I've been maxing out my contributions with after-tax money and then doing in-plan Roth conversions with every contribution. It's a great way to get extra money into a Roth account if you can afford it.
I had been maxing out both the pretax and after tax contributions for several years, but only discovered the Mega backdoor Roth strategy last year. Fortunately, the market was in a bit of a dip at the time so I was able to do an in plan Roth conversion of only the after tax amounts with minimal taxable gains. After that I did immediate conversions after each contribution.
I’m in the process of executing another Roth strategy which might make a good video topic since even my tax preparer was unaware of it. I had been making non deductible contributions to my IRA for several years since I couldn’t make Roth contributions, and because of the pro rata rule it would be expensive to do Roth conversions right now. However, I found that I can rollover my IRA to my 401k plan and leave only the non deductible contributions behind, which I can then convert to a Roth IRA for free. According to the IRS the pro rata rule does not apply when rolling an IRA into a qualified retirement plan, but you are not allowed to roll over any non deductible contributions, i.e. your cost basis. Since the gains on the non deductible contributions are taxable they can be rolled over.
Since I’m in a fairly high tax bracket I max out the pretax basic and catchup contributions and also the after tax contributions, which I immediately convert to Roth. Seems like the best of both worlds to me. I save a lot on current taxes, and will save on future taxes when I eventually withdraw the gains on the Roth portion.
A follow-up may be the (2) 5 year rules that apply. You can also do a backdoor (after tax) Roth contribution of $8K if you are over 50. This also applies against the Max limit per year.
Thank you, this is very helpful. Can one also do rollover to roth 401k within former employer plan, where both traditional 401k and Roth 401k accounts are already active?
Nice video. Thoughts... 1/ On timing, some plans offer daily in-plan conversions (which ostensibly means bi-weekly dollar cost averaging mirroring pay day). 2/ Those of us who foolishly did 401K -> IRA rollovers (and thus can't do standard backdoor Roth conversions) can still do Mega as the IRA aggregation/prorata rule doesn't apply to after tax 401K -> Mega Backdoor Roth.
Very good information. It’s too late for retired however my plan didn’t allow it anyway. A question for you for future video’s. How do you manage various retirement income streams, ie, SSA, 401K distributions to Roth, savings while minimizing tax and IRMA exposure? Thank you
Thank You Dave for your informative videos. I have learned so much in the months since finding your channel. I scheduled a consultation with your firm, that's how much I value your information. You didn't mention if it makes sense to do a Roth Conversion after you are retired and no longer earning a salary. Do the same questions apply in this scenario?
Hello Dave, thank you for the content, super helpful. Can I contribute to both a (Regular) Backdoor Roth and a (Mega) Backdoor Roth in the same year?. Also is it possible to roll-over the 403b after tax contributions out of the 403b to combine the funds with a preexisting (regular) Backdoor Roth, instead of doing in plan Roth conversions?
I don't understand this and why the primary question isn't center stage... Will you earn more money in retirement than what you are earning now? I would suggest that for most, the answer is no. I've saved in a 401k my entire life and have a tidy sum but for the life of me, I can't understand how anyone making $180,000 per year, would add another $70,000 to their taxable income... Especially, if they believe their retirement income will be in the neighborhood of $100,000... How will your preretirement compare to your income now? I would suggest the very large majority would make less. This is the most important question yet I don't anyone making the most important question. Tell me where I'm wrong.
my 401k allows after tax contributions on top of regular pre tax/ roth. i take advantage of this option and contribute the max allowed. i do not need that money to live and would just be saving/ investing in regular brokerage - therefore i believe that placing it in after that and doing in plan conversion 2 times per year makes much better sense for me. future earnings 100% tax free . my plan offers a self managed account at schwab so i have no constraints on investments. it allows me to invest like brokerage . lately i've been keeping it in Tbills till market looks appealing. market is my only option - i own 2 beach cottages that i sometimes rent seasonally - - be mostly use the cottages - but lesson learned - being a landlord is gross... market makes a much better tenant LOL....
as always... Thanks Dave! We have nearly $1M in a qualified pension and are looking to retire in 2028. Trying to get a good tax plan in place. We are looking at doing Roth conversions for roughly $500,000 in pretax 401K accounts. Hopefully, it's not too late for 2023, and we'd like to take advantage of the tax cuts before they expire in 2026. That should give us 3 years at $60,000 each to move $180,000. Unsure how we should handle the rest. Our taxable income is roughly $60,000 and we would like to stay in the 12% tax bracket, below the 22% tax bracket if possible. Will converting $30,000 in a fiscal year put us over the threshold into the higher tax bracket? TYIA
I've been maxing out my contributions with after-tax money and then doing in-plan Roth conversions with every contribution. It's a great way to get extra money into a Roth account if you can afford it.
I had been maxing out both the pretax and after tax contributions for several years, but only discovered the Mega backdoor Roth strategy last year. Fortunately, the market was in a bit of a dip at the time so I was able to do an in plan Roth conversion of only the after tax amounts with minimal taxable gains. After that I did immediate conversions after each contribution.
