Finance People: Depositing Post-Taxed Income from Checking Account into 401K

[contax_shooter]

I looked at my account this morning and came to the realization I screwed up really bad.

For the past 4 years, I’ve deposited post-taxed income directly from my checking account into an IRA pre-tax retirement account that is linked with my bank (Merrill Edge).

I’ve spoken to a few Army Legal consultants available in my area, they all gave me the same answer: I’ll inevitaby be taxed AGAIN when I withdraw that money.

They’ve recommended that I just rollover everything I’ve saved into my TSP account and take that loss when I’m eligible. I’m seeking if anyone else has a way to reconcile this debacle, I can easily prove that the income I’ve deposited was already taxed.

Expensive life lessons as a youngin.... at this time I will stop contributing to this account.

[Eurodriver]

Outside of talking directly with the 401k people and explaining the situation I’m not sure there is anything you can do aside from being poor when you’re old and hoping for a no income tax bracket.

If you still have the records for the transfers from your checking account I would keep those for your discussions with the 401k folks. The problem is that you aren’t going to get that 401k money for many years and by then no one will believe it was post tax contributions and even if they do it won’t matter. The IRS is only gonna see the distribution.

You could have a qualifying medical emegency and withdraw the exact amount you contributed. Do you want new boobs?

I’m not trying to be too funny, just keeping the attitude light.

Sorry.

[contax_shooter]

Outside of talking directly with the 401k people and explaining the situation I’m not sure there is anything you can do aside from being poor when you’re old and hoping for a no income tax bracket.

If you still have the records for the transfers from your checking account I would keep those for your discussions with the 401k folks. The problem is that you aren’t going to get that 401k money for many years and by then no one will believe it was post tax contributions and even if they do it won’t matter. The IRS is only gonna see the distribution.

You could have a qualifying medical emegency and withdraw the exact amount you contributed. Do you want new boobs?

I’m not trying to be too funny, just keeping the attitude light.

Sorry.
It sucks to suck. And the poor gets poorer.

[Sam]

Look into ROTH IRA to park your POST tax savings.

[Crow Hunter]

I looked at my account this morning and came to the realization I screwed up really bad.

For the past 4 years, I’ve deposited post-taxed income directly from my checking account into an IRA pre-tax retirement account that is linked with my bank (Merrill Edge).

I’ve spoken to a few Army Legal consultants available in my area, they all gave me the same answer: I’ll inevitaby be taxed AGAIN when I withdraw that money.

They’ve recommended that I just rollover everything I’ve saved into my TSP account and take that loss when I’m eligible. I’m seeking if anyone else has a way to reconcile this debacle, I can easily prove that the income I’ve deposited was already taxed.

Expensive life lessons as a youngin.... at this time I will stop contributing to this account.

What type of account were you using precisely?

If it is a Traditional IRA account (limited to $5,500/year), you have to contribute to it with after-tax money but you can deduct it from your taxes.

You can always go back and amend your taxes and claim the deduction.

If it is actually a 401k plan (limited to $18,000/year) it is usually tied to your job and it should come out pre-tax unless you have a Roth 401k.

Is it some other kind of an account?

ETA:

Amending tax returns info

https://www.irs.gov/newsroom/ten-facts-on-filing-an-amended-tax-return

After Tax Rollovers from retirement accounts

https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans

[Averageman]

I'm pretty sure you are sick about this right now.
Talk to whomever is managing your account or the system you are in and see what you can do and if you can possibly still fix this, but honestly, I've never heard of it happening.
If you are caught in this ask thier opinion on how to best fix it.
The end result you might end up with is an traditional Roth to fix this and then get your account straight and move forward from there.

[ChrisCross]

I looked at my account this morning and came to the realization I screwed up really bad.

For the past 4 years, I’ve deposited post-taxed income directly from my checking account into an IRA pre-tax retirement account that is linked with my bank (Merrill Edge).

I’ve spoken to a few Army Legal consultants available in my area, they all gave me the same answer: I’ll inevitaby be taxed AGAIN when I withdraw that money.

They’ve recommended that I just rollover everything I’ve saved into my TSP account and take that loss when I’m eligible. I’m seeking if anyone else has a way to reconcile this debacle, I can easily prove that the income I’ve deposited was already taxed.

Expensive life lessons as a youngin.... at this time I will stop contributing to this account.

