After-tax Roth 401K contribution limit

[ptax255]

Hi, is there a limit to contributing after-tax 401K when switching employers? Client maxed out on previous employer with the pre-tax 401K and made after-tax contributions on top of that. Now switched employers and is asking if they can make additional after-tax contributions?

Thanks!

[qbteachmt]

Everything has a limit. Your employee might need to do some corrective distributions, because these are for the person, not the employer. You can't max out at multiple employers; the Employee either has or has not maxed out.

Did you search the web or the IRS for the information for the tax year in question and for this taxpayer's age, and the details (such as, more than one account or plan is being contributed into)? You have to look it up, to know what applies.

[ptax255]

I looked it up and it seems to me that the limit for after-tax Roth is per employer, not per person. So wanted to confirm if others interpretations is the same as mine.

"Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. "

Example 1: In 2020, Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business and sets up a solo 401(k). Greg contributes the maximum amount to his employer’s 401(k) plan for 2020, $19,500. He would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,500. He would also like to contribute the maximum amount to his solo 401(k) plan.

Greg is not able to make further elective salary deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,500, to his employer’s plan. However, he has enough earned income from his business to contribute the overall maximum for the year, $57,000. Greg can make a nonelective contribution of $57,000 to his solo 401(k) plan. This $57,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sha...

[qbteachmt]

Greg is not a good example for what you asked. You asked about someone who has two employers and will be paid via payroll (and W2). Relationship matters: "Now switched employers"

It needs to made clear, when working with these types of benefit topics, that there are plans (employer established), and there are accounts (individual owned), and there are the people with a relationship as employer and/or employee. That and/or is important. The type of plan/account matters, as well, because, for instance, a SIMPLE IRA and a 401(k) stand separately; but, a 401(k) and a Solo 401(k) are both 401(k) and are not separated. A SIMPLE IRA and having a traditional or Roth IRA also are not separated, for instance, you see that on a 1099-R or Form 8606.

If your taxpayer that has 1099-NEC earned income and files Sched C and establishes a SEP-IRA (which is an account) or a Solo 401(k) (which is a plan, that provides for an account), there are different provisions. Under these conditions there is both an employer and an employee, even if that is the same person. But that means there are those separate provisions, depending on which hat your taxpayer is wearing at any point in the discussion.

Greg cannot make more contributions to the Solo 401(k) plan as the person earning the income, if Greg already maxed out employee contribution to a employer's 401(k) plan. However, Greg's Sched C "employer" (company) named Greg can still provide the employer share to the Solo 401(k). Watch the terminology:

"elective salary deferrals" means from the earned income the employee or the person "treated as employee" even though Greg as Sched C "owner/employee" doesn't earn a Salary.

"nonelective contribution" means from the employer company or the person "treated as the employer whose own company would be employing the person doing the work, if there was an employer/employee relationship provided for."

I found an article that might be more applicable:

https://www.cerebraltaxadvisors.com/blog/multiple-401k-accounts/

Hope that helps.

[qbteachmt]

Two IRS links for reference:

https://www.irs.gov/retirement-plans/how-much-salary-can-you-defer-if-youre-eligible-for-more-than-o...

https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the...

[ptax255]

Thanks for all the info. I guess I'm still confused because if nonelective means employer portion, I have many clients that do the after-tax contributions (also known as mega backdoor Roth) being W-2 employees. So they max out the elective portion + after-tax contributions on top of that.

[qbteachmt]

"mega backdoor Roth) being W-2 employees. So they max out the elective portion + after-tax contributions on top of that."

You really have to know the specific plan type, because there are wage limitations for participating in some types of plans/accounts. Then, you have to know if there is employer participation or not, elective or nonelective. For example, the reason people participate in an employer plan is that the contribution max is higher than IRA (excluding SIMPLE). But the issue for Roth is when there is an upper earned income limit, above which you don't qualify to participate. That's where two things come into play: Nondeductible and Backdoor

Making a nondeductible contribution as post-tax to a plan or account that allows for it, such as 401(k) and Trad IRA, then, converting that to the Roth you would have wanted to participate in. Since it is already post-tax, there is no further tax owed (setting aside issues of pro rata conversion, of course; this is theoretical, hypothetical). And for these employer plans, the plan has to allow certain activities. There might be 8 provisions in the regulations, but an employer isn't required to offer all of them (post-tax amounts, hardship withdrawals, loans, etc).

Backdoor is just, "converted so quickly there is no taxable earnings or growth." Again, setting aside issues of pro rata and assuming an entire contribution is basis and also is converted right away. It's not a contribution type, in other words, so it is not subject to wage limits for participation.

