Author Topic: After-Tax 401k Contribution Rollover  (Read 1494 times)

prognastat

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After-Tax 401k Contribution Rollover
« on: June 16, 2016, 01:06:39 PM »
So my employer recently started offering after tax contributions and they allow both in-service and regular rollovers to IRA and Roth IRA. They allow up to 4 of these rollovers per year.

My employers plan has some ok low fee vanguard index funds.

I was wondering though if there is any financial/tax reason to regularly roll over these after-tax deposits to a vanguard Roth IRA as opposed to them building up as after tax deposits in my 401k and waiting to roll them over one I leave the company or retire?

Mother Fussbudget

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Re: After-Tax 401k Contribution Rollover
« Reply #1 on: June 16, 2016, 02:20:17 PM »
Many financial bloggers refer to this as the "Mega Backdoor Roth".
The advantage to rolling these over as soon as possible:  the money in the Roth IRA grows TAX-FREE, whereas the growth in the 401k is probably tax-deferred. (i.e. taxable at the time of distribution).

If you do an in-service withdrawal of after-tax contributions to a Roth IRA, that money will grow TAX-FREE as opposed to tax-deferred.  Your personal mileage will depend on your overall tax situation.  For most people TAX-FREE $$'s in FIRE is preferable to tax-deferred.

Some good articles:
http://www.madfientist.com/after-tax-contributions/
http://www.forbes.com/sites/ashleaebeling/2014/10/15/aftertax-401k-rollovers-advanced-version/#7fbe1c495914
http://thefinancebuff.com/rollover-after-tax-to-roth.html




tonysemail

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Re: After-Tax 401k Contribution Rollover
« Reply #2 on: June 16, 2016, 02:43:13 PM »
Fidelity has a $25 rollover fee for my company's plan.
So I'm planning to roll over once a year, once the after tax contributions have maxed out.

http://forum.mrmoneymustache.com/taxes/mega-backdoor-roth-question/
« Last Edit: June 16, 2016, 03:56:24 PM by tonysemail »

seattlecyclone

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Re: After-Tax 401k Contribution Rollover
« Reply #3 on: June 16, 2016, 03:06:08 PM »
Yes, the sooner you roll over to Roth, the less taxable gains you'll build up. Weigh this tax cost of waiting versus any fees (and time) you'll spend doing a conversion more frequently.

prognastat

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Re: After-Tax 401k Contribution Rollover
« Reply #4 on: June 16, 2016, 03:43:00 PM »
Thanks, I appreciate the info.

I'll have to look at what the fees involved would be and use that to determine how often to do it.

It sounds like it also depends a lot on what your returns end up being. If there is little to no increase in between deposits the fees might actually outweigh the taxes, but if it goes up a lot then you can end up paying quite a bit more in taxes by waiting.