Author Topic: Calling all "After-Tax" Gurus - Help me pick optimal route!!!  (Read 1083 times)

droh82

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Calling all "After-Tax" Gurus - Help me pick optimal route!!!
« on: August 27, 2018, 09:06:41 PM »
My work has a 401k plan with Fidelity and I've been front loading my 401k pretax contributions (50% of paycheck) for the beginning half of the year. I'm now close to the 18500 yearly limit and have dropped my pretax contributions to 6% and now throwing money into After-Tax (non-roth) contributions because my employer allows in-service distributions.

I plan to immediately roll these After-tax contributions into a Fidelity ROTH IRA every paycheck so they can grow tax free forever; paying tax on the minimal gains in the day or 2 it takes to process the transaction to my ROTH IRA.

So i just tried to roll it over and learned that its a $20 transaction fee, taken from pretax, everytime I roll my After-tax contributions into Roth IRA.

So now i'm contemplating the best and most efficient way to do this:
 

1. I get paid bi-monthly so for the rest of the year i would have to do this 8 more times if i plan to rollover every paycheck. So it would be $160 (8 x $20) taken from pretax. Considering the money grows tax free once its in the ROTH IRA would this still be the best option due to the tax benefits of ROTH?

2. Should i contribute to After-tax but only rollover to ROTH IRA once a year, at the end of the year? This option would only be a $20 transaction fee but have me pay a bigger tax on the gains in the 4 months i have to wait until the end of the year.
       
        2a. I understand i can split the rollover - my After-Tax contributions can go to ROTH IRA and the earnings those After-Tax contributions made can go into
              Traditional IRA but, I also have a ROTH IRA with Vanguard as well and there were 2 years previously (2014 and 2015) where my salary was low
              enough to deduct the full $5500 contributions on my taxes those years. Will having this Vanguard ROTH IRA affect me in any way, tax or penalty wise
              if I start to move my After-tax EARNINGS into a traditional IRA?

3. Is there another option i may have overlooked? Any other suggestions?

4. On a side note, i read somewhere that the After-tax rollover to ROTH IRA doesn't have to go through the "5 year" seasoning period. Do I have this information correct?


Any feedback or insight would be greatly appreciated. I'm trying to be as efficient as possible and take advantage of tax free growth while trying to stuff as much as possible into my ROTH IRA accounts as I can.

not_a_trex

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Re: Calling all "After-Tax" Gurus - Help me pick optimal route!!!
« Reply #1 on: August 27, 2018, 09:33:41 PM »
Doing some napkin math, if you're capping the pretax contributions now, 16 paychecks in, you're contributing a little over $1000 per paycheck. So $20 is just under 2% of that contribution. Since no one has a crystal ball to say how the markets will perform, I'm going to estimate that during the remainder of the year your money will grow another 7% * 4 / 12 or 2.3%. In that projection, even if you put all the money your would contribute for the rest of the year at once (which you aren't since you're contributing a little each paycheck), paying to rollover after every paycheck is going to kill your earnings. I would keep it simple and just wait until the end of the year to do it all at once.

I believe rollover money still has to go through the 5 year seasoning before it can be withdrawn penalty free.

Do you have an option do convert after-tax contributions to Roth 401K money? I don't know if you have good investment options in your plan, but it may get you out of the $20 fee.

Edit: bad math
« Last Edit: August 27, 2018, 09:37:02 PM by not_a_trex »

droh82

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Re: Calling all "After-Tax" Gurus - Help me pick optimal route!!!
« Reply #2 on: August 27, 2018, 09:57:28 PM »

Do you have an option do convert after-tax contributions to Roth 401K money? I don't know if you have good investment options in your plan, but it may get you out of the $20 fee.



Hmm.. wouldnt converting After-Tax to ROTH 401k affect the yearly 401K limit though? Also, I have great fund options in my 401K. Extremely low cost index funds. I may have to research this option if it doesn't affected the yearly limit.

MustacheAndaHalf

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Re: Calling all "After-Tax" Gurus - Help me pick optimal route!!!
« Reply #3 on: August 28, 2018, 12:51:19 AM »
Where did you read that you can convert some to Roth and some to Traditional, and decide to move the entire basis into Roth?  That doesn't sound like how the IRS works - I would assume your basis moves proportionally: meaning both accounts get a proportional share of contributions and earnings.  I'd be surprised if the IRS let you game your cost basis - your contributions vs earnings.  You might want to ask about that over in the "Taxes" part of the forums.

The cost calculation would involve how much you are contributing to the after-tax 401(k), your tax rate, and an estimate of stock market growth.

not_a_trex

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Re: Calling all "After-Tax" Gurus - Help me pick optimal route!!!
« Reply #4 on: August 28, 2018, 01:15:39 AM »
Hmm.. wouldnt converting After-Tax to ROTH 401k affect the yearly 401K limit though? Also, I have great fund options in my 401K. Extremely low cost index funds. I may have to research this option if it doesn't affected the yearly limit.

It doesn't affect your pre-tax/Roth 401K contribution limit any more than it does your $5500 IRA contribution limit. I have heard though of plans that limit the number of times you can do this sort of in-plan rollover (eg once per quarter or once per year). If you only do this once a year you should be okay.

BiotechGuy

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Re: Calling all "After-Tax" Gurus - Help me pick optimal route!!!
« Reply #5 on: August 28, 2018, 05:53:17 AM »
Iím in the same situation. Last few years Iíve done quarterly rollovers. This year Iím doing it 2 times (after bonus in March and in Q4). That keeps the percent down below 1%, but keep in mind even if the fee is 1-2% and you do it every few paychecks, itís a one-time fee. Your gains are affected for this year you put it in but you have a lifetime of growth thatís tax free and fee free (if u use one of their new fee-less ETFs). I wouldnít over think it. Just keep pumping money in.

terran

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Re: Calling all "After-Tax" Gurus - Help me pick optimal route!!!
« Reply #6 on: August 28, 2018, 06:25:46 AM »
As mentioned ask Fidelity if you can rollover to the after tax source within the plan to the Roth source (this is the language they use with my wife's plan). This won't effect your limits any more than you already are by contributing to after tax.

Since you can do an in-service withdrawal to a Roth IRA you should be able to rollover separately to Roth and Traditional such that the earnings go to traditional and you defer taxes on them until withdrawal. Check with Fidelity about whether that's an option and if there's an additional fee.

I don't think I'd want to pay $20 every pay period, so if that's the only option I think I'd do it once a year. You might consider contributing a whole bunch now (front load) and do the conversion if you have money to live off of in the meantime. That would speed up the time between contribution and conversion.

droh82

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Re: Calling all "After-Tax" Gurus - Help me pick optimal route!!!
« Reply #7 on: August 30, 2018, 02:40:33 PM »
Where did you read that you can convert some to Roth and some to Traditional, and decide to move the entire basis into Roth?  That doesn't sound like how the IRS works - I would assume your basis moves proportionally: meaning both accounts get a proportional share of contributions and earnings.  I'd be surprised if the IRS let you game your cost basis - your contributions vs earnings.  You might want to ask about that over in the "Taxes" part of the forums.

https://www.madfientist.com/after-tax-contributions/

The comments section has alot of useful information too. I found this link from one of the comments:
http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/basis-recovery-from-employer-plans/