In-Service After Tax 401k to Roth IRA Rollover

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lemonlime
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Joined: Thu Mar 07, 2019 11:25 pm

In-Service After Tax 401k to Roth IRA Rollover

Post by lemonlime »

Hello everyone, long time viewer and first time question.
I’ve looked into this question but haven’t been able to find a specific answer to this specific case.

I’m a big believer in Roth IRAs as they allow my earning to be withdrawn tax free after 59 1/2 and I just like knowing that I won’t have to pay tax on my nest egg.

I have a 401k plan that allows after tax contributions and one rollover of the after tax contributions to a Roth IRA once annually.

I have a Roth IRA that I plan on contributing the max amount on and another Roth IRA for my wife that will be maxed as well. I contribute to my employers match plus a little in my 401k currently as Pre Tax dollars. I also have an HSA being max contributed.

My question is, should I be investing that contribution to my 401k as after tax and then rolling it into my Roth each year? I know it depends on what I expect my tax bracket to be, but let’s just say I like knowing that all my earning are tax free. I see a lot of scattered information that this only makes sense if you have already maxed out your Pre tax contributions. Also this would essentially make my 401k empty each year, besides what I’ve already contributed Pre tax, which just seems weird.

FYI for those interested, currently in the 24% bracket with a decent expectation on my career doing well.

What are the thoughts of the bogleheads? Thank you!
sailaway
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by sailaway »

If you are already maxing out all other tax sheltered space, your options with this money is to pay taxes. After that, you can put in taxable, probably paying taxes later, or Roth, where you won't pay taxes later, probably some tax annually, with dividends and what not.

This is not a question of relative tax brackets. It is only a question of are you willing to let the earnings sit until until you turn 59.5.
gsmith
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by gsmith »

IMHO, after-tax with in-service transfers is one of those awesome secret loopholes that only applies to people who work for the right businesses, and I did this when I could annually.

As I understand it, instead of $6000 limit contributing to a IRA, or $19000 limit for a 401k don't apply to after-tax 401ks.
The total contribution limit for retirement plans w/ after tax is $56,000 (incl. trad/Roth/employer match accounts)
By combining w/ in-service, you are able to put away more money, while bypassing any percentage based fees charged by the 401k provider while you are employed there.

The downside is that until you do the rollover, after tax is treated similar to a non-deductible IRA with a basis; so you will need to keep track of how much you've contributed to after-tax, and pay tax on any profits during the rollover. This isn't a Roth-to-roth, it's non-deductible IRA-to-Roth.

The other downsides of rollovers apply, loss of bankruptcy protections, ERISA, 401k loans, etc.

This is not legal/accounting advice and is for entertainment only.
nolesrule
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by nolesrule »

lemonlime wrote: Thu Mar 07, 2019 11:50 pm

FYI for those interested, currently in the 24% bracket with a decent expectation on my career doing well.

What are the thoughts of the bogleheads? Thank you!
You should probably be maxing out your pre-tax contributions to 401k first. Roth only at this point is likely paying too much taxes and you'll end up with a smaller amount after accounting for taxes upon retirement.
retiredjg
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by retiredjg »

lemonlime wrote: Thu Mar 07, 2019 11:50 pm My question is, should I be investing that contribution to my 401k as after tax and then rolling it into my Roth each year? I know it depends on what I expect my tax bracket to be, but let’s just say I like knowing that all my earning are tax free.
I think it would be a mistake not to fill at least 1 tax-deferred account in the family each year, even if you prefer paying your taxes up front.

Fill at least 401k and put the rest into Rothness. This may not be your best financial choice, but it is a reasonable choice if you really just want to pay taxes now instead of later (if you realize you will have less money later because of doing that).

When you retire, there will be some income that is not taxed at all (the amount of the standard deduction), some will be taxed at 10% 12%, and 22%, and so on (using today's rates as an example). In retirement, you will want some untaxed money to fill those lower tax brackets. SS may fill some of it, but if you don't have a pension, you will not be able to get the full benefit of the lower tax brackets if most of your assets are in Roth accounts.
bloom2708
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by bloom2708 »

+1 for doing Pre-Tax 401k and Roth IRA.

