After-tax 401k?

[conniebird]

Hi - making sure I know all the info before deciding where to put money after maxing out my 403b and back-door roth.

 

My 403b plan allowed after tax contributions - should I do this? From what I read, it's basically like another Roth IRA - I don't pay taxes on the growth?

I also have access to a 457b with low fees and ER and a very flexible distribution plan should I leave the hospital. But might be better to max out after-tax 403b contributions first?

 

Thanks in advance!

[conniebird]

Edit - I read that it grows tax-free like a ROTH only after you leave the company and convert that after-tax to a Roth. Still seems like a great idea.

[litovskyassetmanagement]

conniebird wrote:

Edit – I read that it grows tax-free like a ROTH only after you leave the company and convert that after-tax to a Roth. Still seems like a great idea.

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Yes, after-tax is a good idea after you've maxed out your tax-deferred option.  You can roll it over into a Roth IRA directly.

[jfoxcpacfp]

conniebird, you are one of the fortunate few. Not many retirement plans allow after-tax contributions and anyone who has this option should, imo, make the most of it. Here's how it works: as you know, $53k per year can go into your 401k. That means you can contribute $18k pre-tax and up to $35k after-tax. Or, you can choose to contribute $53k, after tax. iow, if you don't have a profit-sharing component to your 401k, you can still get $53k per year into your 401k. This wasn't always the case, but the IRS ruled in late 2014 to open the door to these "mega-Roth" rollovers.

The earnings on the after-tax portion are counted as "pre-tax" earnings. If and when you separate from service, you can roll the whole balance of your after-tax allocation to a Roth IRA. As you can imagine, this can be a significant way to super-fund a Roth IRA. You can either roll the earnings into the Roth, also, or you can roll them into a pre-tax IRA and pay no taxes. So, if you've worked for your employer for 10 years and contributed $53k to your after-tax account every year, you would be able to move over 1/2 million $$ into a Roth IRA upon separation from service. If you chose to pay tax on the earnings, you would have even more to roll over.

• IRS article referencing the above - note they refer to this as a "rollover"


• Michael Kitces discusses in depth - note he refers to it as a "conversion", but they are talking about same strategy.

If you do not roll over 100% of your account, you will be subject to pro-rata rules, but for most everyone who separates from service, this is not applicable

[conniebird]

Thank you so much Johanna.

I am still trying to wrap my head around logistics and tax issues. My plan allows in-service non-hardship distributions - I am still waiting to find out how often I can do this.

I read on bogleheads that I should convert the after-tax stuff at least once a year, some folks do it more often.

I currently max out my 403b - $18K, and my employer also contributes about $21K (awesome), so basically that leaves $14K as after-tax a year I can convert to a Roth.

 

I am looking for a step by step how to do this guide like WCI did for a regular backdoor Roth...

[jfoxcpacfp]

conniebird wrote:

I am looking for a step by step how to do this guide like WCI did for a regular backdoor Roth…

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This should be explained in your SPD (Summary Plan Description). Because plans differ, I don't think you'll find a 1,2,3. Personal accounts (IRAs) are easier to explain because the rules are governed solely by the IRS. The employer, however, has a lot of latitude beyond IRS regs so no 2 plans are alike.

[conniebird]

jfoxcpacfp wrote:

conniebird wrote:

I am looking for a step by step how to do this guide like WCI did for a regular backdoor Roth… 

Click to expand…

This should be explained in your SPD (Summary Plan Description). Because plans differ, I don’t think you’ll find a 1,2,3. Personal accounts (IRAs) are easier to explain because the rules are governed solely by the IRS. The employer, however, has a lot of latitude beyond IRS regs so no 2 plans are alike.

Click to expand...

Reviving this thread. Sort of forgot about this post-tax contribution ability.

I read the two links Johanna, and got a little confused but I think you clarified it above anyway.

So let's say I put in 100K of after tax contributions by the time I retire/separate from the job. There will be growth on it, let's just say its 20K. That 20K is counted as pre-tax earnings? Meaning that 20K is in the "pre-tax" portion of my 403b? And I can covert that 100K to Roth upon separation/retire ??? Sounds too good to be true !!!

I will need to think about this...not sure I want all my money tied up in pots that are hard to assess before "retirement age". I might have goals that need to assessed before retirement so that would be better served in a taxable account...

[jfoxcpacfp]

conniebird - since this thread started, I have blogged specifically about this technique here (just sub 403b for 401k).

conniebird wrote:

My plan allows in-service non-hardship distributions – I am still waiting to find out how often I can do this.

