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  • kather
    replied
    Originally posted by jhwkr542 View Post
    What are the fees associated with the 401k? That'd probably be the only thing pushing me to move to Roth IRA. If there's a 1-2% advisor or record keeping fee in the 401k, then avoiding that would outweigh the tax hit on STCG.
    Minimal flat administrative fees.

    Appreciate all the responses. Sounds like a win-win situation for me.
    I'll look into if there is any option to bring me up to a full match.

    Leave a comment:


  • jhwkr542
    replied
    What are the fees associated with the 401k? That'd probably be the only thing pushing me to move to Roth IRA. If there's a 1-2% advisor or record keeping fee in the 401k, then avoiding that would outweigh the tax hit on STCG.

    Leave a comment:


  • JBME
    replied
    Originally posted by CalMD View Post
    You can convert the gain into rollover IRA to defer tax.
    Ideally though you convert the entire after-tax balance to your Roth IRA and just pay income tax on the gains on the after-tax money (which you try to limit by rolling it out to your Roth IRA ASAP, as the plan allows). The issue with converting the gain into a rollover IRA to defer tax is that now you have a non-zero balance in an IRA, which will make doing the regular backdoor Roth IRA much more complicated.

    Leave a comment:


  • Larry Ragman
    replied
    Just a brief comment on that $305k annual cap as a limitation on the 6% match. It is annoying to be sure. I understand most employers just go with it, but it is worth checking if your employer has an alternative for highly compensated employees. For example, mine provides an annuity contribution equal to the difference between the capped match ($18,600 in your case) and the full 6% match. Our logic is that all employees deserve the full match (6% in your case, mine is different).

    Leave a comment:


  • spiritrider
    replied
    There is another advantage of in-plan Roth rollovers remaining within the plan. Employee after-tax contributions are subject to ACP testing even in safe harbor 401k plans

    If you are a highly compensated employee (HCE), some of your employee after-tax contributions might need to be returned in the event of a test failure. It is far more difficult if the contributions and earnings have been rolled over to a Roth IRA.

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  • CalMD
    replied
    You can convert the gain into rollover IRA to defer tax. Usually though the automatic in-plan conversion is more convenient. Additionally, if BrokerageLink is available, you can trade in almost anything else and there is no need for IRA in such instance.

    Leave a comment:


  • Larry Ragman
    replied
    Yes, the automatic conversion is a better option. By the way, that is still a mega backdoor Roth process, just more tax efficient. The “mega’ refer to the fact that your after tax contributions plus your pre tax ($20.5) plus the employer match can total up to $61k per year. “Backdoor” because you are going from your 401k to a Roth, though in your case it will be a 401k Roth. And yes, that conversion of the after tax to Roth is nominally taxable, but it will be effectively zero if you do it every payday.

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  • kather
    replied
    Thank you for the input.

    I followed up to clarify a few things, and it seems the automatic in-plan conversions happen after each deposit. Sounds like the better option.

    Leave a comment:


  • Lithium
    replied
    Your gains do get taxed at ordinary income rates. I would automatically convert from after tax to Roth 401k as soon as you can to minimize the effect of this.

    Think of it this way, if you were doing a Backdoor Roth and you deposited money in a non deductible IRA, what happens if the IRA goes up in value before you convert it to Roth? You get taxed on the gain. It’s the same thing. Your plan should send you a 1099-R for the in-plan conversions next year. Also, it’s probably a good idea to invest the after-tax assets conservatively (i.e. money market savings) if possible prior to conversion/rollover.

    Leave a comment:


  • kather
    started a topic after tax contributions

    after tax contributions

    Hi all,

    I'm at a new position and have discovered that I can make after-tax contributions to my 401k. Met with our appointed Fidelity advisor - kind of left with more questions. Figured I'd come here since this has been a great resource for me.

    So I will of course plan to maximize pre-tax 401k contributions to $20,500. My employer matches up to 6%. Apparently, the IRS caps this at $305,000 according to our advisor, which was actually news to me, which comes out to $18,600. This leaves about 21,900 left for me to use. So from here I have two options. I can elect to have this automatically converted to a Roth 401K account every month. Alternatively, I can let it accumulate as after-tax and then do Mega Backdoor Roth a few times per year. He told me most elect the latter as they have more investment options in a Roth IRA. I think for my purposes our options in the Roth 401k are decent enough (have access to FXAIX, VBIMX, VTSNX). I asked him that if I let the post-tax accumulate and then do MBDR, do my gains get taxed when I convert to Roth IRA - he wasn't sure. Any ideas? Any advantages you all can see to one vs the other?

    Before this, I had been maximizing my 401k contribution and matching, and then contributing to BDR and a taxable account to get up to 20-25% savings. There's absolutely no reason not to do this is there? I suppose one could be liquidity. I know the idea is that I'm not supposed to touch this, but can I still withdraw the principal without penalty like I can with Roth IRA contributions? He told me the 5-year penalty period for Roth conversions is timed from the first ever conversion - is this true?

    Appreciate any advice y'all can give. Thanks.
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