Under retirements accounts information, contributions, can only enter assets for deductible contributions. Would be nice to be able to enter nondeductible contributions also (ie nondeductible IRA)
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Isn't a non-deductible IRA equivalent to a Roth? We allow you to enter Roth data. From an internal perspective the difference is that the IRA contributions are deductible, the IRA withdrawals are taxable, Roth contributions are taxable, Roth withdrawals are not taxable.
Best,
Dick Munroe
I'm making non-deductible contributions to my 401(k) since I max out the $16,500 each year and then add about another $4000 on top of the roughly $7000 I get as an instantly vested employer match. So with about $27,000 in total annual 401(k) contributions how do I enter that in ESP?
Also, curious if anyone has any guidance on whether to put the non-deductible contributions in taxable investments (like low-cost index funds or Vanguard ETFs) to create flexibility for withdrawals if I retire early, say at 55, or even for expenses before age 70 mandatory RMDs? I already have more in taxable investments than retirement investments so I recognize this is very good "problem" to have.
Doug,
I think you should check with your 401(k) administrator to see how they are handling the your $4,000 contribution in excess of the $16,500 deferral limit.
There are two issues, potential excess elective deferrals and treatment at withdrawal.
While the retirement plan administrator is responsible for applying the proper annual limit on deferrals, the employee is responsible for monitoring the total amount deferred, If more than the limit was deferred you should request a corrective distribution.
I'm aware of an employer sponsored retirement plan (the Federal Employees TSP) that treats all contributions as deductible, i.e. taxable, when withdrawn, even if some were actually nondeductible. If that's your case it might be better to establish a separate IRA outside of your retirement plan and make a nondeductible contribution. This could either be a traditional, a Roth IRA, or a combination of the two. Note the contribution limit applies to the combined total contributions, not to individual accounts. Also, you should report nondeductible contribution to a traditional IRA on an IRS Form 8606.
I think you should enter the $16,500 as an Individual deductible contribution, the $7,000 as the Employer's contribution, and the $4,000 as a Roth IRA contribution.
By entering the $4,000 as a Roth IRA, even if you actually put it in a nondeductble traditional IRA, you will be taxing it in the year of contribution and withdrawing it as nontaxable in the future.
Mike O'Connor
Interesting questions. I too contribute more to my 401K than is acceptable as pre-tax by the federal government. I just assumed that the extra was treated as a Roth. After reading your post, I question that logic. I also contribute $6000 (the max) to a Roth each year. So my question is a little different; What is this money considered as by the government? Can it be mearly a saveings account within a 401K? If that's the case, should we receive a 1099 indicating gains or losses. Should it be tracked seperatly within the 401K? And as you point out, where should it be invested? Should it be pulled out of the 401K and invested seperatly, making the tracking much easier?
I think the government will penalize you for over-contributing. IIRC it's a pretty substantial one as well, so it behooves you to get it right.
Best,
Dick Munroe
tafraser,
As I advised Doug above, I think you should check with your 401(k) administrator to see how they are handling the your contribution in excess of the $16,500 deferral limit.
Inaddition to the above two issues you have an additional issue: excess IRA contributions.
Even if your retirement plan administrator treats the excess 401(k) contribution as a nondeductible contribution to a traditional IRA, the contribution limit applies to the combined total of all IRA contributions, not to individual accounts.
As Dick said there is a penalty on excess contributions, it's a 6% excise tax each year that the excess contribution remains in the IRA.
If you withdraw an excess contribution and any earnings on the excess contribution by the due date of of the tax return for the year of the excess contribution you do not have to pay the 6% excise tax on the contribution. However, earnings on the excess contribution are taxable and are subject to the 10% early withdrawal penalty.
Mike O'Connor
Thanks Dick and Mike for your input. I'll be contacting my 401K administrator as soon as I get back to work. It looks as though I'll be owing more taxes than I anticipated (IRS Publication 525). I've only had an excess contribution for a couple years now, and it's been very little. I assume the 6% each year will add up, but I'm 62 years old now, there shouldn't be an early withdrawal penalty, should there?
My contributions to the Roth IRAs seem to be OK, depending on the 401K excess treatment. I've been trying to wade through IRS Publication 590 and haven't seen any restriction on contributions related to 401Ks. All restrictions relate to age, income, and combined IRA contributions. Any coment on this?
Thanks again for your insite
Tom
Tom,
The limit for the combined contributions of the employee and the employer to a 401(k) is the lesser of 100% of compensation or $49,000 per IRS Pub 525. So that's probably not an issue from what you say.
However, the issue is how much your employer reported as an elective deferral. The elective deferral is limited to $16,500 for employees under 50 and to $22,000 for employees 50 or older.
You are correct, the early withdrawal penalty only applies if you are younger than 59 1/2.
