questions about conversions

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NH3930
Posts: 15
Joined: Sun Sep 02, 2018 12:20 pm

questions about conversions

Post by NH3930 » Tue Sep 18, 2018 1:12 am

Hello everyone. I'm fairly new to this site and have learned/read a pretty good deal in the past month or so. I have another couple of post where i outlined more details.

In a nutshell to summarize:

Pre-tax
-401k -Will not hit this year, but plan on maxing out the $18,500 pre-tax going forward
Company match - 5% up to 10% salary
HSA - contributing max, holding max in network out of pocket, investing rest

Post-Tax
RIRA - opened and funded max this year, plan on doing the same going forward
participate in ESPP where get 5% discount off average of last day hi-low every 6 months (i've been holding this until gets to long term gain, but am reconsidering just immediately selling to reduce risk. Did good so far this year, but thinking about selling since stock is up right now and just take the higher tax on gains. I think this makes sense for me?)

The proceeds from years of ESPP selling has just set in my core account. I know that was a bad idea since it didn't "work" for me. What I have done so far, is establish an acct at ally to get some interest in savings acct and some no penalty cds. I have somewhere around $50k to invest. This will leave me with 6-12 months of e emergency funds in my savings.

I was going to invest in the taxable acct, but want to make sure there is no other tax free I can invest in. That leads me to my question: mega back door Roth. I found out my 401k allows post tax contributions and in service withdraws. So far, I believe I can only contribute up to 25% of my salary being all pre-tax, post-tax, or a combination thereof. This basically limits what I can get in there. I was hoping to be able to somehow get the cash I have on hand in there, but I don't guess there is a way. Anyway, there is another rub I think as well. From my understanding, the 5% company match is 5% of my salary spread out with each paycheck. Once I reach the $18,500 limit and can no longer contribute, their contribution drops off. That means I can conceivably not get the 5% match even if I'm contributing much more than 5%. I originally thought they matched me dollar for dollar, but that doesn't seem to be the case. I think what I need to do is crunch the numbers and see what percentage of my salary gets me to 18,500 for the year. Then make this my pre-tax and set my post-tax to be 25 minus that. Basically if 20% gets me to 18,500, that means I do that to ensure I get 5% company match. That wold leave 5% post tax. I think my thinking is correct on this. What I don't know is if they will still make matching contributions if I set my pre-tax to 25% and let that hit 18,500 somewhere in October and then turn post tax to 25% for remainder of year. I haven't thought about the math behind it too much to see if that would get me more post-tax money in there or not. It would be better if the company matched me dollar per dollar and then it would be moot point because I would get the full company match as long as i contributed at least 5%. I just recently discovered this perplexing ordeal. It seems like there is no automatic/easy way for me to ensure I get the full company match, maximum pre-tax, and post-tax yearly in my 401k. I will have to monitor it and make the adjustments once I hit the 18,500 mark. Plus, I believe I will have to be cognizant of switching back to pre-tax at beginning of year.

With my reading, I just want to ensure that I understand the mechanics of the mega-back door roth. I think I need to somehow get the post tax contributions out of there. What about the gains? They will be taxed right? How often should I remove them? They will be invested the same as my pre-tax contributions unless I perform the 25% pre-tax during the year and switch to post-tax once I hit $18,500. I could conceivably change what i invest in at this point to be something to minimize gains like all bonds If I would still get the company match with post-tax contributions (see above), and if it is worth it to try and minimize gains this much. I've read about post tax contributions going into Roth, while the gains go into TIRA. I don't have one of those yet.

So is anyone else in a similar situation? Do the 20% through year pre-tax with 5% post tax to ensure the full company match or 25% until get $18,500 and then switch to 25% post-tax? Do I move the post-tax immediately to minimize gains, or leave them until end of year? Do I move all into a Roth or split it up? How often? Is it best to do this all in a single year for tax purposes?

Sorry for all the questions and if I'm not clear. Still learning.

Thanks in advance!

2cents2
Posts: 328
Joined: Sun Mar 02, 2014 11:31 am

Re: questions about conversions

Post by 2cents2 » Tue Sep 18, 2018 7:40 am

If your company match is only paid on pretax contributions with no "true up" at the end of the year, then you have it right--you have to spread out your pretax contributions (at least 10% of salary) through out the year in order to get the match. You might double check to see if your company also matches after tax contributions.
Do I move the post-tax immediately to minimize gains, or leave them until end of year?
Check to see if there is a fee to make the transfer. Make sure you are not paying more in transfer fees than what you would expect to pay in taxes on the gains. Also, would you be able to use your new 401k contributions to favor your bond allocations while your Roth and non tax advantaged accounts favor equities ? It might not be possible with your overall desired allocations, but it might be worth a look.

NH3930
Posts: 15
Joined: Sun Sep 02, 2018 12:20 pm

Re: questions about conversions

Post by NH3930 » Tue Sep 18, 2018 10:43 am

when I called the plan provider and asked the question, I was told that I could not get the entire company match if I hit the 18,500 mark before year end, so I’m pretty sure there is no true up. Is that a common thing? I will verify if the company matches if I make post tax contributions.

Randomly selecting 100k salary for example, 18.5% pretax and 6.5% post tax will get me $18,500 pretax and $6500 post tax during year. If choose 25% pretax then would contribute 25000/26=961.54 per two week pay cycle. Would hit the 18,500 mark in 18,500/961.54= 19.24 pay cycles. Leaving 26-19.24=6.76 pay checks for post tax contributions (6.76*961.54=6500).

Doing same exercise with 200k salary as a check, 9.25% pretax and 15.75% will get me $18,500 and $31,500 pre tax and post tax respectively. If choose 25% pretax then would contribute 50000/26=1923.08 per two week pay cycle. Would hit the 18,500 mark in 18,500/1923.08= 9.62 pay cycles. Leaving 26-9.62=16.38 pay checks for post tax contributions (16.38*1923.08=31500).

From the above two scenarios, it appears mathematically to be the same to spread it out through the year in percentages pre and post tax versus maxing pretax only and then maxing post tax. Benefit of the former is less work during year. Draw back is not being able to control which investments the contributions buy. I’m thinking I could proactively move the post tax contributions into bonds until the end of year. Alternatively I would be rolling them out each paycheck to minimize gains?

As a note, in my current plan, 200k salary would be too much money overall into plan since limit is 55k/yr. I think x(.25+.05)=55,000. X=$183,333 is max salary to do this as outlined.

Am I on the right track? Any other recommendations. How to make post tax investment choice inside 401k since it will go to my normal allocations if put in throughout year. When and frequency to covert to RIRA. I’m with Fidelity so those with it doing similar stuff, do they track post tax as a separate bucket and can you see the differences from the website?

Thanks!

esar
Posts: 9
Joined: Mon Sep 17, 2018 6:36 am

Re: questions about conversions

Post by esar » Tue Sep 18, 2018 11:49 am

@NH3930
"Am I on the right track? Any other recommendations. How to make post tax investment choice inside 401k since it will go to my normal allocations if put in throughout year. When and frequency to covert to RIRA. I’m with Fidelity so those with it doing similar stuff, do they track post tax as a separate bucket and can you see the differences from the website?"

My wife's 401K plan allows in service withdrawal of post tax contribution (fidelity manages the plan). She has a tIRA account and rIRA account created outside of her 401K accounts at fidelity and transfers the post tax 401 contribution every 3 months into rIRA (post tax contribution amount) and tIRA (any gains). Although, she could do the in service withdrawal every pay period and roll over into rIRA/tIRA, she does not do this because of the admin fee charged by Fidelity ($20) to do this.

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