I’m in the process of executing another Roth strategy which might make a good video topic since even my tax preparer was unaware of it. I had been making non deductible contributions to my IRA for several years since I couldn’t make Roth contributions, and because of the pro rata rule it would be expensive to do Roth conversions right now. However, I found that I can rollover my IRA to my 401k plan and leave only the non deductible contributions behind, which I can then convert to a Roth IRA for free. According to the IRS the pro rata rule does not apply when rolling an IRA into a qualified retirement plan, but you are not allowed to roll over any non deductible contributions, i.e. your cost basis. Since the gains on the non deductible contributions are taxable they can be rolled over.
Since I’m in a fairly high tax bracket I max out the pretax basic and catchup contributions and also the after tax contributions, which I immediately convert to Roth. Seems like the best of both worlds to me. I save a lot on current taxes, and will save on future taxes when I eventually withdraw the gains on the Roth portion.
currently i do all roth & after tax max - - - - but i may employ your strategy - need to run the tax savings numbers
Love the antifragile reference. Great book
A follow-up may be the (2) 5 year rules that apply.
You can also do a backdoor (after tax) Roth contribution of $8K if you are over 50. This also applies against the Max limit per year.
Thank you, this is very helpful. Can one also do rollover to roth 401k within former employer plan, where both traditional 401k and Roth 401k accounts are already active?
The option to do an in-plan conversion is becoming more and more available. However, it would not be a tax-free conversion.
Nice video. Thoughts... 1/ On timing, some plans offer daily in-plan conversions (which ostensibly means bi-weekly dollar cost averaging mirroring pay day). 2/ Those of us who foolishly did 401K -> IRA rollovers (and thus can't do standard backdoor Roth conversions) can still do Mega as the IRA aggregation/prorata rule doesn't apply to after tax 401K -> Mega Backdoor Roth.
Very good information. It’s too late for retired however my plan didn’t allow it anyway. A question for you for future video’s. How do you manage various retirement income streams, ie, SSA, 401K distributions to Roth, savings while minimizing tax and IRMA exposure? Thank you
Thank You Dave for your informative videos. I have learned so much in the months since finding your channel. I scheduled a consultation with your firm, that's how much I value your information. You didn't mention if it makes sense to do a Roth Conversion after you are retired and no longer earning a salary. Do the same questions apply in this scenario?
TSP does not allow this. Right?
Hello Dave, thank you for the content, super helpful. Can I contribute to both a (Regular) Backdoor Roth and a (Mega) Backdoor Roth in the same year?. Also is it possible to roll-over the 403b after tax contributions out of the 403b to combine the funds with a preexisting (regular) Backdoor Roth, instead of doing in plan Roth conversions?
If one's income is too high and no longer eligible for Roth IRA contribution, is this conversion still allowed?
Yes it is. I started doing it last year.
yes your plan simply needs to offer after tax contributions and in plan roth conversions.
Yes
To clarify, you’re moving funds from a taxable brokerage account and into a Roth 401K with a current employer?
I don't understand this and why the primary question isn't center stage... Will you earn more money in retirement than what you are earning now? I would suggest that for most, the answer is no. I've saved in a 401k my entire life and have a tidy sum but for the life of me, I can't understand how anyone making $180,000 per year, would add another $70,000 to their taxable income... Especially, if they believe their retirement income will be in the neighborhood of $100,000... How will your preretirement compare to your income now? I would suggest the very large majority would make less. This is the most important question yet I don't anyone making the most important question. Tell me where I'm wrong.
my 401k allows after tax contributions on top of regular pre tax/ roth. i take advantage of this option and contribute the max allowed. i do not need that money to live and would just be saving/ investing in regular brokerage - therefore i believe that placing it in after that and doing in plan conversion 2 times per year makes much better sense for me. future earnings 100% tax free .
my plan offers a self managed account at schwab so i have no constraints on investments. it allows me to invest like brokerage .
lately i've been keeping it in Tbills till market looks appealing.
market is my only option - i own 2 beach cottages that i sometimes rent seasonally - - be mostly use the cottages - but lesson learned - being a landlord is gross... market makes a much better tenant LOL....
The after tax contribution is so confusing to me. 🤔
Investments are the roots of financial security; the deeper they grow, the stronger your future will be."
as always... Thanks Dave!
We have nearly $1M in a qualified pension and are looking to retire in 2028. Trying to get a good tax plan in place.
We are looking at doing Roth conversions for roughly $500,000 in pretax 401K accounts.
Hopefully, it's not too late for 2023, and we'd like to take advantage of the tax cuts before they expire in 2026.
That should give us 3 years at $60,000 each to move $180,000. Unsure how we should handle the rest.
Our taxable income is roughly $60,000 and we would like to stay in the 12% tax bracket, below the 22% tax bracket if possible. Will converting $30,000 in a fiscal year put us over the threshold into the higher tax bracket?
TYIA