Started a mega backdoor Roth

[radtek2112]

We've maxed out both 401ks and IRA's. Next step is putting %25 of my paycheck into the 401k (after tax) that will be transferred to a Roth account.

[MM_MG]

Congrats! 

We started doing the same at the end of last year as well.  Feels good.

[medinaj2160]

How does this work? What is the benefit compared to an after tax investment account? We soon will also maxout our 401k's and traditional IRA's

[Trudie]

How does this work? What is the benefit compared to an after tax investment account? We soon will also maxout our 401k's and traditional IRA's

There are threads on here that have addressed the specifics of the mechanics (who can set one up) and the benefits, so I won't go into the details.  But -- if you are eligible -- the advantage is that after you can contribute more than the $5500/$6500 to your Roth IRA in a given year by using this strategy.  And, the advantage of the Roth of course is that your earnings will grow tax free and that contributions (not earnings or conversions) can be withdrawn at any age without penalty.  So, it's good for early retirees.

[Dezrah]

Great job, OP.

I met with our plan administrator yesterday to inquire whether this was possible. Turns out the fact the company does Profit Sharing makes After Tax contribution limits very complicated to predict while at the same time it throws a wrench in the Erisa Calculations. Good problem to have I guess.

Honestly this may be a good thing for us. I still want to purchase a home someday and I would never make it if that money were strictly tied up in illiquid retirement accounts. Yes, I know I can withdraw or get a loan for a down payment, but psychologically I know I couldn't stand to do that.

[radtek2112]

How does this work? What is the benefit compared to an after tax investment account? We soon will also maxout our 401k's and traditional IRA's

There are threads on here that have addressed the specifics of the mechanics (who can set one up) and the benefits, so I won't go into the details.  But -- if you are eligible -- the advantage is that after you can contribute more than the $5500/$6500 to your Roth IRA in a given year by using this strategy.  And, the advantage of the Roth of course is that your earnings will grow tax free and that contributions (not earnings or conversions) can be withdrawn at any age without penalty.  So, it's good for early retirees.

Here's a better explanation than I can give.
http://www.madfientist.com/after-tax-contributions/

[spud1987]

Congrats! I started this in 2015 and now have about an additional 35k in my roth. The best part (other than the tax-free growth and withdrawals after 59.5) is that the contributions can be withdrawn after 5 years (same rule as with regular roth ira contributions). So I am getting a jump start on my 5 year roth pipeline, which is important for me since I'll be FIRE-ing at around age 35 with a taxable account that won't last for 25 years.

[radtek2112]

Congrats! I started this in 2015 and now have about an additional 35k in my roth. The best part (other than the tax-free growth and withdrawals after 59.5) is that the contributions can be withdrawn after 5 years (same rule as with regular roth ira contributions). So I am getting a jump start on my 5 year roth pipeline, which is important for me since I'll be FIRE-ing at around age 35 with a taxable account that won't last for 25 years.

Great job spud! I agree, it'll be a good option for some accessible money in FIRE.

[spud1987]

Congrats! I started this in 2015 and now have about an additional 35k in my roth. The best part (other than the tax-free growth and withdrawals after 59.5) is that the contributions can be withdrawn after 5 years (same rule as with regular roth ira contributions). So I am getting a jump start on my 5 year roth pipeline, which is important for me since I'll be FIRE-ing at around age 35 with a taxable account that won't last for 25 years.

Great job spud! I agree, it'll be a good option for some accessible money in FIRE.

Another great aspect is that I am now saving $54k/year without the money even hitting my bank account. I, like most mustachians, have the will power to save big chunks of money that arrives in my checking account every two weeks. But there is a huge psychological benefit to maxing out retirement accounts without having to think about it. Between my wife and I we are "automatically" saving about 85k/year in our tax-advantaged accounts (between our 401k, hsa, and matches).