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Question for the Money Doctors

Question submitted on May 18, 2011.


Should I contribute any post tax money into a 401k?


I''m assuming you aren''t referring to a Roth 401k, but just post tax contributions into a regular 401k. On a pre-tax or elective deferral basis, you may contribute up to $16,500 plus another $5500 "catch up" if you are over age 50. So whatever amount you contribute up to these maximums will be deducted from your earned income for tax purposes. In addition to these amounts pre-tax amounts, you may also contribute after tax monies up to So, it is a very attractive tax planning strategy for higher income earners.

In addition to your pre-tax contributions you can also make post tax contributions. In 2011, the total pre and post tax contribution limit is $49,000, so if you contribute $16,500 on a pre-tax basis, you can contribute an additional $32,500 on a post tax basis. (Note: the total contribution limit or $49,000 also includes any employer matching funds, so if your employer added $5,000 to your pre-tax contributions, your additional post tax contribution is limited to $27,500 ($32,500-$5,000)).

However, any earnings from these post tax contributions into a 401k will be taxed as ordinary income when withdrawn. A better strategy would be to use your post tax dollars and invest in a low cost mutual fund or ETF. Any capital gains and dividends earned in these funds would be taxed at a maximum 15% and may even be tax free if you are in the 15% tax bracket.

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