In brief, you will not be double taxed. However, you will be taxed on investment's gains. SEE BELOW:
Because post-tax contributions are made with money you've already paid taxes on, only the investment's gain or income (i.e. interest and dividends) -- and not your contributions -- enjoy the benefit of tax-deferred growth.
When you withdraw post-tax 401(k) funds you only pay taxes on the gain (interest or dividends) your investment has earned. As with pre-tax contributions, taxes are due only when you take money out of your account.
Post-tax contributions are not tax-deductible, so you don't get a tax break for making them.
Depending on your plan's rules, you may be able to withdraw your post-tax contributions at any time without incurring a penalty. However, because the gain you earn on your post-tax 401(k) investment is tax-deferred, you must pay income tax on that amount when you withdraw your money. The gain is also subject to an early withdrawal penalty if withdrawn before age 59ý. The penalty will not apply in the cases of a qualified hardship as defined by the IRS, if you take early retirement starting in the year you turn 55, or if prior to turning 55, you take withdrawals based on a series of equal periodic payments as defined by the IRS.
Now, considering that the best tax break and the greatest opportunity for taking advantage of tax-deferred compounding come with pre-tax 401(k) contributions, why would anyone consider making post-tax contributions?
Here are some possible scenarios:
- If you are already making the maximum pre-tax 401(k) contribution allowed and really want to contribute more (to get the benefit of tax-deferred investment growth).
- If your employer matches both pre-tax and post-tax contributions, and you are fully vested for matching contributions, you might choose to maximize the employer match by making the maximum allowable pre-tax contribution and making post-tax contributions as well.
- If you are committed to saving money, but aren't sure you'll be able to leave your money invested until retirement, you might make after-tax contributions because you will be able to withdraw them without penalty before age 59ý. A person considering this idea needs to remember that the gain earned on the investment is subject to an early withdrawal penalty if taken out before age 59ý. Also, income tax on the investment gain is due at the time of withdrawal.
While it is more advantageous to make pre-tax contributions, if you haven't already done so, you may want to request that your employer withhold pre-tax contributions.
Let me know if I can be of further assistance to you in this matter.