Click to expand...

If your plan allows annual in-service Roth conversions (bet it does since it allows the above), you are in a great position to build up your Roth. Check out the SPD. Yes, the income is taxed as ordinary income but the benefit of doing it periodically while still employed is that you can convert before much buildup. Of course, some years, it will be down, not up.

[conniebird]

jfoxcpacfp wrote:

conniebird – since this thread started, I have blogged specifically about this technique here (just sub 403b for 401k).

conniebird wrote:

My plan allows in-service non-hardship distributions – I am still waiting to find out how often I can do this. 

Click to expand…

If your plan allows annual in-service Roth conversions (bet it does since it allows the above), you are in a great position to build up your Roth. Check out the SPD. Yes, the income is taxed as ordinary income but the benefit of doing it periodically while still employed is that you can convert before much buildup. Of course, some years, it will be down, not up.

Click to expand...

Nope..I asked, multiple times. Can only withdraw at separation or retirement.

[jfoxcpacfp]

conniebird wrote:

jfoxcpacfp wrote:

conniebird – since this thread started, I have blogged specifically about this technique here (just sub 403b for 401k).

conniebird wrote:

My plan allows in-service non-hardship distributions – I am still waiting to find out how often I can do this.

Click to expand…

If your plan allows annual in-service Roth conversions (bet it does since it allows the above), you are in a great position to build up your Roth. Check out the SPD. Yes, the income is taxed as ordinary income but the benefit of doing it periodically while still employed is that you can convert before much buildup. Of course, some years, it will be down, not up.

Click to expand…

Nope..I asked, multiple times. Can only withdraw at separation or retirement.

Click to expand...

I'm confused. If your plan allows in-service, non-hardship withdrawals, you do not have to wait until separation or retirement. See this article. Perhaps you have to wait until age 59.5?

[conniebird]

I read your article when you posted it .... but since I'm unable to do inservice distributions I figured I couldn't do it.

 

So I can still do it but will have to pay taxes on the growth like my regular pre-tax 403b contributions. Still seems like a good idea to me...basically like a big one time Roth conversion at retirement. I think I can keep the growth in the "pre-tax" part of my 403b and roll that all over to a TIRA.

[jfoxcpacfp]

conniebird wrote:

I read your article when you posted it …. but since I’m unable to do inservice distributions I figured I couldn’t do it.

So I can still do it but will have to pay taxes on the growth like my regular pre-tax 403b contributions. Still seems like a good idea to me…basically like a big one time Roth conversion at retirement. I think I can keep the growth in the “pre-tax” part of my 403b and roll that all over to a TIRA.

Click to expand...

I thought I remembered you commenting but didn't go back to look. Still seems like a good idea to me, too. It's referred to as a "Mega-Roth", also. I consider it a great opportunity if your employer allows after-tax contributions.

As for the growth, it's far better to grow your investments as much as possible and pay taxes on the growth than to forego growth because you might be taxed. That's like working less so you won't pay more taxes   .

[conniebird]

Thanks! I read about the mega backdoor roth but thought I couldn't do it if I can't do the in-service distributions... but looks like you still can just need to defer the roth conversion part. This is pretty awesome!

[conniebird]

jfoxcpacfp wrote:

conniebird wrote:

jfoxcpacfp wrote:

conniebird – since this thread started, I have blogged specifically about this technique here (just sub 403b for 401k).

conniebird wrote:

My plan allows in-service non-hardship distributions – I am still waiting to find out how often I can do this. 

Click to expand…

If your plan allows annual in-service Roth conversions (bet it does since it allows the above), you are in a great position to build up your Roth. Check out the SPD. Yes, the income is taxed as ordinary income but the benefit of doing it periodically while still employed is that you can convert before much buildup. Of course, some years, it will be down, not up.

Click to expand…

Nope..I asked, multiple times. Can only withdraw at separation or retirement.

Click to expand…

I’m confused. If your plan allows in-service, non-hardship withdrawals, you do not have to wait until separation or retirement. See this article. Perhaps you have to wait until age 59.5?

Click to expand...

Yes...at first it sounded like I could, then they said I couldn't. Hence why I asked multiple times. I read the plan too.

[jfoxcpacfp]

conniebird wrote:

Thanks! I read about the mag backdoor roth but thought I couldn’t do it if I can’t do the in-service distributions… but looks like you still can just need to defer the roth conversion part. This is pretty awesome!

Click to expand...

lol, congratulations. Seriously.