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Author: Randi927 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: A quick question..... Date: 2/20/2000 12:53 AM
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I am opening up my 401K at work. Is it beneficial to to have this money taken off the top of my paycheck OR contribute after taxes??

I do have Traditional IRAs and also ROTHs. I am a 43 yo. single woman.

Thank you,
Randi
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Author: L2J Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19308 of 76418
Subject: Re: A quick question..... Date: 2/20/2000 8:03 AM
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I didn't know that you could contribute to a 401k after taxes. At least I didn't have that option. But if that plan is available to you, I can only say that it depends on your situation or more likely what you plan your future situation to be. Withdrawals from a 401k normally happen after age 59.5, at some future point when hopefully you are taxed at a lower rate. Now if you contribute after taxes(?), similar to ROTH... Is your empolyer contributing a % to your 401k as well? I believe there are regulations on how this works and I still don't understand "after taxes option". But that is why I'm here to learn. Sorry to ramble and having a quick answer. I'm going to look for more replys to your question.

HaGD, L2

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Author: mathetes Big red star, 1000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19310 of 76418
Subject: Re: A quick question..... Date: 2/20/2000 8:29 AM
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I didn't know that you could contribute to a 401k after taxes. At least I didn't have that option. But if that plan is available to you, I can only say that it depends on your situation or more likely what you plan your future situation to be. Withdrawals from a 401k normally happen after age 59.5, at some future point when hopefully you are taxed at a lower rate.

Many large corporations had savings plans in place, as a benefit, before the advent of the 401(k) legislation that now has "given its name" to so many plans. Those older plans were after tax plans. When the 401(k) provisions permitted pre-tax contributions to be made, the older, after tax plans became one choice in the new improved savings plans.

The advantages of the after tax version is that one can still receive a corporate matching contribution (where it's offered) and it is far easier to make withdrawals, because they're not subject to the penalties associated with pre-tax plans. Corporations, again, usually restrict the number of times you can withdraw, but that's just to keep people from treating it as they might a bank savings account. And, obviously, you've already paid the taxes on the contributed amount, so owe taxes only on any increase in value that might have been received........

It still is generally more prudent to make contributions to the pre-tax plan; however, that presumes that one can afford to set aside more or less permanently that portion of one's income. That is a burden to many.....

mathetes

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19369 of 76418
Subject: Re: A quick question..... Date: 2/21/2000 3:37 PM
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{{The advantages of the after tax version is that one can still receive a corporate matching contribution (where it's offered) and it is far easier to make withdrawals, because they're not subject to the penalties associated with pre-tax plans. Corporations, again, usually restrict the number of times you can withdraw, but that's just to keep people from treating it as they might a bank savings account. And, obviously, you've already paid the taxes on the contributed amount, so owe taxes only on any increase in value that might have been received........}}

Hmmm. I have an IRA with Westinghouse which has both pre- and after-tax contributions. I would like to roll it over to a self directed IRA, but I have been told by two people now that a) the after-tax monies cannot be put back into an IRA, and b) I will owe taxes on the appreciated amount (as you say) but I will also be penalized for a "premature withdrawal", since the money can't be IRA'd. (The IRA is about 4/5 pre- and about 1/5 after-tax, by percentage.)

Any comments about this? I feel like the money is "trapped" for another decade unless I want to pay the taxes (that part is OK with me) AND the penalties (which is not OK IMO.)

Thanks.

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19374 of 76418
Subject: Re: A quick question..... Date: 2/21/2000 4:58 PM
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Hmmm. I have an IRA with Westinghouse which has both pre- and after-tax contributions. I would like to roll it over to a self directed IRA, but I have been told by two people now that a) the after-tax monies cannot be put back into an IRA, and b) I will owe taxes on the appreciated amount (as you say) but I will also be penalized for a "premature withdrawal", since the money can't be IRA'd. (The IRA is about 4/5 pre- and about 1/5 after-tax, by percentage.) Any comments about this? I feel like the money is "trapped" for another decade unless I want to pay the taxes (that part is OK with me) AND the penalties (which is not OK IMO.)

We may have a bit of symantics difficulty here. If you have an account with Westinghouse (as in the company and your ex-employer) it is not an IRA account; it is a §401(a)-(k) qualified plan account which could in its time have all different kids of features including the ability for you to contribute both before-tax and after-tax dollars. If this is what oyu have then: thin of the account as having four different types / sources of money forgetting for the moment how it really invested: before-tax contributions; earnings on b/t contribs; after-tax contributions; and earnings on the a/t contrib's. If you roll this account from Westinghouse to an IRA (lest's say at the discount broker of your choice) only three of four money types are rollable. Everything rolls to the IRA except the after-tax contributions.

The after-tax contributions are not rollable. Instead, they must be returned to you; however, this is akin the a return of principal in that it is non-taxable event; e.g. you pay not tax on the amounts returned to you. If you think about it for a moment this actually makes sense in that, by their nature as after-tax contributions; you already paid taxes on these dollars some years ago; thus no tax this time.

Regular tax & penalties would only apply if you withdrew from the other three "money types" & did not roll those dollars into a rollover IRA account.

TheBadger





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