"and made after-tax contributions on top of that"

Are you comfortable that this part already hasn't exceeded the limits, has met thresholds, etc? Your taxpayer should have had a plan administrator at the first job who watches and knows the limits. But changing jobs might mean the taxpayer needs to seek out the new plan's administrator and review what all they have done so far. And your taxpayer might benefit from rolling their prior 401(k) funds either to IRA or to the new employer's 401(k) (if the new employer provides that option).

This is why benefits planning and administration is its own specialty 🙂

[sjrcpa]

Each person gets one 401(k) deferral limit per year - no matter how many employers they have; and whether pretax or Roth deferrals.

[ptax255]

Per the IRS website, the total contributions (not the elective deferrals) are per employer plan.

Example 1: In 2020, Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business and sets up a solo 401(k). Greg contributes the maximum amount to his employer’s 401(k) plan for 2020, $19,500. He would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,500. He would also like to contribute the maximum amount to his solo 401(k) plan.

Greg is not able to make further elective salary deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,500, to his employer’s plan. However, he has enough earned income from his business to contribute the overall maximum for the year, $57,000. Greg can make a nonelective contribution of $57,000 to his solo 401(k) plan. This $57,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sha...

[sjrcpa]

You already posted that and were told it does not apply to your situation.

[ptax255]

I still don't see how the contributions are limited per person though (excluding the elective deferrals)

"Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. "

[sjrcpa]

But, you're asking about elective deferrals with 2 employers, aren't you?

[ptax255]

I am questioning whether the mega backdoor contributions are considered elective deferrals and subject to the $23k limit? If yes, how can employees contribute 23k + after tax contributions, which I know many of my clients do.

[qbteachmt]

Are you even clicking the links I'm providing and reading those?

"I am questioning whether the mega backdoor contributions"

Let's drop "Backdoor" because that process is after any funds have been put (contributed) into any account. Backdoor is part of conversion, not part of contribution. A Trad IRA contribution limit might be $7,000; that same Trad IRA account might have $150,000 in it and I can convert all $157,000 to Roth, and there was no Roth contribution in this paragraph, because those converted funds are not contribution to the Roth. They already existed. Even though there is a $7,000 contribution limit, there is no $ limit on the conversion.

"are considered elective deferrals"

So... what happens later (backdoor or not) is moot to the issue here. You are stating this backwards.

Start here: Deferrals of an employee's pay, at the employee's election, are contributed to the employer plan by the employer. These are elective deferrals by definition. What the employee does with them later, such as retires and takes distributions, rolls into a different employers' plan or out of plan to an individually held account, and/or converted in-plan to Roth, is not going to change the nature of the contribution. There may or may not be employer matching; it depends on the plan's provisions (not on the IRS). Congress and thereby, the IRS, control which provisions are allowable, not which provisions are offered.

"and subject to the $23k limit?"

The IRS maintains limits for how much you can contribute to a qualified retirement plan:

https://www.investopedia.com/terms/e/electivedeferralcontribution.asp

https://www.investopedia.com/terms/1/401kplan.asp

https://www.investopedia.com/retirement/401k-contribution-limits/

"If yes, how can employees contribute 23k + after tax contributions, which I know many of my clients do."

That's what I pointed out. It is possible those after-tax contributions are not allowed. And, your clients can be getting bad advice from brokers. You need more details, to know the answer to what or how and if it is allowed or not. Employees of what entity type, putting into what plan type, what is the after-tax component provision? Are they making a catchup contribution because of age? Are they maxing out their 401(k), then making a nondeductible Trad IRA post-tax contribution? You stated mega-backdoor Roth, which typically is 401(k) conversion to Roth 401(k). This?

https://www.schwab.com/learn/story/should-you-consider-roth-401k

"Choosing a Roth 401(k) or a traditional 401(k) might not be an either-or decision. If your employer offers both, you can contribute to a Roth 401(k) and a traditional 401(k). However, keep in mind that your annual contribution limit would apply across both accounts. For example, you can’t contribute the 2023 salary deferral limit of $22,500 ($30,000 if you’re age 50 or older) to each 401(k). Instead, you must divide the total amount between accounts—for instance, putting $11,000 in a traditional 401(k) and $11,500 in the Roth 401(k). The same goes for your total annual contribution amount ($66,000, or $73,500 if you’re age 50 or older), which includes employer matches."

You have to know the plan type (401(k), safe harbor 401(k), Solo 401(k), SEP IRA, SIMPLE IRA, etc), its provisions, the relationship (employee, shareholder, sole proprietor, highly compensated employee?) and perhaps you are describing people who have an employment position (paid via W2) as well as Sched C, like Greg there.

