I'm very familiar with the so-called "mega backdoor Roth" approach, but I'm looking to improve my knowledge even more with exact tax code rulings and definitions.
My Summary: Mega backdoor Roth contributions take advantage of the fact that "after tax, non-Roth" contributions to employer 401(k)s are not subject to the $19,500 elective deferral annual contribution limit, but instead can fill up the much larger $58,000 bucket for total contributions.
After tax, non Roth contributions would generally not be very desirable, since your income is taxed as you contribute, and all earnings are taxed at income tax rates on withdrawal. However, many plans allow for "in-service distributions" of this money that can be withdrawn and rolled over to a Roth IRA (or in-plan conversion to Roth 401k). As soon as this money is in a "Roth" account, all future earnings are tax free. Effectively, this money is as good as Roth money if you get it converted to a Roth account immediately.
My Questions:- Why don't after-tax, non-Roth contributions count against the lower "employee elective deferral" limit ? Literally speaking, they are deferrals from my (employee) paycheck, and they are elective, aren't they? What category do they fall under, and why? It's not clear from the IRS Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits.
- How come after-tax, non-Roth money is allowed to be converted to Roth accounts? Is that more like a default ability, or explicitly granted?
- Where does the whole concept of after-tax, non-Roth money even come from?
Why I ask: All of these questions just seem all the more glaringly obvious since my 401(k) provider (Fidelity) has instituted automated conversions of after-tax, non Roth money to Roth. (In plan conversion). It just seems so ridiculous that in November of this year, after I had already contributed $19,500 to my 401k, that I can continue to contribute thousands more dollars, which for a split second is tagged as "after-tax, non Roth", but immediately and automatically gets converted to Roth money and can grow completely tax free.
