My previous employers' 401k plans did not allow after tax contributions. When I hit the max before the end of the year it cut me off and I just got bigger paychecks towards the end of the year.

I started a new job about a year ago, and my new plan does allow after tax contributions. I reached the max and the plan automatically started making after tax contributions based on my previously selected pretax contribution percentage.

My first question is how does this work in general? Will only my gains on these after tax contributions be taxed at withdrawal? My after tax contribution won't be taxed a second time on withdrawal, will it?

Second question is about roll over options. I read that there is a recent rule change that allows after tax 401k contributions to be rolled over into a Roth IRA. Would this have to be done as part of a roll over of the entire account with pretax contributions to an IRA and the after tax to Roth IRA? Can I do something with just the after tax contributions by themselves if I'm still at the company and in the same plan? I have two 401k accounts from previous jobs that I need to roll over and would like to take care of everything at once if I can.

It's just like a Roth IRA. In fact, it's called a Mega Roth. And since they are after tax, you can immediately roll them over into your Roth if you don't like the funds in your employer's plan. Congrats.

http://www.madfientist.com/after-tax-contributions/

https://www.bogleheads.org/forum/viewtopic.php?t=137366

Good links, thanks.

So it sounds like I need to find out if my plan allows in-service withdrawals of after tax contributions. If so, I could just keep bumping up my savings % every year like I already do and roll the after tax money into a Roth IRA every year letting me max out tax advantaged savings.

If I can't do that, should I keep making after tax contributions? Even if I think I'll be at this company a long time?

It get a little muddy, but I think the consensus is that taxable retirement contributions are probably better than after tax 401k contributions on the scale of "Where to put my money next".

The reason being is that, with after tax 401k, you are paying taxes on the principle at your marginal rate and then paying taxes on the earnings at your marginal rate when you withdraw in retirement.

In a taxable account, your earnings are taxed as capital gains rates (probably lower than your marginal rate), and you have the ability to tax loss harvest, claim the foreign tax credit, etc.

It looks like my plan may allow in-service roll over withdrawals. This option listed in the drop down menu of the withdrawals section on the website is just "in-service withdrawals". Obviously I have some more research to do.

The after-tax contribution will be pretty small this year, and I won't max out next year until late in the year. I guess I have some time to think long and hard on this.

Thanks for the responses.

The mega Roth contribution is right. You're a lucky dude to have this plan.

You can roll the principal out at any time to your Roth IRA.

ZoneClub said:

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In service roll over withdrawals are restricted by age.

Here is one site with a couple of reasons not to rollover:

http://blogs.wsj.com/experts/2015/02/09/beware-of-in-service-401k-rollovers/

Another reason would be creditor protection exists for 401k/Roth 401k but creditor protection is released upon rolling into an IRA.

Here is another:

http://www.goodfinancialcents.com/in-service-distribution-401k-rollover-while-still-working/

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This seems like apples and oranges. I service Rollover of pre-tax contributions to an IRA vs post tax contributions to a Roth IRA (what op is referencing)

ZoneClub said:

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In service roll over withdrawals are restricted by age.

Here is one site with a couple of reasons not to rollover:

http://blogs.wsj.com/experts/2015/02/09/beware-of-in-service-401k-rollovers/

Another reason would be creditor protection exists for 401k/Roth 401k but creditor protection is released upon rolling into an IRA.

Here is another:

http://www.goodfinancialcents.com/in-service-distribution-401k-rollover-while-still-working/

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I thought federally they were now protected to 1M after the 2005 bankruptcy law Bush got through? I could be wrong on that, but state level protections apply in almost every state, and I think Texas includes inherited IRAs as well.

Protections and relevant state statutes cited:

http://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf

I do exactly what you are about to do and it is easy. The max for me is 10k AT. At the end of the year, I roll it into my Roth. They take the gains and place it in my pretax 401k.

A buddy of mine rolls his into the Roth 401k and the gains into pretax.

Your other option is keep it all in the AT 401k until you separate from service. Upon the rollover, you will get two checks. One with all the principal that you place in the Roth and the other being gains that you can roll into your Traditional IRA.

Microsoft's 401(k) plan allows for up to $24,000 annually to be deposited after-tax with the ability to perform in-plan Roth conversions so that the after-tax gains aren't lumped in with pre-tax contributions. This is beyond the initial $18,000 pre-tax you can contribute to the plan and their $9,000 matching contribution.

This is the holy grail of retirement plans. If your plan allows for something similar, you should definitely take advantage.

L3 allows a total of 25% between pre tax and post tax and matches 4%. It can add up quickly!