SECURE Act 2.0 allows the employer match to be Roth directly, at the employer's discretion. Or, "the employee" is putting the employer's share into Roth 401(k) as a match, or as the nonelective share (but they call it theirs because it's their company)? Or, maybe these employees are contributing their elective deferral as Roth and letting the employer match be Traditional 401(k) and then converting via mega-backdoor?

You can't use the words "plan" or "account" or even "contribution" out of context. You also can't use the word "employee" out of context. Just like you are trying to refer to multiple 401(k) sidestepping the issue of "different employer" vs "one employee job + a self-employed sidegig."

Perhaps this will help; it's the nonelective part:

https://www.investopedia.com/terms/n/non-electivecontribution.asp

There are a lot of variables. It's a matrix.

[ptax255]

"If yes, how can employees contribute 23k + after tax contributions, which I know many of my clients do."

That's what I pointed out. It is possible those after-tax contributions are not allowed"

These after-tax 401K contributions are allowed. They're from various employers that allow their employees to max out elective deferrals  and contribute after-tax (which are then converted to Roth). Therefore I don't think the elective deferral limit applies to the after-tax contributions. Now is the limit per person or per plan? Can my client, who switched employers and has reached the $69K limit from the first employer,  contribute after-tax 401K with the new employer? I read the links you provided, they just don't answer my question. Another excerpt from the IRS link. I think the answer is yes.

"Remember that annual contributions to all of your accounts maintained by one employer (and any related employer) - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures, to your accounts, but not including catch-up contributions - may not exceed the lesser of 100% of your compensation or $69,000 for 2024"

[sjrcpa]

In my experience, plans that allow after tax contributions (which are not the same as Roth 401(k) deferrals), are very rare. The prototypes offered by the major providers do not. They would probably have to be individually designed plans.

You say your client works for 2 employers in 2024 that do allow after tax contributions?

[ptax255]

Correct. Client is looking to maximize the after tax contributions with the new employer if possible.

[qbteachmt]

"Therefore I don't think the elective deferral limit applies to the after-tax contributions."

Everything has a limit. That's where we started. That's where we've gone. That's where we still are. The elective deferral has a limit, and it is a subset of the total limit. For clarity, let's review: we've identified that this discussion is in reference to the "after-tax basis funds optionally put into the (trad) 401(k) plan, so that later withdrawals of these amount are taxed on growth only, or so that a nontaxable backdoor conversion to Roth can be done."

"Now is the limit per person or per plan?"

Yes:) Plans have different provisions and can have their specific limits, and the IRS maintains a personal limit for the tax year. Your initial question for your taxpayer was having two completely separate employers and being a W2 earner for each job. Their plan(s) have provisions, which can differ.

"Can my client, who switched employers and has reached the $69K limit from the first employer, contribute after-tax 401K with the new employer?"

I found you this article to read:

From: https://www.bankrate.com/retirement/after-tax-401k/

"You can still have an after-tax 401(k) even after you’ve maxed out your traditional or Roth 401(k) contributions for the year, if your employer allows it."

Just because Congress and the IRS have a bunch of provisions, the plan can not allow or offer them, such as after-tax additions, loans, or hardship withdrawals. For all you know, their new employer doesn't even allow it. And since the employee has reached their annual max, it's moot.

"Expands the 401(k) contribution maximum. If you’re looking to put away more into a tax-advantaged retirement account, the after-tax 401(k) lets you do it. You can contribute up to $69,000 (in 2024) annually or $76,500, if you’re at least 50 years old, including any employer matching funds."

The bold italics are my emphasis.

"Another excerpt from the IRS link. I think the answer is yes.

"Remember that annual contributions to all of your accounts maintained by one employer (and any related employer) - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures, to your accounts, but not including catch-up contributions - may not exceed the lesser of 100% of your compensation or $69,000 for 2024"

From: https://money.usnews.com/money/retirement/401ks/articles/how-to-make-after-tax-401k-contributions

Key Takeaways

• An after-tax 401(k) contribution allows you to deposit more than the $23,000 pretax limit for 2024 ($30,500 for those age 50 or older).
• The total 401(k) contribution limit that includes employer and employee contributions and after-tax 401(k) contributions is $69,000 in 2024 ($76,500 for those age 50 or older).
• Contributions that are above the tax-deferred limit will be taxed as income in the year they are made.
• Not all employers allow after-tax contributions, so check the options related to your plan.