After Tax in a 401(k), like the Boeing VIP
At Boeing, the maximum contribution limit for most of us is pegged at 25% of income. If you're contributing 25%, earning more than $70,000 and you're under 50, you would run into the $17,500 pre-tax limit before the end of the year. Boeing makes this pretty painless, and simply switches you to "after tax contributions" once the limit is reached. An odd side effect of this is your taxable income (and therefore your take home pay) will change rates at the changeover point. If you prefer, you can do some back of the envelope calculations and designate the appropriate pre-tax and after-tax contribution rates for use all year.
For example, if your gross pay is $100,000:
I had a Certified Financial Planner at Schwab tell me that what I (and Boeing) was doing was not possible, so as I said at the top, this bit is relatively unknown. Here's a link to some IRS writings:
"Elective deferral limits. The law, under IRC section 402(g), limits the amount that you can defer on a pre-tax basis each year. See the 401(k) plan contribution limits. Elective deferrals that exceed the section 402(g) dollar limit for a year or are recharacterized as after-tax contributions as part of a correction of the Actual Deferral Percentage (nondiscrimination) test are included in your taxable income."
While it does not explicitly state that after-tax contributions are OK, the concept is hiding in there.
There is another limit to keep in mind as your contributions and income grow - $52,000 per year total defined contribution (2014 value). This is the sum of all of your employee and employer contributions (Boeing has a 6% company match for Engineers). Even at 25% of salary + 6% match, you need to be a pretty high earner to run afoul of that.
So why contribute more money beyond the immediate tax advantage of pre-tax? My original motivation was a simple one, I wanted to sock away as much money as possible as quickly as possible to fund early retirement at age 55. I have since found that having a chunk of after-tax contributions gives me options come rollover time. When it's time to roll the 401(k) over to an IRA, I can actually roll it into two IRA's:
A side note for those planning to retire at 55 - a key difference between 401(k) and IRA's are the distribution rules. With IRA's, you have to be 59 - 1/2 to make withdrawals without additional tax penalty. With a 401(k), that age is 55. If you need this money to balance your spending budget during that 4-5 year period, consider leaving that amount in your 401(k) and just rollover the excess.
I had a conversation recently with someone I work with on the subject of after-tax Boeing VIP contributions. She and her husband are both Boeing employees contributing to the VIP. Each year, they are rolling over just their after-tax 401(k) contributions to Roth IRA's that are held elsewhere. Presumably they are doing this to give them access to either lower cost investing options or specific investments not available within the Boeing VIP. It's an interesting strategy, and she said there was no 'penalty' if you don't touch the Boeing contributions. I'd probably pursue this myself if I had a longer investing timeline. Since I'm just 2 years away from retirement, I think I'll pass on this.
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