After tax 401k worth

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Topic Author
Pickle11
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After tax 401k worth

Post by Pickle11 » Thu Nov 14, 2019 9:30 am

Question for the forum, how much value do you place on a job with after tax 401k and in plan roth conversions.

How do you value this unique opportunity in terms of comp. Assume you are almost financially independent.

runner3081
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Re: After tax 401k worth

Post by runner3081 » Thu Nov 14, 2019 9:37 am

Zero. I have one and don't use it, opt for the pre-tax instead.

cmublitz
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Re: After tax 401k worth

Post by cmublitz » Thu Nov 14, 2019 9:45 am

Pickle11 is almost certainly referring to the tax-advantaged space after the normal ~$19K of employee contribution to fill the rest of the ~$56K of actual 401k limit.

I've never had an employer offer that as an option, so I can't say for certain, but I think it'd be worth maybe ~$2-4k to me or so.

lakpr
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Re: After tax 401k worth

Post by lakpr » Thu Nov 14, 2019 9:48 am

I'd value it by about half the amount I am allowed to contribute to After tax 401k. So if the benefits indicate that I can contribute $20k per year, I take it to mean essentially I am getting a $10k more in salary than what's on paper.

I am assuming that between now and retirement, the growth in the MBR would be about 50% above my contributions. Assuming a 5% real return rate (over and above inflation), the money doubles every 14 years, so if my retirement is at least 15 years away, the "average" growth in the MBR is 50%. That's where I am coming up with the "half the amount allowed to contribute" measure.

markcoop
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Re: After tax 401k worth

Post by markcoop » Thu Nov 14, 2019 9:54 am

I have it and haven't used it yet. I do max out my 401K ($25K as I'm over 25) and my Roth IRA. I have looked into using it a little (after-tax 401K contributions and then convert to Roth 401K), but because it would be a manual process and I'm at the edge of what I can contribute, I haven't done so. The value I personally would put on it is not much because I feel I will meet my financial goals without using it.
Mark

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1789
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Re: After tax 401k worth

Post by 1789 » Thu Nov 14, 2019 9:55 am

It is starting in Jan 2020. I am planning to put 10k if i can. I think it is a very powerful tool to use. Of course i will do that beyond regular pre tax 401k and Roth IRA. No taxable account other than emergency money.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

bloom2708
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Re: After tax 401k worth

Post by bloom2708 » Thu Nov 14, 2019 10:01 am

If you have big enough salaries, after-tax/Roth conversion is very valuable. You can stuff an additional ~$30k to Roth. Depending on age and matching dollars. Up to the $56k limit.

If your salaries are low enough to be in the 12% tax bracket, you likely don't make enough to fully fund after-tax (this is me, I need to pay some bills)

If your salaries are high enough that you are in the 24% tax bracket (or higher), you have to pay a lot of tax now to fund those dollars. State tax should be factored in too. This is not really a problem because a high earner will do $19k pre-tax and pre-tax HSA (if available). There are no other ways to shelter money, so it is taxable or after-tax/Roth 401k. You have to pay the tax, so getting to Roth 401k is valuable. All future earnings are free of tax.

If you fall in between 1-2 it still makes sense to use it if all your savings after pre-tax are going into taxable. Get taxable to some amount you are comfortable with and then after-tax/Roth 401k. ESPP is another place to harvest the 10-15% discount if you buy/sell in a rolling fashion.
Last edited by bloom2708 on Thu Nov 14, 2019 11:09 am, edited 1 time in total.
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rkcs
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Re: After tax 401k worth

Post by rkcs » Thu Nov 14, 2019 10:15 am

bloom2708 wrote:
Thu Nov 14, 2019 10:01 am
If you have big enough salaries, after-tax/Roth conversion is very valuable. You can stuff an additional ~$30k to Roth. Depending on age and matching dollars. Up to the $56k limit.

If your salaries are low enough to be in the 12% tax bracket, you likely don't make enough to fully fund after-tax (this is me, I need to pay some bills)

If your salaries are high enough that you are in the 24% tax bracket (or higher), you have to pay a lot of tax now to fund those dollars. State tax should be factored in too. This is not really a problem because a high earner will do $19k pre-tax and pre-tax HSA (if available). There are no other ways to shelter money, to it is taxable or after-tax/Roth 401k. You have to pay the tax, so getting to Roth 401k is valuable. All future earnings are free of tax.

If you fall in between 1-2 it still makes sense to use it if all your savings after pre-tax are going into taxable. Get taxable to some amount you are comfortable with and then after-tax/Roth 401k. ESPP is another place to harvest the 10-15% discount if you buy/sell in a rolling fashion.
As a long time reader, for my first post, I want to thank you for writing who and when it benefits so clearly and in simple language. This is why i love coming to this forum - lots of learning but written so that everyone can understand.

To the question itself, this is indeed very valuable if you are anyway contributing to a taxable account and as one other poster mentioned, would assign 50% or more of the contribution value if you are at least 10 - 15 years away from withdrawing the money. Best.

Topic Author
Pickle11
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Re: After tax 401k worth

Post by Pickle11 » Thu Nov 14, 2019 11:31 am

Thank you for all the responses. I am specifically speaking to the space above the pretax deferral.

Strategy seems to be if a person has the ability and liquidity to transfer amounts from taxable to after tax it should be done. This assumes assumes you might even be moving it from left pocket to right pocket and not taking a cash salary while doing it.

