Ask Me Help Desk - After-Tax Money in 401k

After-Tax Money in 401k

I'm 54 and retiring very soon from my job. I want to know
If I can take out my after-tax deposits (not interest) and
What happens when you do this. As one 401k help site
Indicates: "While it doesn't help the employee's current
tax situation, funds that were contributed on an after-tax
basis may be easier to withdraw since they are not subject
to the strict IRS rules which apply to pre-tax
contributions. When distributions are begun,
the employee pays no tax on the portion of the
distribution attributed to after-tax contributions, but
does have to pay tax on any gains."

Yes you can withdraw after tax contributions.

You can't put after tax money in a 401k, it's all pre-tax. Are you talking about an IRA? This would make complete sense if you were talking about a Roth IRA because you can take the principle out without penalty or tax.
There are roth 401ks but that's a whole different scenario with different limitations.

I don't know if you can put After-tax money in a 401k now, but I did for 15+ years up until the year 2000. The IRS rules use to state them years ago, but now the rules don't specifically refer to them anymore - at least not that I can see. I had a friend who when he came to my company a number of years ago, his previous company asked him whether he wanted them to cut him a check for the after tax money(the rest he tranferred to our 401k).

Oh yeah - I'm new to this site. Where would I post a reply to someone who's answered my question?

Quote:

Originally Posted by Sandman4

Oh yeah - I'm new to this site. Where would I post a reply to someone who's answered my question?

You just did.

I guess the question would be how you contributed: usually your employer will ask you to select what percentage you want to contribute to your 401k and then it's deducted from your paycheck, which is set up on a pre-tax basis, not after tax. Was this the case in your situation?
Another possible scenario would be if you had rolled over your 401k into an IRA and then contributed to that (by sending in a personal check or automatic contributions from your bank account) and that would be considered 'comingling' and most companies advise against that.
I think what you need to do is find the paperwork on this retirement account and then post on here exactly what type of account it is.

Quote:

Originally Posted by pathisfer

You can't put after tax money in a 401k, it's all pre-tax. Are you talking about an IRA? This would make complete sense if you were talking about a Roth IRA because you can take the principle out without penalty or tax.
There are roth 401ks but that's a whole different scenario with different limitations.

Sorry this is incorrect. The 401(k) rules allow for after tax contributions. Not all companies allow them however. The recent addition of Roth 401(k) plans allows for another way to contribute after tax money

To ScottGem: I KNOW I put in a post - but the only way I saw how to do it was by "answering" my own question. I thought there would be an actual reply icon.

To pathiser: I know pretty much how 401k's, traditional IRA's and Roth IRA's work. Before the advent of Roth IRA's, you COULD put after-tax monies into your 401k account. I know this because I did it for a number of years. My statements reflect this. The problem is that the IRS rules do not seem to bother accounting for the after-tax dollars anymore. Sometimes I've read there are NO penalties withdrawing this money (even if you do it early), sometimes I've read you can take it out, but you HAVE to also withdraw and pay taxes on their earnings. And others say that you have to pay the 10% penalty whether it was after-tax money.

I believe most say the following for after-tax money:

"- Less restrictions on withdrawing income before the age of 59.5.
Note: If you withdraw any amount before the age of 59.5, you will have to pay taxes on the earnings you made ON THAT WITHDRAWAL amount.

- For example, if you withdrew $5000 on which you earned $450 interest, you will not be taxed on the $5000. However, you WILL be taxed on the $450."

The thing is I would like to be sure before I withdraw any money.

The Question referred to in the Answer This Question box is the ORIGINAL question. Maybe better wording would be Post a reply to this Thread, except many people won't understand what a thread is.

Have you spoken to the Plan Admins about this. I think if you contrbuted $5K in after tax money and you just withdraw the $5K, the earnings remain in the plan and wouldn't be taxed.

What it came down to is the amount of After-tax basis (actual amount I deposited) was about 40% of the money I have in the after-tax portion of my account. When I separate from the company, I can get a check for that basis sent to me (no taxes or penalties) and the rest would be put into a traditional IRA. I wouldn't have enough to cover the taxes of putting the rest into a Roth, but c'est la vie.
Thanks for your input though.

I don' think you can designatethe withdrawal to be only from your after-tax portion of the account. Any withdrawal you make will be apportoined between after-tax, pre-tax, and earnings components based on the make up of your account . For example: suppose your account has $20K in it, consisting of $5K in after-tax contributions, $10K in pre-tax contributions, and $5K in earnings. If you withdraw $5K the administartor will attribute this withdrawal to being 1/4 from after-tax contributions, 1/2 from pre-tax, and 1/4 from earnings. At least that's how I think it works - I suggets you talk to the plan administrator to see how it would work in your case.