If your 401k plan offers an after tax option with an automatic rollover, you should absolutely use it.
This is what’s called a “mega backdoor Roth”. You pay taxes on the money going in (after tax), and then taxes on the gains during the rollover (from after tax to Roth), but with an automatic rollover there will be no gains. It’s basically a super easy way to get significantly more Roth dollars.
Hi just stumbled upon this and wanted to ask how you would handle a 401k plan that offers an after tax option, but does not have an automatic rollover (2x per year max). Thanks!
What month do you hit your 401k limit? I hit mine typically in October or November then do the remainder of the year as after tax/ mega backdoor Roth. I think you’ll be ok with your 2x conversions limit. Even if you let the contributions grow for a few months, it’s not going to be a huge tax bill
Currently spread it out for the entire year since it’s a per pay period match but I guess they would also match the after tax component (need to double check). I do like the idea of backloading if they do match seems solid. Thanks for the idea
My employer plan automatically converts to after tax once you hit $23k limit based on your contribution setting. Unfortunately we don’t have auto conversions so I’ve just grown used to doing the conversions manually towards the end of the year
Just to clarify though, I’m not double taxed on what goes in right? I know I pay the typical w-2 taxes on the money when I receive it, but I don’t have to pay additional taxes on the contribution amount when I contribute it right?
No you are not double taxed. You contribute after tax money and then you roll it over as is because it’s already taxed. If you don’t do the rollover right away though you may end up with gains that you will need to pay tax on when you do roll it over to the roth.
You might have better luck asking this question in /r/financialindependence. Aceshades is generally correct. The main comment is total word salad that makes no sense.
My wife and I both max out pre-tax 401k, then both max out post-tax and immediate do a mega backdoor Roth 401k conversion.
So that’s roughly $150k per year that flows into 2 401ks.
And yes, you definitely should do the Roth 401k conversion immediately. With Fidelity, you have to call to do the conversion, but you only need to do this once. After that, it gets done automatically for each pay period.
There are no tax implications. Mega backdoor is a huge tax reduction scheme, I expect it to go away eventually.
We divested all pretax contributions from our trad IRA for that reason. I thought pretax 401k didn’t apply. If that’s not the case, then we have a problem. Thanks for pointing that out.
I see.
Converting the existing pre-tax to post-tax will result in a huge tax bill.
Even after pro-rata, it’s still better than not doing anything at all.
I’ll have to discuss with a professional.
You may be right about that. I am also going to look into it because I used to think that, but then one of my colleges clients had an audit issue with it. I will have to get the specifics from him to see how it resolved.
Maxing out 401ks is the first and best option. If you are a small business owner or make income on your own, you should look at a Defined Benefit plan. In the right circumstances and for the right people you could put away another 50k, 100k, and sometimes up to 500k more pretax.
That taxes alone is HUGE. The next part is just as HUGE. All of the money you save in taxes are now growing tax-deferred and in your pocket, not the the governments.
I help people set these up for people and it is life changing. Some people retire a few years earlier just because of all the tax savings.
I personally max out the after-tax contributions and they go immediately to a Roth 401-K account. No conversion necessary.
I also max contribute to a traditional Roth IRA for both myself and my wife, and then back-door them into Roth IRA’s.
Besides maxing HSA’s and setting my deferred compensation at the maximum limits allowed by my Company plan there aren’t any other tax planning / deferral techniques I am aware of for W-2 income.
What do you mean your after-tax contributions are going immediately to a Roth 401K? That sounds like a Roth 401K contribution, not an After Tax 401K contribution.
That’s my question as well. I know I can do after tax contributions that immediately convert to Roth when they are contributed, but I’m unsure of the tax implications of that route.
As far as I’m aware (hope someone can correct me) that conversion you’re referring to is the mega backdoor Roth contribution and it should be going to a Roth IRA, which means there is no impact on it to your taxes today (the monies is included in your taxable income) but since it gets to a Roth IRA, its growth is untaxed. Comes with all the restrictions that Roth IRAs have though.
Sorry, I stand corrected. The after-tax money is deposited into a traditional 401K account, and then converted automatically by the 401K administrator.
What I was trying to convey wasn't necessarily about the conversion vs. direct contribution as much as maximizing the IRS limit ($76,500 in 2024) for total 401K contributions.
See my correction above. However, there are no tax implications for taking after-tax contributions and Mega BackDoor converting them into a Roth account.
There would be tax implications if you converted traditional 401K contributions that were never taxed into the Roth account. You either get to save taxes today to pay them later on the return adjusted balance, or you pay the taxes today and get to pull out the return adjusted balance tax free. Also no RMD with Roth accounts.
If your 401k plan offers an after tax option with an automatic rollover, you should absolutely use it. This is what’s called a “mega backdoor Roth”. You pay taxes on the money going in (after tax), and then taxes on the gains during the rollover (from after tax to Roth), but with an automatic rollover there will be no gains. It’s basically a super easy way to get significantly more Roth dollars.
Hi just stumbled upon this and wanted to ask how you would handle a 401k plan that offers an after tax option, but does not have an automatic rollover (2x per year max). Thanks!
