I was correct, the 2012 contribution limit of $17,000 applies both to the 401k and the Roth 401k or a combination of contributions to both. So, I promptly freaked out as I was concerned that he had gone above and beyond the 2012 contribution limits and we were going to be back on the naughty list for the IRS (we previously were audited).
So three calls to Fidelity later and we learned that Mr. Sam's company offers an after-tax spillover contribution option in its 401k. What that means, is that Mr. Sam can max out his 401k with pre-tax dollars up to the contribution limit of $17,000 ($17,500 in 2013) and then he can continue contributing to his 401k with after tax dollars up to a maximum of $50,000.
This is one of those retirement options that most people have never heard about. So, why would we want to put more after-tax money into Mr. Sam's 401k? For us, the big advantage is the company match. Mr. Sam gets a great match and that match continues with the after-tax spillover contribution. So for each extra dollar he puts in he gets an immediate 20% return. While, his match is in company stock, since he is vested he can sell that stock at any point.
Now that we know about this option, we need to figure out how we better take advantage of this investment option in 2013.
Have you heard about the after-tax spillover? Do you have that option in your plan? If yes, do you use it?
8 comments:
I think that the 'after tax' portion of that 401k is going to be a non-deductible account. That means its not a Roth but its not pre-tax. You pay taxes now and you pay taxes on the gains when you take it out. Theres not a ton of benefit to such an account for most people. In your case it may make sense to get that employer match but if there wasn't a match then I doubt you'd really want to contribute to a non-deductible account.
Jim
I have this option. The money in your after-tax account can be converted to a Roth IRA at any time. I am maxing out my after-tax account in my workplace and will then convert it to a Roth IRA every year.
-Anon in NY
Jim R and Anon in NY, thanks for the comments and thoughts. We are still researching how to make this option work for us.
I really like the idea of converting to the Roth IRA.
Jim R - Not sure of the tax consequences and impact. It took us three conference calls with Fidelity before we understood what this option was. The 22% match makes this option more attractive for us, but I'm always fearful of the IRS and of complicating our taxes. I have no idea how a retired person keeps track of all their pools of money and determines which to withdraw from first, last or not at all and how to track the taxes. This is a question I need to pose to my elders.
I just recently heard a little blip about this concept somewhere on the blogosphere (in a forum, I think) but this definitely went into more detail so thank you for those links. My company does not offer this spillover option because when I maxed out last year, my contributions just stopped. Also when I spoke to a CSR beforehand to make sure that's what would happen, they didn't mention any other options so I assume it's not available ... although I honestly wouldn't want to take advantage of it anyway. I'm just barely able to max out all my retirement contributions as it is (between the Roth 401k, Roth IRA, and HSA) so there isn't much left over and I'd like to leave that little bit to other goals. Eventually if I want to invest it somewhere, it might be in P2P or real estate or some kind of taxable account with a brokerage firm that will further diversify my holdings and/or reduce fees.
I have it at my work, I can plan high on my pre-tax contribution and like Mr Sam so not miss out on the match towards the end of the year. For me, the after tax contribution kicks in about the same time I max my SS contribution for the year so they offset each other. I like the feature, I have a challenge with my wife's 401k making sure it doesn't max out early and she miss out on the employer match. My company allows me to withdraw the extra at any time, they do all the record keeping so I don't have too. A few years back I pulled out the extra to purchase a rental. My company required me to pull the earnings out with it so transferred the earnings to a rollover IRA I already had so I was avoided any taxes on the transaction. I only go over the IRA max by at most a couple thousand a year so its not a big deal and the earnings continue to be tax deferred. So when I start drawing down my 401k in retirement, these after tax dollars will come out first.
Sam, I think tracking the accounts has become more of a problem lately. My dad is retireed and all his accounts are IRA/401k style pre-tax accounts so they all function the same. Roths are a relatively new concept and so he doesn't even have one. Non-deductible accounts are pretty rate and most people don't have those even now. Probably the best way to keep it simple/easy in retirement is to consolidate all your accounts as much as possible so you at least only hve one provider with separate balances for IRA & Roth IRA.
Jim
What a deal! My company caps the employe match (and fairly low too) so this isn't an option.
Very fast!! Pickup of my vehicle in Florida within 24 hrs of
contract. Delivered to California two days earlier than
estimated. The driver was very polite and took great care
of my classic car.door to door transport service
Post a Comment