Don't be focused on all Roth and pay a bunch of tax and wind up saving less. Deferring 24% + state tax means your check is bigger and you can save that in your Roth IRA.

Don't do things that hold you back from saving more. Best to have a mix of pre-tax, Roth and if you can do post-Tax, (Mega back door), then that is great. Pre-tax HSA is another place to save.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
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Clever_Username
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by Clever_Username »

gsmith wrote: Fri Mar 08, 2019 8:47 am The downside is that until you do the rollover, after tax is treated similar to a non-deductible IRA with a basis; so you will need to keep track of how much you've contributed to after-tax, and pay tax on any profits during the rollover. This isn't a Roth-to-roth, it's non-deductible IRA-to-Roth.
This might be a stupid question, but can the profits be rolled to a pre-tax IRA and the contribution to a Roth IRA? I've been looking at plan docs for a friend's new employer and cannot figure this out (my employer doesn't do the post-tax 403(b)).
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
marcopolo
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by marcopolo »

Clever_Username wrote: Fri Mar 08, 2019 11:06 am
gsmith wrote: Fri Mar 08, 2019 8:47 am The downside is that until you do the rollover, after tax is treated similar to a non-deductible IRA with a basis; so you will need to keep track of how much you've contributed to after-tax, and pay tax on any profits during the rollover. This isn't a Roth-to-roth, it's non-deductible IRA-to-Roth.
This might be a stupid question, but can the profits be rolled to a pre-tax IRA and the contribution to a Roth IRA? I've been looking at plan docs for a friend's new employer and cannot figure this out (my employer doesn't do the post-tax 403(b)).
If by pre-tax IRA, you mean a Traditional IRA, then yes, the regulations allow for this type of split rollover.
As an added bonus, if the plan allows it, the regulations allow those profits that went into the Trad IRA to then be rolled back into the 401k to clear the way for backdoor Roth contributions without having the pro-rata rules complicate things.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Clever_Username
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by Clever_Username »

marcopolo wrote: Fri Mar 08, 2019 11:23 am
Clever_Username wrote: Fri Mar 08, 2019 11:06 am
gsmith wrote: Fri Mar 08, 2019 8:47 am The downside is that until you do the rollover, after tax is treated similar to a non-deductible IRA with a basis; so you will need to keep track of how much you've contributed to after-tax, and pay tax on any profits during the rollover. This isn't a Roth-to-roth, it's non-deductible IRA-to-Roth.
This might be a stupid question, but can the profits be rolled to a pre-tax IRA and the contribution to a Roth IRA? I've been looking at plan docs for a friend's new employer and cannot figure this out (my employer doesn't do the post-tax 403(b)).
If by pre-tax IRA, you mean a Traditional IRA, then yes, the regulations allow for this type of split rollover.
As an added bonus, if the plan allows it, the regulations allow those profits that went into the Trad IRA to then be rolled back into the 401k to clear the way for backdoor Roth contributions without having the pro-rata rules complicate things.
Good news for my friend, thank you. It wouldn't be for me if I become eligible for such a plan as I already have a t-IRA and a rollover IRA, so I'd have to roll those into the 401(k)/403(b) first. But it's great to know!
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
Topic Author
lemonlime
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Joined: Thu Mar 07, 2019 11:25 pm

Re: In-Service After Tax 401k to Roth IRA Rollover

Post by lemonlime »

Thank you all for the insightful ideas an opinions. I believe for now I will continue to contribute all my 401k dollars as pre-tax and then just contribute to a Roth on the side as normal. I suppose why have all my eggs in one basket, might as well diversify my tax advantage accounts just like investments. Who knows exactly what will happen to taxes in the future. Cheers!
Pigeye Brewster
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Re: In-Service After Tax 401k to Roth IRA Rollover

Post by Pigeye Brewster »

lemonlime wrote: Fri Mar 08, 2019 5:40 pm Thank you all for the insightful ideas an opinions. I believe for now I will continue to contribute all my 401k dollars as pre-tax and then just contribute to a Roth on the side as normal. I suppose why have all my eggs in one basket, might as well diversify my tax advantage accounts just like investments. Who knows exactly what will happen to taxes in the future. Cheers!
Good call. :beer
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