Let’s walk through some further optimizations to the Mega Backdoor Roth Contribution. This strategy takes advantage of After-Tax, Non-Roth Contributions to employer retirement plans like 401(k)s. I refine the strategy laid out in my previous video, and explain a new option: the 401(k) “In Plan Conversion” which involves moving the money to your Roth 401k instead of out to a Roth IRA. We’ll go over the pros and cons, comparing a Roth IRA vs In Plan Conversion
Having a good grasp of this trick is a key tool in your kit for financial independence and early retirement!…(read more)
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There is also another big advantage of transferring out to a Roth IRA(outside of your 401K bucket) every pay period. You can actively manage what investments are right for you(ETF's/Mutual Funds/individual socks etc…) instead of having to choose whatever options are available within your companies 401K plan.
I have couple of old 401k. But current job has mega backdoor facility. If I do in-plan post-tax to roth, do I have pay pro-rata tax on my old 401k?
Helpful information. One small thing – it is my understanding that if you already have had ANY other Roth account for 5 years, then the new Roth monies do not need to be in the new account for 5 years before they can be accessed penalty free.
Hi Will. Thank you so much such clear explanation. I have a question for withdrawals from Roth IRA. Following the ordering rule, if I took all my regular contributions and I need more from Roth IRA, how does tax and penalty work from backdoor for earnings (i.e., earnings in after-tax 401k) and contributions to after-tax 401k within 5 years and after 5 years? I guess for this, earnings and contributions to after-tax 401k are BOTH treated equal as non-taxable in ordering rules after mega backdoor Roth, right? because we pay tax on earnings when we do the mega backdoor. On the other hand, if I do in plan conversion first, then rollover to Roth IRA, how are contributions and earning in Roth 401k treated after rolled to Roth IRA? How are tax and penalties calculated? TIA!
does someone know the name of the non roth- after tax accounts? I have fidelity… I’ve filled my 2022 401k bucket at $20,500, I have 2021 Roth IRA bucket full with 6000 and I have 2022 Roth IRA bucket full… I have $10.05 in my Traditional IRA… Can someone explain to me how to open this NON ROTH AFTER TAX ACCOUNT???? Thanks!
With the lousy 401k choices do I have to max out my employer pre-tax/Roth to do a Mega backdoor. I would like to put all income in post tax and do the automatic conversion
Could someone clarify – why would you choose to contribute to the `after-tax non-roth 401(k)` and then have it rolled over to the `roth 401(k)` vs. just contributing directly to the `roth 401(k)`? I feel like I missed the reason for taking that less direct path.
Thank you for the video. One update: my fidelity account allows in-plan conversions with just a checkbox. Not sure if others do.
Another question: do your 401k contributions by employer and employee and IRA contributions all count towards that $49,000 limit?
Is the after tax contribution only from paycheck? Or can I make a lump sum payment ask my 401k after tax non Roth contribution… Reason I ask is we have not been investing much so have money saved and wanted to try to get it in to Roth IRA sooner than later.
Thanks for the great video by the way. You explain things very well
For the Roth in plan conversion of your after tax money… does it need to go through an after tax 401k before going into the Roth 401k, or can it go directly into your Roth 401k and then when you leave your company be rolled over into Roth IRA? BC the Roth 401k account is already an after tax account…
What if you just make one large contribution at the end of the yr and then roll it into the Roth at the beginning of the following yr like Jan 1
Great video. This might be a dumb question but, does the after-tax contribution have to come directly from your paycheck to your 401(k) company? Or can you make an after-tax contribution directly to your 401(k) company by sending them a check from your personal checking account?
Thank you so much
Needed this video – maxing out my HSA, Roth IRA, and Roth 401(k) this year and trying to figure out what's next…this is it! Any word on how this may be hindered by Build Back Better?
This is a BRIILIANT explanation of how to do an immediate Roth conversion of my after-tax contribution. Luckily, my emplyer's Roth 401k through Vanguard allows it, so I was able to set it up! Thanks Will!
My employer's 401k manager says that I have to be 59-1/2 years of age before I can rollover after tax non roth contributions into a roth ira. Is that true? If so, then this isn't a great idea for folks under that age.
You are genius, it is the best explanation I have discovered. Most explanations stop half way through, and do not talk about the ultimate optimization.
What if I have been contributing to after tax for a few years now and didn’t know about this? I’m at about $50k and don’t know what part of that is gains. Thanks for help in advance.
Hello Will, really appreciate the informative video. I was wondering if this would still be adventageous as a small business owner with a safe harbor 401k in place?
The fraction of people this can help is small. A. Your plan would have to allow after tax contributions (most don’t) B. youre contributing enough to max the 402g limit and C that it doesn’t affect any employer match because you maxed out early. For most this is a waste of time.
If I'm still employed, does it mean I can't rollover the roth 401k contributed via the mega backdoor to a roth IRA account?
i did this and now I have both pretax 401k + roth 401k in the same fidelity account, is it possible to move only the Roth 401k part to an individual Roth IRA or the pro-rata rule kicks in due to the mixing?
this is insanely helpful, thank you for your service!! please make more videos are your favorite niche FIRE topics!
Some firms, e.g. Fidelity, allow you to do an in-house conversion into a Roth IRA if you have this account with them. This I think represents the best of both worlds: you get the investment choices in an IRA with the convenience of an in-house conversion.
Are you allowed to do this with 457b plans?
do you have a last video link?
This only works if your plan allows it… I don’t think it is better. It is just a different way if your plan allows it. You explained the whole “if your plan allows it” in your first video better.
Thank you for the video. If you do in-plan conversion (after-tax 401k bucket to roth 401k), i wonder if the company matching would stop early.
Thanks for these videos. My employer allows post-tax contributions, but no in-plan distribution or conversion while employed, only once leave the company. Will i be able to use that annual $58k after tax in this scenario?
Excellent explanation as usual
Thanks for sharing your insight. Almost didn't recognize you in the small frame. Long time since the Earhart days.
Hi Will, why I need to do the mega Roth the same year? Is that a rule or a suggestion? I had contributed after tax to my employer plan a few of years ago (2017-18) now I know I can do the In-service distribution and split the money between the Roth IRA (post tax contributions) and the traditional IRA for all my earnings. Please help
Does fidelity allow you to automatically transfer after tax 401k to a Roth IRA? My company does not offer Roth 401k but does allow after tax contributions.
Bit confusing how this will all work when filing, especially since I have some after tax contributions from years ago that have gained interest. I suppose the easiest would be to transfer it all, have the taxable event, then try to rollover at each pay period to avoid additional taxable events. If I have to call fidelity every two weeks, that is a bit annoying though
My 401K plan does not allow in-plan conversion of after-tax contribution to Roth. I called Fidelity to set up distribution of after-tax contribution (& associated earnings) to a Roth IRA. He suggested I transfer the after-tax contributions to Roth IRA, but the associated pre-tax earnings to a rollover IRA. I'm wondering if this inhibits my ability to do a backdoor Roth – will the pro-rata rule apply to rollover IRAs, like it does to Traditional IRAs?