Fidelity - Pre-tax, ROTH, after-tax? Wait wut?

[MoonLiteNite]

So i see on my fidelity account 3 options that i can divide my 401k into... So here is the SS... and you explain to me what that last one is?



Pretax is normal 401k, i pay into it before i am taxed
ROTH is uhh ROTH, i pay taxes then add into the account
And after-tax is uhhh ROTH ver 2.1b?

And this is the screen in which i would change the % i put in.
I hit my yearly limit and my HR kindly asked me to just remove the % now so they don't have to cut me a weekly check.
So i saw this while editing my %s... just kinda odd, i couldn't figure it out...

[boarder42]

After tax is the first step of the mega back door Roth. If your plan allows in service withdrawal you can put money there then roll it out to a Roth IRA.

Why are you putting anything in a Roth 401k

[MoonLiteNite]

After tax is the first step of the mega back door Roth. If your plan allows in service withdrawal you can put money there then roll it out to a Roth IRA.

Why are you putting anything in a Roth 401k

Still trying to figure it out.
I started planning ER on my own a few years ago, ROTH seemed like the best option since i figured i would actually have a hobby income.
After some research last month (and finding this site) i thought keeping the ROTH one was good, since i could just roll my 401k over into a ROTH IRA over night once i quit my job and have no issues or taxes to deal with. And i could pull out my contributions with ease. Or at leas that is what i heard from some the folks on this forum.

At least, that is what i got from posting here, i was actually to do 100% ROTH next year.


Edit:
Found this site..
http://www.madfientist.com/after-tax-contributions/

So basically it is an add-on of ROTH but this is where my employer's % goes as well.
So i need to figure out how much they put in yearly, then i can top off the rest to hit the max yearly limit. Just extra more tax free money...

I guess my issue of using ROTH vs pre-tax is needs to be looked at with another topic? :D

edit2:
Well i suppose my first thought still holds true, ROTH may be better for me if i plan to have some income later in life, most likely i will actually be in a higher tax bracket. I make under 40k/yr as is and when i quit my job when i am FI, i could start making triple that with a business. I can easily split up my 401k into 2 IRAs as shown on the site.

I will be putting some money into that after-tax % though! I thought i was going to have to cut everything to 0% but nope! I can just flip that switch since no way did my company and myself put in 53k this year together.

[boarder42]

you're making pretty grand assumptions but 40k is probably low enough you may come out ahead if you're maxing your pretax accounts you likely could get close to a savers credit.  my income isnt low enough to look into that but it could be valuable for you to look at, also saving in pretax helps you reach FIRE much faster than roth.  your employer percentage always goes into a pretax account doesnt matter if you choose roth or otherwise.  the after tax is not roth unless you roll it to a roth IRA.  its just an after tax contribution similar to a taxable account, if you want your investment gains protected like a roth you have to do the mega back door roth.

[jim555]

I have about 10k as after tax mixed in my 401k before tax.  This was put in prior to the Roth existing in law.  When I roll out the 401k the two will get split.  Mega back door was not possible at my job.

[MDM]

I guess my issue of using ROTH vs pre-tax is needs to be looked at with another topic? :D

...later in life, most likely i will actually be in a higher tax bracket. I make under 40k/yr as is and when i quit my job when i am FI, i could start making triple that with a business.

See Traditional versus Roth - Bogleheads.

If you know "for sure" that you will have a higher tax bracket at withdrawal, Roth is better.  The downside of being wrong, however, is worse if one chooses Roth than if one chooses traditional.  Good luck!

[teen persuasion]

I'm having trouble with the math here.  How did you hit your yearly limit already?  I see 40% of $40k, or $16k, and we are only 2/3 of the way thru the year, so $10k or $11k.

[MoonLiteNite]

you're making pretty grand assumptions but 40k is probably low enough you may come out ahead if you're maxing your pretax accounts you likely could get close to a savers credit.

