Megabackdoor Roth AND backdoor roth?

[westcoaster]

turns out my 401k allows nonroth after tax contributions and nonhardsharp inservice distributions of after-tax funds... so I'm megabackdoor roth eligible (!?)

As I understand it, if I have $10,200 (10k contribution with $200 earnings) in the after-tax 401k, i can only roll over the $10k into a Roth IRA. The $200k would get rolled over into a traditional IRA. Does that mean I run afoul of the pro-rata rule when I want to repeat the exercise the following year? And would it stop me from doing my usual backdoor roth?

Sorry if this question is naive.

[westcoaster]

A follow up question, would it be worthwhile to max out the after tax 401k before putting money in taxable even if NOT doing the megabackdoor roth?

[The White Coat Investor]

You mean $200 not $200K, right? But yea, just convert that to the Roth IRA too. No biggie. The tax bill will be less than $100.

Your follow-up is a tricky question. It depends on how tax-efficient the investment is and how long you leave it invested. When I run the numbers with a tax-efficient investment, it takes decades for the tax-protected compounding to make up for the higher tax on earnings (ordinary instead of capital gains rates.)

[jfoxcpacfp]

westcoaster wrote:

turns out my 401k allows nonroth after tax contributions and nonhardsharp inservice distributions of after-tax funds… so I’m megabackdoor roth eligible (!?)

As I understand it, if I have $10,200 (10k contribution with $200 earnings) in the after-tax 401k, i can only roll over the $10k into a Roth IRA. The $200k would get rolled over into a traditional IRA. Does that mean I run afoul of the pro-rata rule when I want to repeat the exercise the following year? And would it stop me from doing my usual backdoor roth?

Sorry if this question is naive.

Click to expand...

If the SPD allows you to do so (which I'm guessing it does), follow WCI's advice and r/o 100% of the after-tax balance to a Roth annually. Much better to pay a bit of tax and have that income grow tax-free forever and ever amen. You are one of the lucky ones who gets to do this, congratulations.