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Author: mday1 Two stars, 250 posts CAPS All Star Mission Olympia 2 Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25242  
Subject: Roth 401(k) and company match Date: 6/19/2012 1:08 PM
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My company added a Roth 401(k) as an alternative to a traditional 401(k). They also match my contributions (100% of my contributions, up to 6% of my salary). According to the plan literature, the company match is considered pre-tax contributions, and will be taxed (along with any gains from those contributions) when I eventually take a distribution. Obviously, my contributions would be post-tax; they and their gains will not be taxed at distributions (as long as I meed the time and age criteria).

I'm a little confused about how this mix of pre-tax and post-tax contributions work. Suppose the company match ends up being 40% of the total dollars going into the account (my contributions are the other 60%). Does that mean that when I take distributions, 40% of that money will be taxable and 60% will be tax-free?

How would this mix of pre-tax and post-tax contributions affect a rollover to a Roth IRA? Would I end up paying taxes on 40% of the amount rolled over? Or could I roll over 40% (the pre-tax portion) to a traditional IRA and 60% (the post-tax portion) to a Roth IRA without paying any additional taxes?

(In case it's important, I've been contributing to a traditional 401(k) for 20+ years, so I've got a sizable chunk already sitting waiting to be taxed later.)

Thanks for your insights,

-Mark
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Author: mjolah Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24894 of 25242
Subject: Re: Roth 401(k) and company match Date: 6/19/2012 2:24 PM
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As far as tracking which amounts are pretax (either your pretax contributions, or any company match) are concerrned, it can be (and sometimes is) done as you suggest (based on percentages) - but most recordkeepers actually keep the money is separate "buckets" on their recordkeeping platform - so they know exactly how much goes in as what kind of contributions, can track the actual contribution amounts, and the difference between the ending balance and the contribution amounts (for each type of contributions) is the earnings attributeable to that source. This is true even though most recordkeepers don't allow you to invest eh separate buckets separately (although the trend has been in that direction - especially since the tax treatment on distribution may be different considering you have a Roth option).

When you do take that distribution, you will have to provide directions with respect to the Roth and the non-Roth amounts separately. Both are rolloverable into their respective IRA counterparts (Roth IRA for the Roth bucket and a tradition IRA for the other buckets).

Good luck!

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24895 of 25242
Subject: Re: Roth 401(k) and company match Date: 6/19/2012 3:10 PM
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To clarify: When you do take that distribution, you will have to provide directions with respect to the Roth and the non-Roth amounts separately. Both are rolloverable into their respective IRA counterparts (Roth IRA for the Roth bucket and a tradition IRA for the other buckets) without any additional taxes due to the rollover. Pre-tax 401(k) money can also be rolled directly over to a Roth IRA. However, there will be taxes due based on the amount converted.

AJ

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Author: mjolah Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24896 of 25242
Subject: Re: Roth 401(k) and company match Date: 6/19/2012 3:47 PM
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Yup, like AJ says - which is a good (and necessary) clarification.

Thanks AJ.

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Author: mday1 Two stars, 250 posts CAPS All Star Mission Olympia 2 Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24897 of 25242
Subject: Re: Roth 401(k) and company match Date: 6/19/2012 4:58 PM
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Just to follow up, I called Schwab (who manages our 401(k)) and asked.

It turns out I left out an important detail. There's a lot of moving parts here. ;-) The plan also has a self-directed brokerage option where I can buy and sell individual securities, and I've been taking advantage of that (with the help of Stock Advisor and Rule Breakers).

The plan's mutual funds are tracked internally in two "buckets" for pre-tax vs. post-tax contributions and the gains that result from them. In the self-directed brokerage, the pre-tax and post-tax funds are co-mingled, so they keep track of the percentage of each as they flow in or out.

Thanks a bunch to both you and AJ! That was very helpful!

-Mark

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