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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have been having $25 deducted each check and sent to an

Customer Question

I have been having $25 deducted each check and sent to an old 401K. I realized I am sending post tax dollars. I called fidelity and they said a tax adviser could tell me how to straighten it out. Please help! I don't want to pay double tax.
Submitted: 1 year ago.
Category: Tax
Expert:  Tax.appeal.168 replied 1 year ago.

In brief, you will not be double taxed. However, you will be taxed on investment's gains. SEE BELOW:

Post-tax Contributions:

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 The gain is also subject to an early withdrawal penalty if withdrawn before age 59ý.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.

REFERENCE SOURCE:

https://www.expertplan.com/faq401k/faq_taxes.jsp

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.

Customer: replied 1 year ago.
Fidelity said there is no way for the IRS to know the $25 deposits are post tax since they are being deposited in a pre-tax account - they said there would be forms to complete
Expert:  Tax.appeal.168 replied 1 year ago.

What type of 401k plan is it? Roth 401k, traditional 401k, safe harbor 401k...?

Customer: replied 1 year ago.
A traditional 401k from Intel when I worked there
Expert:  Tax.appeal.168 replied 1 year ago.

The post tax contributions don't come into play until you take a distribution. SEE BELOW:

The benefits of an after tax 401k withdrawal are plainly obvious. You’ve already paid taxes on the money you have put into the account, so naturally when you withdraw it, you owe nothing else to Uncle Sam.

Another added benefit of an after tax 401k withdrawal is that you will not owe the IRS a 10% early withdrawal penalty for taking the distribution even if you are under the age of 59 ½. Sweet deal!

But wait…as always there’s a catch (you really didn’t think you were going to get away scot-free did you?). The IRS has a few tricks up its sleeve that you need to be aware of regarding the after tax 401k withdrawal.

Don’t forget that the after tax contributions you have made to the account have probably earned more money on it, right? If you invested properly, it did. And if you’ve been invested for quite some time, chances are the earnings are quite substantial. Well, these earnings have never been taxed before.

REFERENCE SOURCE:

http://about401k.com/withdrawal/after-tax/

Customer: replied 1 year ago.
I'm sorry we are not connecting on this concern - post tax contributions are co-mingled with pre tax contributions in one pre tax 401k account - I want to know the correct way to identify (and separate if necessary) the pre tax from the post tax contributions to this single traditional employer sponsored 401k
Expert:  Tax.appeal.168 replied 1 year ago.

My apologies, I am unable to assist you further. I will release your inquiry back into the queue so that someone else may be able to assist you.

Expert:  Lev replied 1 year ago.

Different expert here.

Please allow me to assist...

Unfortunately all 401k contributions are allowed ONLY via payroll deductions are treated as pre-tax.

That means - all distributions may be taxable.

If you made 401k contributions in different way - that would not change anything and will not create after-tax basis for distribution purposes.
The ONLY allowed way to have after-tax basis in 401k is your plan has Roth option.

A designated Roth account is a separate account in a 401(k) plan that holds designated Roth contributions. The amount contributed to a designated Roth account is includible in gross income in the year of the contribution, but eligible distributions from the account (including earnings) are generally tax-free.

That is the correct way to identify and separate the pre-tax from the after-tax contributions.

If your 401k plan doesn't have a designated Roth account - ALL distribution will be reported as taxable income.

Customer: replied 1 year ago.
Thank you for your answer. I am familiar with Roth IRAs - Fidelity has informed me that there is a way to separate these funds in the eyes of the IRS with the correct forms but could not advise further as they are not tax accountants. I will seek advice elsewhere. I appreciate your time.
Expert:  Lev replied 1 year ago.

As we already mentioned above - if your 401k plan doesn't have a designated Roth account - ALL distribution will be reported as taxable income.
You will not be able to avoid taxable income on distribution.
Unfortunately - there is no other options.

Sorry if you expected differently.