Mega Backdoor ROTH question

[radtek2112]

I began putting money in my 403b post-tax account and was going to start to move money to the ROTH (both accounts with Fidelity).  I was told I have to pay $25 and fill out paperwork each time I do this.  I was originally planning to call Fidelity every quarter or so to move the money from the 403b to the ROTH.  Now that I discovered there is a fee and paperwork each time, I might just do this annually or twice a year.  What do you think?  Will it be more or less advantageous (tax-wise) to move the money more often than annually even with the $25 penalty?  I'm glad I can do a mega backdoor ROTH, but it's a little bit more involved then I thought it was going to be.

Thanks for any input.

[seattlecyclone]

By waiting to do the conversions, the balance in your after-tax balance may increase in value. These earnings would be taxable income at the time of conversion. If (for example) you're in the 25% tax bracket, $100 of gains means $25 in taxes.

Suppose you invest $2,000 in your after-tax 401(k) once per month and you expect your investments to increase by 1% monthly (as a simple, but optimistic example).

If you do the conversion every month immediately after contributing, you'll have no gains to pay tax on, but you'll pay 12 * $25 = $300 in fees over the course of the year.

If you do the conversion once per year, you'll only pay a single $25 fee, but you'll also have roughly $1,300 of gains to pay tax on. This adds up to $325 in extra taxes in the 25% bracket. Total cost: $350.

If you do the conversion twice per year, you'll pay $50 in fees, and will have about $600 in accumulated gains to worry about ($150 in taxes in the 25% bracket). Total cost: $200.

See where I'm going with this? Plug in your own tax rate and growth assumptions to see what ends up being optimal.

[radtek2112]

Thanks for an excellent answer Seattlecyclone!!

[tonysemail]

market has been pretty flat this year.
i'm only up $200.
So I will wait until I max out the after-tax contributions and do a single conversion.