Roth 401k contributions??

[hightower]

I recently noticed that my 401k plan through my employer says it allows for Roth contributions.  I have never heard anyone talking about this before and I don't understand why anyone would do this.

I'm assuming that you would still be limited to the 18k/yr contribution limit which would mean that for higher income individuals, it would make no sense to contribute after tax dollars to this plan, correct?  On the other hand, if you're allowed to put as much as you want in there on top of your normal contributions then that might make a lot of sense?

[Rotish]

It makes sense in residency. When you're an attending in the highest tax bracket, it does not make sense, since you'd rather be taxed on your contributions when retired

[janettebournes]

hightower wrote:

I recently noticed that my 401k plan through my employer says it allows for Roth contributions.  I have never heard anyone talking about this before and I don’t understand why anyone would do this.

I’m assuming that you would still be limited to the 18k/yr contribution limit which would mean that for higher income individuals, it would make no sense to contribute after tax dollars to this plan, correct?  On the other hand, if you’re allowed to put as much as you want in there on top of your normal contributions then that might make a lot of sense?

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I contribute to a Roth 401k even though I know it's probably (almost definitely) not the correct mathematical decision

I think WCI had a good blog post on this before -> https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/

Items within the post that pushed me towards Roth 401k contributions ->

• Political/Economic Considerations -> "For example, if you believe that future tax rates are going to be much higher than current tax rates, you might be more likely to make Roth contributions and pay your tax now at what you believe will be a lower rate."


• Estate Planning Considerations -> "There is no doubt that if you don’t plan on spending the money in your retirement accounts and plan to give it to your heirs instead, that Roth contributions are very useful.  The main reason is that Roth accounts don’t have Required Minimum Distributions (RMDs) starting at age 70."


• Ability to Contribute More -> "If you are already maxing out your available retirement accounts, you may lean a little more toward making Roth contributions so you can get more money (on an after-tax basis) into retirement accounts where it will enjoy preferential tax and asset protection treatment."


• State Taxes -> "If you plan to return to New York or California from your job in Florida or Nevada, however, you may wish to pay those taxes up front!"

[jfoxcpacfp]

Like  janettebournes, my opinion in this area tends to go against the grain. One big reason is that I believe big savers are underestimating their retirement income. In our planning models with many physicians, RMD payouts are in low- to mid-6 figures. One physician we're currently working with is in that group and planning to retire early and has a SAH spouse. Before you make a blanket determination that a deduction is better today, you need to do some modeling and forecasting.

Of course, this is in addition to other reasons such as estate planning. And the biggie for some of our clients is that they don't want to be forced to begin emptying their accounts at age 70.5. Not having RMDs on Roth IRAs seems to become very important the closer they are to age 70.5. This is for clients all across the board, not just physician clients.

[hightower]

Does anyone know if the Roth contributions are subject to the same limit (18k/yr) as normal contributions?  In other words, can I contribute 18k via the normal route AND contribute more on top of that via the Roth option?

[wally world]

hightower wrote:

Does anyone know if the Roth contributions are subject to the same limit (18k/yr) as normal contributions?  In other words, can I contribute 18k via the normal route AND contribute more on top of that via the Roth option?

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Yes, the direct Roth contribution option is subject to the same limit as pre-tax contribution. From the IRS website:

"Is there a limit on how much I may contribute to my designated Roth account?

Yes, the combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited (under IRC Section 402(g)). The limit is $18,000 in 2015 - 2017, plus an additional $6,000 in 2015 - 2017 if you are age 50 or older at the end of the year. These limits may be increased in later years to reflect cost-of-living adjustments."

Source: https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts#conts

Having said this, there may be ways to get additional Roth money into the 401k depending on the structure of your plan. In our plan at work, there are 3 parts to our 401k plan. The first part is the 18k employee contribution. This part can be Roth or pre-tax, but the total cannot exceed 18k (unless you are over the age of 50). The second part is employer contribution (the amount depends on your salary in our case). The third part is the difference between the total contribution limit ($54k in 2017) and the first two parts. This is an after tax contribution which can be converted to Roth (the mega backdoor Roth which has been written about by WCI previously).

Happy 4th

WW

[DMFA]

Roth 401(k) still has the same RMDs as traditional 401(k). Of course, if you just roll it into a Roth IRA, that goes away.

[jfoxcpacfp]

DMFA wrote:

Roth 401(k) still has the same RMDs as traditional 401(k). Of course, if you just roll it into a Roth IRA, that goes away.

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That is correct, and I should have mentioned it. I guess I just don't think of it because I cannot imagine anybody not rolling out to a Roth IRA. That would be off the charts dumb.

[jfoxcpacfp]

hightower wrote:

Does anyone know if the Roth contributions are subject to the same limit (18k/yr) as normal contributions?  In other words, can I contribute 18k via the normal route AND contribute more on top of that via the Roth option?

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You get one $18k/year contribution to all 401k/403b's combined, whether traditional or Roth. Employer matching contributions are always pre-tax. If you contribute $18k pre-tax, you will have no option to contribute to a Roth. However, as Wally World articulated, it's worthwhile to ask if your plan allows for nondeductible contributions with an in-plan rollover feature (to Roth). That would be a huge benefit if you have the cash to contribute enough to get you to $54k ($60k if age 50+).

