I'd like to know if anybody here knows the answer to this offhand. Are one's post-tax 401K contributions tax deductable at year end? I'm getting ready to change jobs and have to wait 1 year before enrolling in their 401K program. In the meantime, I'd like to continue to contribute to my current one but will not be able to do this pre-tax. So, if I contribute to it from my post-tax income paycheck, do I get to take this amount as a deduction from my income tax due at year-end like I would if it were pre-tax? Thanks in advance to anybody who knows the answer!

If you stay a participant in your former employer's plan (and they allow you to continue making contributions), then you should be able to deduct the contributions the same way you would deduction contributions to a traditional IRA.  But know what kind of a plan you are in.  Just like you can't deduction contributions to a Roth IRA, you won't be able to deduct contributions to a Roth 401(k), which is a relatively new retirement savings plan. 

Why not just contribute towads a Regular IRA and take that deduction?

ZooMNFInancial:

Why not just contribute towads a Regular IRA and take that deduction?

 

Too little compared to the limits of a 401(k).

Yeah that is what I was thinking. The max contribution for a Roth is $5K while the 401K is just over $15K.

Long story short you can't mix post-tax money with pre-tax. 

birchman2:

Long story short you can't mix post-tax money with pre-tax. 

Not true. My company allows its employees to split between a Traditional 401(k) and a Roth 401(k) as long as it's in 1% increments. I'm only contributing up to the 6% match. Moreover, there are so many investors who wisely take a look at the Traditional and RothIRA.I'm utilizing the Roth 401(k) since I like the idea of paying taxes at the 15% rate whereby I can lock in the taxes now rather than paying them later.

The main thing to consider is what your tax rate is to what you expect it to be. I use a hard and fast rule that it's a great idea to only invest in Roth products in the 15% tax bracket. I utilize that rule. You may want to defer from that strategy if it also helps you with the:

1) Retirement Contribution Credit (as they have breakpoints)
2) Education Credits (Hope Credit, Lifetime Learning Credit) and Tuition & Fees Deduction.
3) Earned Income Tax + High State Income Tax (limited applicability as you have to make up for 25% as most are in the 0% tax bracket that have this credit)
4) Child Tax Credit & Advanced Tax Credits
5) Any other benefit that provides you with tax benefits not recognized by tax bracket difference alone (i.e. avoiding social security tax, welfare benefits, and financial aid to college are examples).

The Roth 401(k) has incredibly bad non-qualified distribution treatment. The RothIRA has incredibly good distribution treatment. You're welcome to ask me about why. So as long as you are in the 25% or higher bracket, it might make sense to take advantage of your employer matches via a Traditional 401(k) and then to invest in a RothIRA. Than again, if you follow the rules, you will derive similar benefits from a Roth 401(k) as with a Roth IRA (but with the Roth401(k), you are subject to mandatory withdrawal during the year you turn 70 1/2).

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Aqua

ZooMNFInancial:

Why not just contribute towads a Regular IRA and take that deduction?

When you are "offered" a 401(k) plan at work, there is termendous restriction on the Traditional IRA, thus most people will have to split between Roth and Traditional IRA.

If you make $95,000 as a MFJ, you are limited to $5,000 of deductiability. For 2007, if you had $81,200 of taxable income, you just crossed into the 25% tax bracket. Thus, the maximum benefit you would derive at $85,000 (before the phase out) would be $3,800 and you would thus want to contribute $6,200 into a RothIRA as you almost never want to deduct in the 15% tax bracket (unless you qualify for the education credits).

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Aqua

aquaswim47:

birchman2:

Long story short you can't mix post-tax money with pre-tax. 

Not true. My company allows its employees to split between a Traditional 401(k) and a Roth 401(k) as long as it's in 1% increments. I'm only contributing up to the 6% match. Moreover, there are so many investors who wisely take a look at the Traditional and RothIRA.I'm utilizing the Roth 401(k) since I like the idea of paying taxes at the 15% rate whereby I can lock in the taxes now rather than paying them later.

The main thing to consider is what your tax rate is to what you expect it to be. I use a hard and fast rule that it's a great idea to only invest in Roth products in the 15% tax bracket. I utilize that rule. You may want to defer from that strategy if it also helps you with the:

1) Retirement Contribution Credit (as they have breakpoints)
2) Education Credits (Hope Credit, Lifetime Learning Credit) and Tuition & Fees Deduction.
3) Earned Income Tax + High State Income Tax (limited applicability as you have to make up for 25% as most are in the 0% tax bracket that have this credit)
4) Child Tax Credit & Advanced Tax Credits
5) Any other benefit that provides you with tax benefits not recognized by tax bracket difference alone (i.e. avoiding social security tax, welfare benefits, and financial aid to college are examples).

The Roth 401(k) has incredibly bad non-qualified distribution treatment. The RothIRA has incredibly good distribution treatment. You're welcome to ask me about why. So as long as you are in the 25% or higher bracket, it might make sense to take advantage of your employer matches via a Traditional 401(k) and then to invest in a RothIRA. Than again, if you follow the rules, you will derive similar benefits from a Roth 401(k) as with a Roth IRA (but with the Roth401(k), you are subject to mandatory withdrawal during the year you turn 70 1/2).

 

Aqua the stuff you know amazes me I tried doing that when I was working and was told I couldn't.(Or just maybe they wouldn't).  I'm actually in the process of a rollover to trade with.  If I come out of retirement maybe I'll inquire with a different employer.