401k / Roth 401k question

[JackBauer]

Ok so the 2009 "401k limit" is $16,500.

What confuses me is that my 401k allows me to put away $16.5k in pre-tax savings, yet I can put a lot more in if I want, post-tax. Yet all websites refer to this limit, without specifying pre-tax, and without stating that you can add more post-tax.

Am I missing something there?

I ask because soon my company will offer a Roth 401k, and I'm currently contributing the maximum percentage to my 401k (30% salary)...

So I have two questions:

1) I assume my full contributions, both pre and post - are considered a 401k, and just websites out there are being vague when they neglect to talk about post-tax contribution capability?
2) If I contribute post-tax now to limit my pre-tax 401k contributions - should that allow me to use the balance of that $16.5k later this year when I should have a Roth 401k available to me?

Thanks

[sweeps]

Yes, the limit is the same for either one, and yes, that means you can effectively stash more when you choose the Roth 401k route.

[JackBauer]

Originally Posted by sweeps

Yes, the limit is the same for either one, and yes, that means you can effectively stash more when you choose the Roth 401k route.

Thank you sweeps, I appreciate the reply.

Do not take this wrong, as I am not saying it with malice...

I just don't see how that corresponds to either of my questions.

I've been searching online and just cannot find the answers, and was hoping I'd be able to find it here. I may have to post on an accounting usenet group or something....

[sweeps]

Please don't take this wrong either, but your questions are worded very strangely.

There is a limit that applies to the combination of pre-tax and Roth 401k contributions for the year. You can put in $16,500 in pre-tax contributions, or you can put in $16,500 in Roth 401k contributions, or you could put in $8,000 and $8,500 or whatever other combination you want. There is an additional $5,500 contribution allowed if you are 50 or older.

Pre-tax dollars are worth less than post-tax dollars. Therefore $16,500 in Roth 401k contributions is effectively worth more than $16,500 in pre-tax 401k contributions.

Perhaps you are talking about non-Roth post-tax contributions? Then yes this limit does not apply, but then it is not a Roth 401k contribution. If you make this type of contribution, you can withdraw the principal tax-free at retirement, but your earnings will be taxed.

[JackBauer]

Originally Posted by sweeps

Please don't take this wrong either, but your questions are worded very strangely.

Ok


There is a limit that applies to the combination of pre-tax and Roth 401k contributions for the year. You can put in $16,500 in pre-tax contributions, or you can put in $16,500 in Roth 401k contributions, or you could put in $8,000 and $8,500 or whatever other combination you want. There is an additional $5,500 contribution allowed if you are 50 or older.

Perfect - that was what I was after. So it appears I made the right decision, since I want to maximize my Roth 401k contributions, to change my 401k contributions to post-tax. I asked the question because everywhere I look I see websites quoting "you can only contribute $16.5k to a 401k", which appears to be incorrect. The right wording would be "you can only contribute $16.5k pre-tax dollars to a 401k".

Pre-tax dollars are worth less than post-tax dollars. Therefore $16,500 in Roth 401k contributions is effectively worth more than $16,500 in pre-tax 401k contributions.

Your point here is that pre-tax dollars are worth less than post-tax dollars - at retirement, right?

Much appreciate the response.

The irony of this is that today I determined that my company hasn't released a time table for the Roth 401k, which means it is highly likely to be part of annual enrollment... so I wouldn't actually be able to utilize it until 2010, making my switch to post-tax so early in the year... pointless.

Still I'm happy to be educated.

Thanks again...

[sweeps]

Originally Posted by JackBauer

I asked the question because everywhere I look I see websites quoting "you can only contribute $16.5k to a 401k", which appears to be incorrect. The right wording would be "you can only contribute $16.5k pre-tax dollars to a 401k".

No, I would agree with the first statement. You can contribute a maximum of $16.5K to a 401k -- that is the combination of both pre-tax and Roth 401k dollars.

If you are just putting in pre-tax dollars during the year, then yes, you can put in a maximum of $16.5K dollars. But then you wouldn't be able to make any Roth 401k contributions that year.