Mike O'Connor
Thanks to all for the feedback. I'm going to delve deeper into this with my employer's specific program and IRS regs.
I've clarified that my employer's plan, administered by Fidelity, does allow "Regular After-Tax" contributions beyond the annual COMBINED "Employee Pre-Tax" and/or "Employee Roth" Limit of $16,500. When I'm 59 1/2 or older I have the option to withdraw the Regular After-Tax principal tax-free proportionate to the amount that I remove from those Regular After-Tax earnings. So, for example, take out a portion of the principal tax-free to spend and rollover the earnings portion to an IRA or spend it as taxable income.
As Mike pointed out in a prior post, "The [current annual] limit for the combined contributions of the employee and the employer to a 401(k) is the lesser of 100% of compensation or $49,000", so I'm still well within that based on my Employee Pre-Tax + Employer Contribution + Employee Regular After-Tax annual contributions.
From my plan's website:
Glossary of Terms
EMPLOYEE PRE-TAX
EMPLOYEE ROTH
REGULAR AFTER-TAX
EMPLOYEE PRE-TAX
The salary amount you can defer, or contribute, into a retirement savings plan before income taxes are calculated on that money. You do not pay any federal income tax nor, in most cases, state income taxes on the amount you defer, up to the annual maximum IRS dollar limit, or on any earnings on this money, until it is withdrawn from your plan account. Your company may match all or a portion of these contributions.
EMPLOYEE ROTH
Designated Roth contributions are elective deferrals for which you irrevocably elect special tax treatment. You will pay federal income taxes and, in most cases, state income taxes on the amount that you elect to contribute to the plan, up to the annual maximum IRS dollar limit. At the time of distribution, you may withdraw your contributions and any earnings on this money tax-free, as long as certain withdrawal criteria have been met. Your company may match all or a portion of these contributions.
REGULAR AFTER-TAX
The amount you can contribute to a retirement savings plan, using a portion of your salary that has already been included in your taxable income. Income taxes have already been calculated on the amount contributed. However, any earnings on these contributions can grow tax-deferred. Income taxes are not due on any earnings until they are withdrawn from the plan. Your company may match all or a portion of your after-tax contributions in order to provide them with the most flexibility regarding taxes. (It may be advantageous for some people to pay taxes on the contributions now, because they would be in a higher tax bracket during retirement).
Hope this is helpful for others but the CAVEAT is that you must be sure what your specific employer plan permits, so peruse your Plan Summary or discuss it with your HR benefits contact.
Thanks Mike. Believe it or not, no one in the 2 labs where I work knew about all this. They assumed as I did, that our employer cut everyone off when the max limits were reached. They only do that for the Catch Up contributions. They're statement is just like the IRS, that it's the employee's responsibility to monitor the totals. Of course we have to dig deep in order to attain that information.
My employer reported the $22,000 as pre-tax and the overage as post-tax deposits on each W2. You're right about the $49,000. I found that out through a help session. I'm withdrawing the post-tax money now, along with the funds it made while in the 401. They'll be issuing a 1099R with all the particulars. I'm still a little unsure of the penalty and or taxes due. The 1099R will state the following: an after tax fund total (all after-tax money and earnings), a pre-tax amount (the lions share), a taxible amount, and the required 20% witholding amount. I'm pulling this out because of the 6% per year penalty, but I don't know where, or how to pay this. Can I assume it will be covered in the 1040 forms? Not a pleasant situation to be in, but I'm glad you all let me know of the issue. ESPlanner, and this forum has more than paid for itself. Thanks again. Tom
Tom,
Since your employer only reported $22k as elective deferals and you said your combined contributions were less than the lesser of 100% of your compensation or $49k, then I don't think you have excess contributions/deferals. Hence no penalties here!
Since you're over 59 1/2 there is no early withdrawal penalty.
So, since you already paid tax on the after-tax contributions, the only thing you have is income tax on the earnings that you withdraw, they will be taxed at ordinary income tax rates.
If you are only withdrawing the after tax contribution and associated earnings, the 1099-R should have a code 7, normal distribution, in box 7. As you said, it will identify the taxable portion, i.e. the earnings, and the nontaxable portion, i.e. the after tax contributions.
The total distribution and the taxable earnings are reported on Line 16a and 16b, respectively, of the Form1040.
Bottom line - no penalties, just ordinary income tax on the earnings!
Mike O'Connor
Thanks again Mike. You really do have a great deal of knowledge. It's good of you to share that knowledge with the rest of us. The only thing I think I could have done better was to delay the draw until later in the year. That way I could have roled the money into a Roth for 2012. The 60 day roleover period expires just before the end of the year, and I've already maxed out my Roth contributions for 2011. Oh well, live and learn.
Take care, Tom