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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: of 76418  
Subject: Re: 401k pre/post contributions Date: 1/28/2000 2:46 PM
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Hi, Gabe:

The way I understand it, the reason for contributing post-tax funds is because the earnings are tax exempt, similar to a Roth. Is that true?

I guess that's so -- it's true that it works that way -- personally, I made post-tax contributions for two reasons:

(1) that's the way my employer & Fidelity handled it when we had reached the $10,000 (or whatever) annual limit -- I believe in some plans, you may just not be eligible to contibute to the 401(k) at all between that point and the subsequent Jan. 1.

(2) I wanted the flexibility of being able to take some money out -- either before or after leaving the job or retiring. My 401(k) balance looked healthy enough that I didn't feel I needed to max-out the pre-tax contributions. Of course I always contributed at least the max. amount that was subject to matching, even in the early years when the matching only occurred on 12/31 and was in company stock.

What about the post-tax earnings?

They are in the part that is eligible for rollover.

In the scenario Phooley mentioned it seems that all pre-tax contributions and ALL earnings will be rolled over to a Conduit IRA, while post-tax contributions will be distributed. Am I understanding what you are saying?

I think so. Of course, "Conduit IRA" implies you are keeping the funds segregated for potential reinvestment in a 401(k). Some people would just consider it an IRA -- maybe "Rollover IRA".

Also, Phooley, would those post-tax contributions be distributed as a qualified distribution?

Well ... I don't think that's quite right.

If you have a 401(k) that includes some post-tax contributions, you can, as far as the IRS is concerned, receive any portion of those after-tax contributions at any time -- while still working, after quiting, after retiring, etc. And as I said, it's your own money -- not taxable when you receive it -- so I don't consider it as eligible for a fancy term like "qualified distribution." It's just your own money -- the taxes on it have already been paid -- and your receipt of it is not a taxable event.

Hope this answers your questions -- I think your perception is quite accurate.

Paul and I may differ slightly on the urgency of maxing out your pre-tax contributions. I definitiely wouldn't argue with someone who decided to do that -- there's nothing really wrong with the idea -- but in some cases I think it's possible for people to build up a balance of money, tax deferred, that's a little too large to manage. This can make estate planning a little difficult, and may make it difficult to take advantage of the exclusions available.

I don't have specific posts to point to -- this thread covers the original (post-tax 401[k]) question pretty well, I believe. Any additional questions should probably be given a fresh start in a new thread.

By the way, I don't claim to be an expert -- I just closed out my 401(k) in 1998, and had kept track of the post-tax contributions over the years so I would know how much money I had coming to me, and just wanted to share my experiences.

Hope this helps,
Phooley
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