Somewhat grand, i was close to it before, but i finally landed a stable job with benifits and such, so to be safe i took this and closed down my part time business.

And never heard of the saver's credit. But yeah, looks like my income is too high for that. My base is around 41k/yr i think. I generally work lots of over time and double time so generally am closer to  50-70 last few years.

I'm having trouble with the math here.  How did you hit your yearly limit already?  I see 40% of $40k, or $16k, and we are only 2/3 of the way thru the year, so $10k or $11k.

And as i was replying your post popped up :)
As said above, i work tons of overtime and double time (over 80 hours a week here and there) so my pay can be all over, there was a 2 month section where i was dumping in 50% into 401k while working 84 and even 100+ hours a week. With around 20 of them being double time. Made over 100k in 1 year making less than 18$/hr :D (oh some of that also came from per a diem)

[boarder42]

then with that information you definitely should NOT be doing anything in roth it should all be going straight to your 401k to lower your tax burden.  and your likely only can contribute to a roth IRA not trad IRA for your 5500 a year.  you also should be mega backdoor rothing as well. with that kind of income. assuming your 401k plan allows inservice withdrawals. it has the first step which is after tax. just needs the 2nd.  you should post more information in your first post as none of this OT was easily apparent.

b/c at 41k

if you max your TRAD 401k you subtract 18k
then if you max you TRAD IRA you subtract 5500
then if you have an HSA available you can subtract another 3350

making your AGI 14150 which gets you the savers credit. but since thats not your actual income and its north of the 15% bracket you still should be maxing all tax deferred accounts first then doing a roth IRA then doing a mega back door roth.

[boarder42]

links

Why you should max taxable
http://www.madfientist.com/retire-even-earlier/

Mega Backdoor roth
http://www.madfientist.com/after-tax-contributions/


your point of when you "retire" you will be earning more than you make now doesnt really make sense.  b/c if you're working a side hustle you wont be drawing down your retirement accounts to live you will be living off what you're earning.  at some point you will likely end up doing nothing and its what you are actually spending that matters. but you get to FI much much faster doing tax deferred investing.

[Enigma]

I recommend currently maxing out tax deferred accounts (Traditional IRA, 401k, HSP if avail) until you go to retire early keeping more of your money you earned.  Then after employment rolling your 401k into your traditional IRA (Both Tax exempt).

Then using a "Tax Conversion Ladder" start slowly moving your money into a new Roth IRA allowing you to start dipping into your retirement funds penalty free (without the 10%) within 5 years.  When you are retire early and begin dipping into your Roth IRA that money will be taxed at your current tax bracket which will be much less than when you were working.

[boarder42]

I recommend currently maxing out tax deferred accounts (Traditional IRA, 401k, HSP if avail) until you go to retire early keeping more of your money you earned.  Then after employment rolling your 401k into your traditional IRA (Both Tax exempt).

Then using a "Tax Conversion Ladder" start slowly moving your money into a new Roth IRA allowing you to start dipping into your retirement funds penalty free (without the 10%) within 5 years.  When you are retire early and begin dipping into your Roth IRA that money will be taxed at your current tax bracket which will be much less than when you were working.

just an FYI there is a lot of misinformation in your post.  its called a roth conversion ladder.  your money is taxed when you roll it from your trad IRA to your Roth IRA not when you pull your money out of your roth IRA.  you roth IRA withdrawals can only be on the contributions or the amount rolled over til you reach full retirement age. 

[Spork]

I've said this in a couple of other similar threads, so my apologies for being repetitive.

It always does seem very obvious to take the tax deduction now vs later and put money into the tIRA.  And, this may be true for most of you.  But I urge you to build a spreadsheet and really do some investigations into what your likely RMDs will be.  Most of us are low spenders/extreme savers.  Just doing math with expected compounding returns extending into the future... see what your balance will be at 70.5 and compute your RMDs from there into the future.

