Non-deductible IRA vs Post-tax 401K
What is the difference between a Non-deductible IRA and Post-tax 401K contributions? They both have already taxed contributions. The non-deductible IRA’s gains are taxed but not the basis, which is the reason for FORM 8606 (I beleive?). How are the the post-tax 401K contributions taxed?
Permalink Submitted by JAMES MAGNO on Fri, 2009-12-18 17:10
For purposes of income recognition, nondeductible IRA contributions which are withdrawn are not taxable. However you can’t pick and choose whether you are withdrawing taxable portion or non taxable portion. All IRAs are aggregated. I believe that in the case of 401k each account is taxed separately. Thus if you withdraw 401k from employer plan #1, you do not aggregate with other 401k plans. The same ratio rules apply. Part of each dollar represents pre tax dollars and part of each dollar represents after tax dollars.
There are some planning opportunities (re roth conversion planning) to segregate nondeductible IRA from pre tax IRA. Similar strategies apply to 401k plan assets, but only to the extent allowed by the controlling plan document.
After tax 401k and nondeductible IRA amounts are treated similarly but not exactly the same because of the governing plan documents.
Jim