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My employer recently began offering Roth 401k contributions. I decided to switch my contributions to the Roth 401k, figuring that it is impossible to guess what my tax situation will be in 25 years (and likely tax rates are going up, rather than down), so it will be good to have both pre-tax and post-tax dollars with different tax treatment at withdraw when I need it.

Much to my surprise, my benefits plan contributed the Roth contribution to the same 401k account. On the statement it now tracks how much is contributed to the account pre and post tax. I had assumed incorrectly (because none of the information I could find about our new plan mentioned this at all) that I would have 2 separate accounts, and that I would be able to choose which account to draw from at retirement, similar to my IRA accounts.

So now my question is, how are withdrawals taxed? Do you get to choose pre and post tax treatment at withdrawal time? What about minimum required withdrawals? How is growth tracked? Are they going to track the amount of growth attributed to pre and post tax dollars? This seems way overly complicated having all the money co-mingled in the same account...

Update: Have confirmed that account statement does account for pre-tax, match and post-tax contributions and earnings separately, but I have to dig for it buried in generated statements in the on-line system.

Just looking at the current holdings, investment elections, re-balancing and transfers apply to the entire value of all the investments regardless of the cash source, which is somewhat annoying, but I can live with it.

Assuming that littleav's answer is correct and hoping that a rollover to separate IRA accounts at retirement is an option for better control :)

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Related (but not identical) question: money.stackexchange.com/questions/1598/… –  Chris W. Rea Jan 17 '13 at 14:08

2 Answers 2

up vote 2 down vote accepted

On the statement it now tracks how much is contributed to the account pre and post tax.

This is the key. Your withdrawals will be proportional. Assuming you have contributed 90% in regular contributions (pre-tax) and 10% in Roth (post tax), when you withdraw $1000, it will be $900 from the regular (taxed fully) and $100 from the Roth (not taxed, assuming its a qualified distribution). Earnings attributed proportionally to the contributions.

I agree with you that it is not the best option, and would also prefer separate accounts, but with 401k - the account is per employee. Instead of doing 401k Roth/Non-Roth consider switching to Regular 401k and Roth IRA - then you can separate the funds easily as you wish.

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@Dilip, RMD rules for 401k are regardless of whether its Roth or not. See the FAQ on irs.gov: irs.gov/Retirement-Plans/… –  littleadv Jan 16 '13 at 22:54
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@littleadv Thanks for the link where I learned something I didn't know before. So unless the employment is continuing past age 70.5 or something else prevents it, it seems that it would be best to roll over the Traditional and Roth portions of the 401k into Traditional and Roth IRAs respectively and thus gain more flexibility. –  Dilip Sarwate Jan 16 '13 at 22:59
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@Dilip yes, that is my conclusion. 401k has some benefits (for example, better protected against creditors), but when you reach the age you have to consider the rollover (if you have a Roth portion). –  littleadv Jan 16 '13 at 23:04
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I am still searching to find whether such a setup is proper, but it occurs to me, the record keeping in a commingled arrangement is probably far more complex. Consider, a roth deposit needs to have its match, if any go to the traditional side. So the proportion of each account is constantly changing. –  JoeTaxpayer Jan 17 '13 at 3:34
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Nope, the match goes into the traditional side regardless of which account employee was depositing to. Now, the latest rules springing from the cliff, included the ability to convert from Trad 401(k) to Roth, so if you wish to convert on a regular basis, that's fine, just brace for the tax bill or account for it in regular withholdings. –  JoeTaxpayer Jan 17 '13 at 3:47

Your assumption, the need for two distinct accounts is correct.

Are you sure that the deposit was made to the same account? Since a 401(k) doesn't really have an account number, just your social security number, it may be they report it to you as though it were aggregated, but it's improper for it to be so. With respect (I mean this literally, I have the utmost respect) to littleadv's answer - the aggregation of the two accounts cannot be legitimate. If I wish to invest my Roth side into investments that grow far greater than the Traditional side, the mixing of accounts destroys this possibility. Something is either wrong, or misunderstood.

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My 401k is set up similarly to the OP's - it all pours down to the same investments. –  littleadv Jan 16 '13 at 18:43
    
@littleadv - by choice or lack of options otherwise? i.e. Can you request different investments for each side? –  JoeTaxpayer Jan 16 '13 at 18:44
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There is only one choice for contributions, rebalance/transfer... it applies to the whole balance/contribution, can't choose pre or post tax contributions –  Jay Jan 16 '13 at 18:49
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There may be tracking in separate accounts underneath, because they do show "balance" broken out by pre-tax, match and post-tax on a statement (when I generate a statement). Looking at current value/investments, it's all lumped together... (which i mentioned in littleadv answer comment.) –  Jay Jan 16 '13 at 18:53
    
I agree that this is screwy, but the inability to have separate allocation decisions between the regular and Roth accounts describes precisely how the TSP is currently set up (and also the proportional withdrawal from both the regular and Roth TSP when you go to take a distribution). This is their first iteration at the Roth, so hopefully that will change. –  Tim Whitcomb Jan 17 '13 at 23:26

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