kwri10s

In the latest MEC message about retirement plans, one of the sections talks about PRSP and after tax contribution limits. What is PRSP? It sounds like a separate "Roth" type account. The message talks about the max we can contribute to this account. But it is separate from the 401k. Is this something you guys are doing? Any insight would be great. Could be another thing I just completely missed during indoc.

av8rdude

It stands for the Pilot Retirement Savings Plan. It's an amount, up to a certain percentage, that comes from your after-tax pay and goes into your 401(k).

It's totally separate and in addition to whatever percentage of your pre-tax pay you put into your 401(k).

It's limited to a certain percentage and dollar amount, which vary according to your age and whatever the current IRS limit is. The latest retirement update from the MEC gives a lot more details.

boxhauler

That was a very concise and thorough email from the union. It really lays out all the different scenarios and options you have.

I have always contributed the max 5% to the after-tax PMPP account. You really don't miss it, and it adds up nicely over time. However, next year I will stop doing this as I have exceeded the max hours for the DSA. Assuming I stay healthy, then I will hit the $53k IRS limit without it. And I could use the extra monthly income for college expenses. Some people though like getting that large check in January on any amount you exceed the IRS limit.

kwri10s

Thanks. So it's the same name as our 401k. And the money goes into the same account? It is just post tax. Does that mean it will be handled just like a Roth, in that the returns are tax free? Or do I now have more taxable growth? It sounds to me like what they are referencing is just personal savings if there is not a tax advantage to putting those funds into the same account with your 401.

Am I messing this up?

kwri10s

How do you contribute the after-tax? I don't ever remember seeing that option anywhere. Maybe I blew it off to my detriment.

boxhauler

Log into your vanguard online account. There will be an option to adjust the percentages withheld from your monthly check into any of your accounts. Just add the after-tax percentage you want withheld.

Your preTax contributions you don't pay income tax on. Your post tax contributions you do. Kind of like a non deductible IRA. But they grow tax free (like an IRA or 401k) until you withdraw them. Hopefully in retirement and at a lower tax rate. It may not be the best use of available dollars for everyone. But it is an option.

kwri10s

Thanks a bunch. Are you sure the income is tax free? Then it would be exactly like a roth and basically an extra amount that we can save since we are over the standard IRA limit. Just making sure I have it correct. Not sure why I never noticed that option before.

boxhauler

It is not like a Roth 401k. You will pay taxes on distributions when you withdraw from it. Best to get a better explanation from Vanguard. Just call their 1-800 number for our plan and they can walk you through it and set up your contribution if you elect to do so.

av8rdude

boxhauler is right. These after-tax contributions to your 401(k) are not a "back door" Roth. Roth contributions have to remain in the IRA for 5 years before they can be withdrawn tax-free. There are several other critical differences as well.

Vanguard keeps track of which of your 401(k) contributions are pre-tax and which are after-tax. Theoretically, as the law is now, you can withdraw your after-tax contributions tax-free if you meet certain conditions. Any gains, and withdrawals of your original pre-tax contributions, are taxed when you make the withdrawals at whatever your tax rate is at the time. I believe it is taxed as regular income, and not at the more favorable capital gains rate.

When you reach age 59 1/2, you can do an In-Service Distribution and "roll over" part or possibly all of your 401(k) into an IRA. If you put it directly into a regular IRA, there would no tax consequences at that time. You'd pay taxes on the funds whenever you withdraw them from the IRA and all the rules about minimum distribution requirements apply.

As an alternative, you can roll it over into a Roth IRA instead. This would mean you'd pay taxes at that time, just as if you'd converted a regular IRA into a Roth. You may have to leave the money in the Roth for 5 years, but then you would owe no further taxes on either the converted amount or any gains, regardless of when you withdraw it, and there are no minimum distribution requirements.

There are some important differences in the way regular IRA's and Roths are handled when it comes to inheritance and estate issues. Beware! This kind of planning requires a professional.

Things are actually a lot more complicated that this overview might indicate. I'm just an observer sharing what I've learned over the years. Don't take ANY action on anything you may read on this forum without consulting a financial advisor and/or tax consultant. At the very least, call Vanguard and ask them what your specific options are. They're very knowledgeable and willing to help.

iarapilot

Also, the after tax can be withdrawn at any time. You are allowed 2 withdraws per year. After that you have to show a particular hardship.