Author Topic: Do losses offset gains in an After-tax 401k? (MBDR)  (Read 118 times)

35andFI

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Do losses offset gains in an After-tax 401k? (MBDR)
« on: October 13, 2021, 12:05:21 PM »
Hi all,

My company allows for After-tax 401k contributions as well as in-service withdrawals so I have been doing the Mega Back Door Roth.
Since they charge $40 per withdrawal, I have been waiting for the balance to get to $4,000 before rolling it over into my Roth IRA.
They do not split up pre and post tax so I have been rolling it all over in one check.

The first two withdrawals had gains that I know I will owe taxes on and the third one had a loss.
I am wondering if I can offset the gains from the first two with the loss from the third in this scenario.

Thanks!

seattlecyclone

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Re: Do losses offset gains in an After-tax 401k? (MBDR)
« Reply #1 on: October 13, 2021, 02:57:52 PM »
When I had individual gains and losses in these after-tax rollovers in the past, they did wash themselves out by the time the 1099-R was generated. Not sure what happens if you have a net loss that crosses over to another tax year.

terran

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Re: Do losses offset gains in an After-tax 401k? (MBDR)
« Reply #2 on: October 13, 2021, 07:02:40 PM »
I think it depends on the record keeper. In my mega-backdoor Roth which uses in-plan conversions (not rollovers to an external IRA) Fidelity included gains on my first few conversions in the 1099R for that year despite losses on subsequent conversions that same year exceeding those first gains. This seemed kind of strange but it was only like $18, so I didn't worry too much about it. Since then the losses that happened before gains have always reduced the gains to $0, so I haven't had a taxable year since that first year. The losses do seem to carry over to future years, but I expect to lose the benefit of those losses if I ever stop doing mega backdoor Roth or leave that plan for whatever reason.

So based on how my plan works you would owe tax on the gains on those first two withdrawals  even if you have losses on subsequent withdrawals that are greater than the gains, but the losses would offset gains on future withdrawals that happen after the withdrawals with losses, even if the later gains are in a different year than the earlier losses. But I suspect this is plan dependent, so your plan could very well work different than mine. I wouldn't bother trying to get an answer as finding a customer service rep or HR person who really understands these things is challenging. Just wait and see what happens with when you get your 1099R and then you'll know how your plan handles it.

35andFI

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Re: Do losses offset gains in an After-tax 401k? (MBDR)
« Reply #3 on: October 13, 2021, 07:57:13 PM »
When I had individual gains and losses in these after-tax rollovers in the past, they did wash themselves out by the time the 1099-R was generated. Not sure what happens if you have a net loss that crosses over to another tax year.

Oh, good to know! All of the rollovers were made in 2021.

I think it depends on the record keeper. In my mega-backdoor Roth which uses in-plan conversions (not rollovers to an external IRA) Fidelity included gains on my first few conversions in the 1099R for that year despite losses on subsequent conversions that same year exceeding those first gains. This seemed kind of strange but it was only like $18, so I didn't worry too much about it. Since then the losses that happened before gains have always reduced the gains to $0, so I haven't had a taxable year since that first year. The losses do seem to carry over to future years, but I expect to lose the benefit of those losses if I ever stop doing mega backdoor Roth or leave that plan for whatever reason.

So based on how my plan works you would owe tax on the gains on those first two withdrawals  even if you have losses on subsequent withdrawals that are greater than the gains, but the losses would offset gains on future withdrawals that happen after the withdrawals with losses, even if the later gains are in a different year than the earlier losses. But I suspect this is plan dependent, so your plan could very well work different than mine. I wouldn't bother trying to get an answer as finding a customer service rep or HR person who really understands these things is challenging. Just wait and see what happens with when you get your 1099R and then you'll know how your plan handles it.

I appreciate the info! My gains for the first two are $3.5k and my losses are ~$60 so I'm not too worried about it.

I can relate to not being able to get a hold of someone that knows what I am talking about.
Before I sent the first rollover check to Vanguard, I was trying to use the app and there were no options for "After-tax non roth" so I called to clear that up to no avail.
Ended up just mailing the check and letting them categorize it correctly.

I'm a mathematician so it's less about the $ and more about calculating it correctly and understanding how it works for me.
That being said, it seems like this is going to be one of those things that I should let go and wait to get my 1099R as you suggested.

On a slightly off topic remark, I hope that the MBDR doesn't get squashed in 2022 so I can actually see how my plan handles it and continue to take advantage of it!
I brought my after-tax contribution to 0% for the rest of the year as to make sure that it's a clean cut if it does go away on Jan 1st.
« Last Edit: October 14, 2021, 06:43:27 AM by 35andFI »