Converting After Tax 401k Contributions to Roth 401k

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
harrad
Posts: 23
Joined: Mon Sep 29, 2014 6:50 am

Converting After Tax 401k Contributions to Roth 401k

Post by harrad » Thu Jun 21, 2018 4:13 pm

Earlier this year we were offered to make after tax 401k contributions. From next month the plan will allow us to convert these contributions to ROTH. I have been maximizing my pre tax 401k contributions, HSA and IRA.

I have a little room to make those after tax 401k contributions but have not been doing so until now - my reasoning was that the tax owed on the earnings did not offer a significant advantage. Is my reasoning wrong? Also with the new option to convert them to ROTH, would this make it advantageous to initially make an after tax 401k contribution and then immediately convert it to ROTH. We were told that the conversion can be made any time and no limitations on the number of conversion attempts. I presume that there would be minimal gains/losses if I do the conversion every month and hence minimal tax consequence.

Thanks!

magicrat
Posts: 315
Joined: Sat Nov 29, 2014 7:04 pm

Re: Converting After Tax 401k Contributions to Roth 401k

Post by magicrat » Thu Jun 21, 2018 4:25 pm

If you can do the in-plan conversion right after (or close to right after) making the after-tax contribution, you should do it. This is really no different than contributing to a Roth and just gives you more tax-advantaged space.

User avatar
Duckie
Posts: 5711
Joined: Thu Mar 08, 2007 2:55 pm

Re: Converting After Tax 401k Contributions to Roth 401k

Post by Duckie » Thu Jun 21, 2018 4:33 pm

harrad wrote:I have a little room to make those after tax 401k contributions
Since the limit for 2018 is $55K minus $18.5K elective deferrals minus any matching / profit sharing, you have potentially $36.5K room for after-tax contributions. Or do you mean you can't afford to contribute the extra?
I have not been doing so until now - my reasoning was that the tax owed on the earnings did not offer a significant advantage. Is my reasoning wrong?
Making non-deductible contributions (aka after-tax) and not converting to a Roth is not the best idea.
Also with the new option to convert them to ROTH, would this make it advantageous to initially make an after tax 401k contribution and then immediately convert it to ROTH.
This absolutely is a good idea if you can afford to contribute the extra amount.
We were told that the conversion can be made any time and no limitations on the number of conversion attempts. I presume that there would be minimal gains/losses if I do the conversion every month and hence minimal tax consequence.
Right, quick conversions means minimal taxes.

Just to confirm, in your case you're talking about converting to a Roth 401k, not rolling / converting to a Roth IRA, correct?

harrad
Posts: 23
Joined: Mon Sep 29, 2014 6:50 am

Re: Converting After Tax 401k Contributions to Roth 401k

Post by harrad » Thu Jun 21, 2018 6:22 pm

Just to confirm, in your case you're talking about converting to a Roth 401k, not rolling / converting to a Roth IRA, correct?
Yes, it would be conversion and not a roll over.

Thanks for the replies!

User avatar
FiveK
Posts: 4923
Joined: Sun Mar 16, 2014 2:43 pm

Re: Converting After Tax 401k Contributions to Roth 401k

Post by FiveK » Thu Jun 21, 2018 11:40 pm

harrad wrote:
Thu Jun 21, 2018 4:13 pm
...with the new option to convert them to ROTH, would this make it advantageous to initially make an after tax 401k contribution and then immediately convert it to ROTH.
Yes. You will still be maximizing your pre-tax contributions, correct? For most people who can afford to contribute to after-tax 401k plans after maximizing all pre-tax contributions, continuing to maximize the pre-tax is correct. See Investment Order for a little more.

Unless you already have a sizeable pre-tax account balance and are already vested in a high pension....

harrad
Posts: 23
Joined: Mon Sep 29, 2014 6:50 am

Re: Converting After Tax 401k Contributions to Roth 401k

Post by harrad » Fri Jun 22, 2018 7:14 am

Yes. You will still be maximizing your pre-tax contributions, correct? For most people who can afford to contribute to after-tax 401k plans after maximizing all pre-tax contributions, continuing to maximize the pre-tax is correct. See Investment Order for a little more.

Unless you already have a sizeable pre-tax account balance and are already vested in a high pension....
Yes. The pre-tax portion will be maximized before any after tax contributions. Thanks for the link, good information there.

Post Reply