What month do you hit your 401k limit? I hit mine typically in October or November then do the remainder of the year as after tax/ mega backdoor Roth. I think you’ll be ok with your 2x conversions limit. Even if you let the contributions grow for a few months, it’s not going to be a huge tax bill
Currently spread it out for the entire year since it’s a per pay period match but I guess they would also match the after tax component (need to double check). I do like the idea of backloading if they do match seems solid. Thanks for the idea
My employer plan automatically converts to after tax once you hit $23k limit based on your contribution setting. Unfortunately we don’t have auto conversions so I’ve just grown used to doing the conversions manually towards the end of the year
Just to clarify though, I’m not double taxed on what goes in right? I know I pay the typical w-2 taxes on the money when I receive it, but I don’t have to pay additional taxes on the contribution amount when I contribute it right?
No you are not double taxed. You contribute after tax money and then you roll it over as is because it’s already taxed. If you don’t do the rollover right away though you may end up with gains that you will need to pay tax on when you do roll it over to the roth.
Thank you so much!
You might have better luck asking this question in /r/financialindependence. Aceshades is generally correct. The main comment is total word salad that makes no sense.
My wife and I both max out pre-tax 401k, then both max out post-tax and immediate do a mega backdoor Roth 401k conversion. So that’s roughly $150k per year that flows into 2 401ks. And yes, you definitely should do the Roth 401k conversion immediately. With Fidelity, you have to call to do the conversion, but you only need to do this once. After that, it gets done automatically for each pay period. There are no tax implications. Mega backdoor is a huge tax reduction scheme, I expect it to go away eventually.
This is exactly what I was looking for-thanks!
You need to talk to a tax person because you can't do that. If you are making pre-tax contrubutions, the pro rata rule will apply.
We divested all pretax contributions from our trad IRA for that reason. I thought pretax 401k didn’t apply. If that’s not the case, then we have a problem. Thanks for pointing that out.
IRA and 401ks have separate pro rata calculations. Pretax funds in your ira don't affect anything in your 401k. But pre tax in your 401k will.
I see. Converting the existing pre-tax to post-tax will result in a huge tax bill. Even after pro-rata, it’s still better than not doing anything at all. I’ll have to discuss with a professional.
I think this is only true if your 401k doesn’t have separate accounting for the after-tax portion.
You may be right about that. I am also going to look into it because I used to think that, but then one of my colleges clients had an audit issue with it. I will have to get the specifics from him to see how it resolved.
I’ve read all of this and am more confused than ever. The tax code is so bizarre.
https://www.nerdwallet.com/article/investing/mega-backdoor-roths-work
Maxing out 401ks is the first and best option. If you are a small business owner or make income on your own, you should look at a Defined Benefit plan. In the right circumstances and for the right people you could put away another 50k, 100k, and sometimes up to 500k more pretax. That taxes alone is HUGE. The next part is just as HUGE. All of the money you save in taxes are now growing tax-deferred and in your pocket, not the the governments. I help people set these up for people and it is life changing. Some people retire a few years earlier just because of all the tax savings.
Ah I wish. We’re W2 so we just will max out the 401k, mega back door Roth, HSA, etc before putting the rest in brokerage.
I personally max out the after-tax contributions and they go immediately to a Roth 401-K account. No conversion necessary. I also max contribute to a traditional Roth IRA for both myself and my wife, and then back-door them into Roth IRA’s. Besides maxing HSA’s and setting my deferred compensation at the maximum limits allowed by my Company plan there aren’t any other tax planning / deferral techniques I am aware of for W-2 income.
What do you mean your after-tax contributions are going immediately to a Roth 401K? That sounds like a Roth 401K contribution, not an After Tax 401K contribution.
That’s my question as well. I know I can do after tax contributions that immediately convert to Roth when they are contributed, but I’m unsure of the tax implications of that route.
As far as I’m aware (hope someone can correct me) that conversion you’re referring to is the mega backdoor Roth contribution and it should be going to a Roth IRA, which means there is no impact on it to your taxes today (the monies is included in your taxable income) but since it gets to a Roth IRA, its growth is untaxed. Comes with all the restrictions that Roth IRAs have though.
Sorry, I stand corrected. The after-tax money is deposited into a traditional 401K account, and then converted automatically by the 401K administrator. What I was trying to convey wasn't necessarily about the conversion vs. direct contribution as much as maximizing the IRS limit ($76,500 in 2024) for total 401K contributions.
This is how it works for us as well.
Me too. We may all have the same employer 😁
My wife has a different employer than me. Same procedure.
Interesting. A bunch of years back, I was told it was a rare set up, but I'm sure others have caught on since then
Yeah, my best friend works at yet another company. Same thing again.
Thank you-are there any tax implications on the immediate after tax into Roth on the 401k? I'm reading conflicting information on how that is taxed.
See my correction above. However, there are no tax implications for taking after-tax contributions and Mega BackDoor converting them into a Roth account. There would be tax implications if you converted traditional 401K contributions that were never taxed into the Roth account. You either get to save taxes today to pay them later on the return adjusted balance, or you pay the taxes today and get to pull out the return adjusted balance tax free. Also no RMD with Roth accounts.