If, in any way, you see the possibility you might also inherit someone else's tIRA (exception: your spouse) ... REALLY do the math.  Inherited IRAs have a slightly exponential acceleration to their RMDs -- especially those where the original owner is already into their RMD period.  With your tIRA and an inherited tIRA, you're very likely to hit an income level that is 2x or more than you have ever earned in your life.  And since you're programmed not to spend, most of those RMDs will be folded into taxable funds -- likely adding a big bag of qualified dividends to the equation.

As mustacians we are pretty programmed to save/don't spend and we're pretty programmed that taxes in retirement will go down.  They do... but they very well may not stay low.  Do the math.

[boarder42]

I've said this in a couple of other similar threads, so my apologies for being repetitive.

It always does seem very obvious to take the tax deduction now vs later and put money into the tIRA.  And, this may be true for most of you.  But I urge you to build a spreadsheet and really do some investigations into what your likely RMDs will be.  Most of us are low spenders/extreme savers.  Just doing math with expected compounding returns extending into the future... see what your balance will be at 70.5 and compute your RMDs from there into the future.

If, in any way, you see the possibility you might also inherit someone else's tIRA (exception: your spouse) ... REALLY do the math.  Inherited IRAs have a slightly exponential acceleration to their RMDs -- especially those where the original owner is already into their RMD period.  With your tIRA and an inherited tIRA, you're very likely to hit an income level that is 2x or more than you have ever earned in your life.  And since you're programmed not to spend, most of those RMDs will be folded into taxable funds -- likely adding a big bag of qualified dividends to the equation.

As mustacians we are pretty programmed to save/don't spend and we're pretty programmed that taxes in retirement will go down.  They do... but they very well may not stay low.  Do the math.

in theory assuming no inherited IRA which is not entirely predictable on value of the acccount anyways.  what you retire with is what you will have at 70 plus inflation.  so you're RMDs will be the same.  unles you're modeling every histoical scenario and seeing what they would be and that could be all over the map when you're talking abut 30+ years of compounding. and varying spending.

[Spork]

I've said this in a couple of other similar threads, so my apologies for being repetitive.

It always does seem very obvious to take the tax deduction now vs later and put money into the tIRA.  And, this may be true for most of you.  But I urge you to build a spreadsheet and really do some investigations into what your likely RMDs will be.  Most of us are low spenders/extreme savers.  Just doing math with expected compounding returns extending into the future... see what your balance will be at 70.5 and compute your RMDs from there into the future.

If, in any way, you see the possibility you might also inherit someone else's tIRA (exception: your spouse) ... REALLY do the math.  Inherited IRAs have a slightly exponential acceleration to their RMDs -- especially those where the original owner is already into their RMD period.  With your tIRA and an inherited tIRA, you're very likely to hit an income level that is 2x or more than you have ever earned in your life.  And since you're programmed not to spend, most of those RMDs will be folded into taxable funds -- likely adding a big bag of qualified dividends to the equation.

As mustacians we are pretty programmed to save/don't spend and we're pretty programmed that taxes in retirement will go down.  They do... but they very well may not stay low.  Do the math.

in theory assuming no inherited IRA which is not entirely predictable on value of the acccount anyways.  what you retire with is what you will have at 70 plus inflation.  so you're RMDs will be the same.  unles you're modeling every histoical scenario and seeing what they would be and that could be all over the map when you're talking abut 30+ years of compounding. and varying spending.

In my case, I know the value of the inherited IRA because it is after the fact.  I can guess at normal growth of my taxable and non-taxable accounts.  I can guess my spending is pretty much the same.  My modeling is just 6% growth with RMDs colliding.  I seriously wish I had converted my tIRA to Roth back in 2006 when I took a few years off -- but the lookahead didn't really occur to me.

[MoonLiteNite]

Thanks everyone for the input!
We can let this thread die :)

I will finally write up a proper case study for myself and post it tomorrow. I have been on this site for about a month now and never posted mine to get thoughts and views.