Not sure if I can link websites (please be gentle if not) but the people over at Bogleheads are very very good with questions like this. You might find your answer browsing there or make an account and post the question. It's a financial forum full of people that follow John Bogle - father of the index fund.

https://www.bogleheads.org/forum/index.php

[contax_shooter]

Thanks all.

I’ve called around and am contemplating on withdrawing the funds. The associate with the retirement account company said I should not be required to pay Federal/State tax if I did the early withdraw, only subject to the 10% IRS penalty.

I think this may be a better route to take that small loss instead of rolling the funds into my TSP where i would be subject to paying taxes on it later on.

[Crow Hunter]

Thanks all.

I’ve called around and am contemplating on withdrawing the funds. The associate with the retirement account company said I should not be required to pay Federal/State tax if I did the early withdraw, only subject to the 10% IRS penalty.

I think this may be a better route to take that small loss instead of rolling the funds into my TSP where i would be subject to paying taxes on it later on.

Whoa!

Don't be so hasty and throw good money after bad.

What type of account is it exactly? That makes a HUGE difference.

If it is like a normal 401k or pre-tax traditional IRA then when you go to take it out after 59.5, you are STILL going to have to pay taxes on it. All you have lost by putting in post tax money in a pre-tax account is the savings on your marginal tax rate. The only retirement account that you don't have to pay taxes on when you take distributions is a Roth IRA that SS mentioned. But that one is funded with post tax money anyway.

Make sure you really understand what you are doing before you compound a mistake.

Let me give you a concrete example:

Pre-tax

You have $100 of income that you put into an account, your marginal tax rate is 25% so you keep from paying $25 of that $100 to the government. After 30 years that $100 grows to be $10,000. If your marginal tax rate is still 25%, when you take out $100, you will still have to pay $25 of it to the government. You won't, however, have to pay taxes on the dividends or capital gains that it generates throughout those 30 years like you would if it wasn't sheltered in a retirement account.

Post-tax

You have $100 of income that you put into the account, the only difference is that you had to pay that $25 BEFORE you put it in. So you can only put in $75 but it still grows tax free until you take it out and when you take it out, you will still pay taxes on it. It isn't any different other than you won't have as much principal to start with. Instead of $100 growing to $10,000 you will only have $75 growing to $7,500. The only benefit that you lose here is that you don't put as much principal in as you could have if you had put it in pre-tax.

What you are talking about doing

If you instead pull that money out and pay a 10% penalty, you now have $75 - the $7.50 of penalty leaving you $67.50 that you can either invest in a taxable account which might grow to $6,750 minus whatever taxes you paid on dividends and capital gains between now and 30 years from now. Or you take that $67.50 and put it into the TSP and you wind up with the same $6,750 without having to pay the taxes on dividends and capital gains but you will still have to pay taxes on it when you pull it out of the TSP after retirement. But now you start with even less principal than you would have had if you had just left it alone.

This is leaving out the fact that if you have invested in US stocks during the last 4 years chances are that you probably have some pretty significant gains. So you will not only pay 10% penalty, you also will have to out the growth as a long term/short term capital gain on this years taxes. Which will cause you to need to pay more in taxes this year and possibly move you up a tax bracket.

So going with the above example instead of paying 10% on $75 you may be paying 10% of $1,500 AND it might push you into the 28% marginal bracket costing you in additional taxes unless you are only withdrawing the principal but why not just leave it there and avoid taking the 10% hit. Even if you have maxed them out at $5,500 for the last 4 years you will have to pay double taxes on $22,000 worth of principal that you didn't have to assuming that you take every last penny out of your IRA before you die. If die with $22,000.1 in your IRA account, you never actually paid taxes on it. You are also not thinking about what $22,000 will be worth in 30 years. With the inflation that is likely coming in the future that $22,000 is likely to be worth significantly less than $22,000. For instance, $22,000 today is only worth $10,250 in 1987 dollars and inflation has been relatively tame for most of the last 30 years.

Unless this is some type of account with vastly different rules that I am unaware of, you will be much better off leaving it alone and letting it grow tax free until retirement and gambling that you will not live to take every penny out of the account.

I am still not sure how you could make pre-tax contributions to an account at a bank other than via an IRA. If that is what it is, just redo your taxes for the last 3 years. You can do that and you will be able to capture the deductions and get a refund of your taxes.