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Author: berniemuh Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76421  
Subject: 401K question Date: 7/8/2000 7:06 PM
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1. 401K question: My employer says I can contribute from 1-15% of my
total income up to a max. of $10,500 on a before-tax basis. I can also
contribute up to $17,000 more on an after-tax basis. Why would I want to
contribute after-tax dollars to a 401K plan?
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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23197 of 76421
Subject: Re: 401K question Date: 7/8/2000 7:26 PM
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Clearly there is less advantage in making after-tax contributions to the 401k. However, it is a little bit like making after-tax contributions to an IRA, but you have fewer investment choices. If your plan offers good choices and they are performing well, you might want to contribute some after-tax dollars.
Once money is in the plan, you can move it from one investment to another without immediate tax consequences.
You will not get hit with large capital gain distributions in December, as happens with mutual funds in taxable accounts.
If you are lucky, it may be possible to buy some load funds in your 401k with the load waived, or to get into closed funds on the basis of a contract between the mutual fund family and your plan administrator.
So it isn't clear that nobody in their right mind would ever put in after-tax 401k money, but you are right that it is much less attractive than the tax-deferred option.

Best wishes, Chris

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Author: phooley Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23198 of 76421
Subject: Re: 401K question Date: 7/8/2000 7:35 PM
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berniemuh,

1. 401K question: My employer says I can contribute from 1-15% of my total income up to a max. of $10,500 on a before-tax basis. I can also contribute up to $17,000 more on an after-tax basis. Why would I want to
contribute after-tax dollars to a 401K plan?


That's a decision you'll have to make for yourself. The way it usually works is:

(1) You can choose to contibute some funds, after tax, to your employer's savings plan

(2) You allocate those funds to various investment choices, probably in the same proportion as your before tax funds (i.e., that's probably just the way the plan will work).

(3) The earnings (we'll assume there are some) on those after-tax funds accumulate, tax-deferred, in your account.

(4) If you take early retirement or if you leave your employer and, let's say, want to roll your 401(k) into an IRA, those after-tax funds will come to you directly, tax-free (of course) to do with as you choose.

As with any decision, you'll need to run your own numbers.

Hope this helps somewhat...
Phooley

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Author: PeachtreeDaClown Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23441 of 76421
Subject: Re: 401K question Date: 7/18/2000 10:19 AM
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My employer somtimes lists my 401 contributions as after tax contributions, so this question has come up in my mind. If I leave my employer - you are saying

"(4) If you take early retirement or if you leave your employer and, let's say, want to roll your
401(k) into an IRA, those after-tax funds will come to you directly, tax-free (of course) to do
with as you choose."

That the money will be sent directly to me and will be able to be placed directly in to a roth or do I have to have the plan send it to a roth providor. Can all of the after taxed amount able to be placed into the roth or do I have to deal with the 2000 limit?

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23442 of 76421
Subject: Re: 401K question Date: 7/18/2000 10:35 AM
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Greetings, PeachtreeDaClown, and welcome. You wrote:

<<That the money will be sent directly to me and will be able to be placed directly in to a roth or do I have to have the plan send it to a roth providor. Can all of the after taxed amount able to be placed into the roth or do I have to deal with the 2000 limit?>>

Two things: First, you cannot transfer money directly from a company retirement plan to a Roth IRA. It must first be transferred to a traditional IRA. Once there, it may be further transferred to a Roth IRA.

Second, after-tax contributions to a retirement plan like a 401k cannot be transferred to an IRA of any type. They are ineligible. Therefore, you receive them directly and may do with them as you please. You could, though, (and based on your job income for the year) use that money to make an annual contribution of up to $2K to a Roth IRA provided you meet the adjusted gross income limits for doing so. In that case, you get the money, and then make the deposit to a Roth IRA.

Regards...Pixy

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Author: phooley Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23474 of 76421
Subject: Re: 401K question Date: 7/19/2000 1:26 AM
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My employer somtimes lists my 401 contributions as after tax contributions... If I leave my employer ... the money will be sent directly to me and will be able to be placed directly in to a roth...

Hmmm.... guess my "to do with as you choose" was a poor choice of words. It's like finding money in the bottom of a drawer or under your mattress. You can use it to buy a DVD player, or take a trip to the Bahamas, or invest in stocks in a long-term buy-and-hold account. Or, all of the above.

I can see why you might like to put it all into a Roth IRA, but as TMFPixy has pointed out, no-can-do -- except for up to $2,000 if you are eligible (plus the possibility of a similar amount for a spouse).

Phooley

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