Originally Posted by JackBauer

Your point here is that pre-tax dollars are worth less than post-tax dollars - at retirement, right?

They are worth more now too. Putting in $16,500 in pre-tax money translates to, let's say, $14,000 in post-tax money. This means you are effectively saving more if you max out your 401k with Roth (post-tax) contributions.

[jIM_Ohio]

Jack

$16,500 in a Roth >>$16,500 in a normal 401k
$5,000 in a Roth IRA >> $5,000 in a traditional 401k

This is because taxes are not accounted for in a regular 401k or traditional IRA, where as the Roth accounts are.

Which account to use is 66 percent taxes and 33 percent withraw technique, IMO.

[JackBauer]

Ok I'm still confused.

Last year I put around $30k into my 401k.

$15.5k of it was tax deferred.
~14.5k post tax, meaning I had paid taxes on let's say $18k or something like that, and then $14.5k or so went into my 401k.

Now it is possible I am completely misunderstanding

unless I am completely misunderstanding my employers savings program... And it is really some other sort of savings plan - which encompasses the $15.5k pre-tax 401k, plus additional post-tax savings potential.

So let's start with the basics...

I had thought a 401k had a tax deferred limit of $15.5k (last year), but you could put additional after tax funds into it as well.

Did I misunderstand that?

Thansk again

[sweeps]

Jack, there are 3 types of 401k contributions: pre-tax, post-tax, and Roth. I assume you made pre-tax contributions and post-tax contributions, but you did not make Roth contributions. If so, you're legal -- nothing to worry about.

The $16.5k limit applies to the combination of pre-tax and Roth contributions only.

[JackBauer]

Originally Posted by sweeps

Jack, there are 3 types of 401k contributions: pre-tax, post-tax, and Roth. I assume you made pre-tax contributions and post-tax contributions, but you did not make Roth contributions. If so, you're legal -- nothing to worry about.

The $16.5k limit applies to the combination of pre-tax and Roth contributions only.

Ok, I finally got it.

Thanks for bearing with me.

I just wish I could find a website that actually said the above... Because what I have read, and I do believe the above to be true... But websites seem to assume that 401k's are purely pre-tax contributions, as they mention the $15.5k (2008) limit, but don't give any suggestion that you can actually contribute more (after paying taxes on that money).

Thanks again

[sweeps]

The problem is that non-Roth post-tax contributions are "old school". Most people only talk about Roth contributions now if they want post-tax.

And honestly, non-Roth post-tax contributions aren't really a great deal. Most people will just stash extra money beyond pre-tax or Roth contributions in a taxable account. That way you can at least take advantage of low capital gains tax.

[JackBauer]

Originally Posted by sweeps

The problem is that non-Roth post-tax contributions are "old school". Most people only talk about Roth contributions now if they want post-tax.

And honestly, non-Roth post-tax contributions aren't really a great deal. Most people will just stash extra money beyond pre-tax or Roth contributions in a taxable account. That way you can at least take advantage of low capital gains tax.

True...

I've been stashing money in that way only to simplify my supposedly "safe" retirement money, where dividends are reinvested, and I don't have any tax consequences now associated with dividend earnings.

I have been concerned though about mandatory distributions later in life... Although I don't think I was planning to invest this way forever, just to get some critical mass going, and allow it to grow over time.

Probably not the smartest thing - but in the end what pushed me in this direction was the (easy) ability to buy my company stock in my 401k in reinvest the dividends without the tax consequences.

[jIM_Ohio]

Jack-

depending on your income, you could take SOME of the 14.5 post tax contributions and possibly make out better tax wise.

Put $5000 into a Roth IRA- better distribution rules than the 401k contributions for one (are you eligible for the Roth IRA?).

Pay down your mortgage- you are getting taxes on the $14500 anyway... it's possible better cash flow in 15 years beats the $14500 being invested now (depends on size of mortgage payment).

If you have a high mortgage payment (relative to income) paying off the mortgage will beat the post tax 401k.

If you post more about age, investment strategy, when you think you want to retire, how much you have in 401k now (pre and post tax) etc... I might be able to give more specifics.