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I had a talk with the brokerage firm retirement planning team, and they told me that if I have money in 401k, it can be pre tax, post tax, or Roth 401k, and even post tax and Roth 401k are different.

If it is in Roth 401k, then it, together with any growth, will just never be taxed again. If it is in post tax 401k, then in the future, some amount or some gain will still be taxed.

And then they told me only 20% of my 401k are in Roth, and 80% are in post tax, and I needed to do something to make them Roth instead of post tax.

It was very confusing and I wonder, how are they different:

  1. Do I pay tax for post tax 401k later? How much do I pay?

  2. What do I have to do to make it Roth 401k? Do I have to pay some tax right away or is it just a procedure thing by filing some papers?

  3. If they differ, then I guess the people who "know" it and do something to make it Roth 401k will pay less tax and people who don't know it will pay more tax. Isn't that quite unfair?

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post tax and Roth 401k are different.

Yes. "Post tax" (or "after-tax") contributions are part of the traditional 401k account. You can contribute more to the 401k than the deferral limit. The amount above the deferral limit is considered "after tax" contribution since it is taxed when you earn it.

Do I pay tax for post tax 401k later? How much do I pay?

Yes. You need to keep track of your post-tax contributions. The amount you've contributed is your "basis". You then prorate your distributions so that a certain portion of your distribution is attributed to the contributed basis and the rest to the earnings. Only the earnings portion is taxed.

What do I have to do to make it Roth 401k? Do I have to pay some tax right away or is it just a procedure thing by filing some papers?

You do a conversion. Basically you roll over the after tax portion into Roth portion. If the plan allows it you can do "in-plan" conversion, if not - you roll it over into a Roth IRA.

You then pay taxes, as described above.

As opposed to IRAs, in 401k you have three separate buckets as you've been told. That makes it much easier both for tracking and for conversions. You only need to consider the after-tax bucket for the basis to earnings ratio.

If they differ, then I guess the people who "know" it and do something to make it Roth 401k will pay less tax and people who don't know it will pay more tax. Isn't that quite unfair?

Isn't it your own responsibility to know what you do with your own money? After-tax 401k contributions are voluntary and you have to explicitly ask to make them. Usually this is done as part of the "mega-backdoor" strategy specifically to increase the Roth component, and the best way to do that is to immediately do the after-tax to Roth conversion. That way the ratio of contribution to earnings is such that there are very little taxes, if at all, to pay during the conversion and then you have tax-free growth.

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  • you mean, I can convert the post tax 401k amount to Roth 401k amount and it is just a procedural thing and that will mean I pay less tax in the future? Then why won't everybody do it? Any why would a 401k plan disallow it?
    – Stefanie Gauss
    Commented Apr 12, 2023 at 1:01
  • Not every plan allows it, it's up to the employer how they set up the plan. Not everyone can afford to put that much money into 401k - you first need to put the almost $20k of the deferral limit before you start filling the after-tax portion. But yes, a lot of high-earners do that.
    – littleadv
    Commented Apr 12, 2023 at 1:11
  • @littleadv some plans allow you to contribute to pre-tax/Roth and after-tax concurrently as well, so the worst-case could be if you wanted to max out your pre-tax 401k but ended up contributing (for example) $12k to pre-tax and $12k to after-tax. Some plans also allow after-tax contributions but don't allow in-service distributions, which would disallow Roth conversions until you leave the company.
    – Stan H
    Commented Apr 12, 2023 at 1:21
  • if it is so complicated, I was thinking that when I retire, I can take out only about $22000 per year, so that everything is tax free no matter what (not reaching an income that needs to pay tax). But it won't be easy if I also take social security, which can also be $20000 per year... (and having only $22000 really is not enough to pay for expenses)
    – Stefanie Gauss
    Commented Apr 12, 2023 at 1:55
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    Remember that you will only pay tax on the earnings, so if your post-tax 401(k) total is 70% contributions and 30% earnings, then you only pay tax on 30% of your withdrawal. If you are in a 20% tax bracket, you only pay an effective 6% tax. It would be better if you can roll it to a Roth 401(k) or IRA sooner and pay the tax earlier, but I would not be destitute just to avoid a 6% tax.
    – D Stanley
    Commented Apr 12, 2023 at 14:30

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