[hightower]

jfoxcpacfp wrote:

hightower wrote:

Does anyone know if the Roth contributions are subject to the same limit (18k/yr) as normal contributions?  In other words, can I contribute 18k via the normal route AND contribute more on top of that via the Roth option?

Click to expand…

You get one $18k/year contribution to all 401k/403b’s combined, whether traditional or Roth. Employer matching contributions are always pre-tax. If you contribute $18k pre-tax, you will have no option to contribute to a Roth. However, as Wally World articulated, it’s worthwhile to ask if your plan allows for nondeductible contributions with an in-plan rollover feature (to Roth). That would be a huge benefit if you have the cash to contribute enough to get you to $54k ($60k if age 50+).

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Forgive me for not quite understanding that last part.  So, this year I'm contributing a full 18k to the 401k (pre-tax) and I'm getting my employer match as well.  At the end of the year I'll have a total of say 25k in contributions.  You said to ask "if your plan allows for non-deductible contributions with an in-plan rollover feature."  My question is, where would this money come from?  If I have 29k sitting in a savings account, could I contribute that?  I guess the term "rollover" is confusing me because that makes it sound like the money has to already be in a retirement account somewhere?

[jfoxcpacfp]

hightower wrote:

Forgive me for not quite understanding that last part.  So, this year I’m contributing a full 18k to the 401k (pre-tax) and I’m getting my employer match as well.  At the end of the year I’ll have a total of say 25k in contributions.  You said to ask “if your plan allows for non-deductible contributions with an in-plan rollover feature.”  My question is, where would this money come from?  If I have 29k sitting in a savings account, could I contribute that?  I guess the term “rollover” is confusing me because that makes it sound like the money has to already be in a retirement account somewhere?

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Sorry to not be clear. This option has been around only for a few years, so there is confusion about it. The money would come from your paycheck.

Here's how it works and we're going to assume you're < age 50:

• A plan participant can have up to $54k added to a 401k annually in any combination of employer/employee contributions.


• Most participants never get to $54k b/c the employers only match a small % of pay. So, for example if you make $250k and your employer matches 6%, you can put $18k into your account and your employer contributes ($250k * .06) = $15k for a total of $33k.


• Some plans allow nondeductible contributions. That means you could contribute another  $21k to your account.


• Some of these plans allowing n.d. contributions also allow in-service rollovers. That means the IRS now will allow you to roll over the $21k into a Roth IRA while you're still working. Again, your plan must allow this.


• If you don't have the in-service r/o option at work, your money has to sit and grow in a nontaxable account (similar to a nondeductible IRA). When you eventually separate from service and take your 401k with you, if you r/o to a Roth at that point, you'll pay income tax on all the growth at your marginal (top) income tax rate. Not good if this account grows over many years.

[hightower]

Thanks for the explanation.  That clears up my confusion a bit.  I'm going to call our HR department and speak to someone about our plan and see what our options are.
My plan has an option to contribute to a ROTH 401k (as I mentioned above), but what I don't know is if I'll be allowed to contribute additional after tax money to it.

So if I am allowed to contribute additional after tax money to my 401k and designate it as a Roth contribution, is that what people refer to as a mega-backdoor roth?

[jfoxcpacfp]

hightower wrote:

So if I am allowed to contribute additional after tax money to my 401k and designate it as a Roth contribution, is that what people refer to as a mega-backdoor roth?

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Kind of. You can't "designate" it as a Roth contribution. Until you roll it over to a Roth, it is just a nondeductible 401k contribution. Same as a nondeductible TIRA - you don't "designate" the n.d. TIRA to be a Roth. You have to roll it over to a Roth.

So the mega-backdoor is another "backdoor" route to get money into a Roth, just through a 401k, not through a personal IRA. And it's "mega" because you can put more than $5,500/year into it. (You still get to make annual personal backdoor Roth conversions, too.)

[DMFA]

Johanna is talking about NRATs (non-Roth after-tax contributions) up to the plan limit ($54k). If your plan allows for those *and* for in-service withdrawals/rollovers, then you should be able to roll that NRAT principal to Roth IRA, which is the "mega-backdoor" Roth.

...and it's an eponym, not an acronym. What do you think ROTH stands for? Roll Over Tax Haven?

[wally world]

hightower wrote:

So if I am allowed to contribute additional after tax money to my 401k and designate it as a Roth contribution, is that what people refer to as a mega-backdoor roth?

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Yep! Here's a nice write up from the Mad Fientist with more details: http://www.madfientist.com/after-tax-contributions/

Also from The Finance Buff: https://thefinancebuff.com/rollover-after-tax-to-roth.html

And last (but certainly not least), from our own excellent host: https://www.whitecoatinvestor.com/the-mega-backdoor-roth-ira/

I would add that you don't have to necessarily convert the after tax portion of the 401k to a Roth IRA (unless you want to). You can convert it to Roth $ and leave it in the 401k as well (which is what I have done).

 

WW