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1789
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Re: After tax 401k worth

Post by 1789 » Thu Nov 14, 2019 12:00 pm

It would not make any sense to put money in taxable account if the 401k after tax comes with automatic in plan roth rollover feature with in service distributions. Please re-read this. Essentially one is funding taxable/after tax 401k after taxes paid. One will grow tax free, the other taxes will be paid to some extend (taxable)

after tax 401k --> automatic roth 401k conversion ---> roth ira OR
after tax 401k --> Roth IRA

So why would it make sense to put money in taxable if one knows that he/she can reach the contributions anytime (as i summarized depending on plan features). Let me know if i missed anything.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

Topic Author
Pickle11
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Re: After tax 401k worth

Post by Pickle11 » Thu Nov 14, 2019 12:15 pm

Agree, doesnt make sense to fund taxable before after tax. My issue is I have a large taxable balance and only recently obtained the use of after tax 401k.

As a result, I am floating my contributions by maxing the after tax from paychecks and essentially not drawing a cash paycheck. My day to day expenses are covered by wife's salary and existing stock of taxable assets.

Since I can only contribute by paycheck, I cannot transfer my existing taxable to after tax and need to rely on paychecks.

JediMisty
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Re: After tax 401k worth

Post by JediMisty » Thu Nov 14, 2019 12:33 pm

Pickle11 wrote:
Thu Nov 14, 2019 12:15 pm
Agree, doesnt make sense to fund taxable before after tax. My issue is I have a large taxable balance and only recently obtained the use of after tax 401k.

As a result, I am floating my contributions by maxing the after tax from paychecks and essentially not drawing a cash paycheck. My day to day expenses are covered by wife's salary and existing stock of taxable assets.

Since I can only contribute by paycheck, I cannot transfer my existing taxable to after tax and need to rely on paychecks.
I see what you're saying about maximizing after-tax and living off your wife's paycheck. I have maxed out my 401k including the after-tax component (except the 5% match, which I must do each paycheck). I'm saving all I can in short term funds right now so I can max out my contributions in the New Year. Since a layoff may permanently end this wonderful investment opportunity, in the first half of the year, I plan to live on savings I'm stashing away now and end-of-year dividends since my paycheck will be wiped out by turbo charging my 401k. This has the same mathematical effect as "transferring" money from my taxable and MM savings into my 401k (Reminiscent of a Roth conversion from an IRA).

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1789
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Re: After tax 401k worth

Post by 1789 » Thu Nov 14, 2019 12:43 pm

Pickle11 wrote:
Thu Nov 14, 2019 12:15 pm
Agree, doesnt make sense to fund taxable before after tax. My issue is I have a large taxable balance and only recently obtained the use of after tax 401k.

As a result, I am floating my contributions by maxing the after tax from paychecks and essentially not drawing a cash paycheck. My day to day expenses are covered by wife's salary and existing stock of taxable assets.

Since I can only contribute by paycheck, I cannot transfer my existing taxable to after tax and need to rely on paychecks.
Yes, all make sense now.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

markcoop
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Re: After tax 401k worth

Post by markcoop » Thu Nov 14, 2019 1:05 pm

1789 wrote:
Thu Nov 14, 2019 12:00 pm
automatic in plan roth rollover feature with in service distributions.
So would you not do it without automatic in plan rollover (I Assume the alternative is to manually do the in plan rollover)?

Does "in service distributions" mean transferring a Roth 401K to a Roth IRA and you can then withdraw contributions?
Mark

anon_investor
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Re: After tax 401k worth

Post by anon_investor » Thu Nov 14, 2019 1:21 pm

1789 wrote:
Thu Nov 14, 2019 12:00 pm
It would not make any sense to put money in taxable account if the 401k after tax comes with automatic in plan roth rollover feature with in service distributions. Please re-read this. Essentially one is funding taxable/after tax 401k after taxes paid. One will grow tax free, the other taxes will be paid to some extend (taxable)

after tax 401k --> automatic roth 401k conversion ---> roth ira OR
after tax 401k --> Roth IRA

So why would it make sense to put money in taxable if one knows that he/she can reach the contributions anytime (as i summarized depending on plan features). Let me know if i missed anything.
I think the one important thing to note is that once the after-tax contributions are converted to roth, they are no longer easily accessible. I believe that even if you can do an in-service distribution to your Roth IRA (not all plans allow for this), those funds have to be held 5 years before they can be accessed without a tax penalty. (edited for clarity)
(added link to article that discusses this 5 year rule)
https://www.schwab.com/resource-center/ ... o-roth-ira

But in the OP's case, it is clear that due to a large taxable account, there is likely no need to access this after-tax contribution that will be converted to roth.

I have the so called "mega backdoor roth" feature in my 401k. And if you can afford to utilize it (meaning you will not need that money for a long time), I think it is a no brainer. You have to pay taxes on that money regardless of what you do with it, so like a regular backdoor roth IRA, this is just gravy especially if you were planning to invest the money anyway. I do not have the "auto roth conversation" feature (I think many Fido administered 401k plans have it). I can manually do it each pay day and it converts the funds before they are invested so I always have $0 taxable growth. Yes, this is a little annoying and I wish I had an auto feature, but the 30 seconds (I can do it on my phone!) of my time twice a month to do this will totally be worth it years from now.

The OP should totally take advantage to the extent that it does not impair the OP's financial stability and lifestyle.

MichCPA
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Re: After tax 401k worth

Post by MichCPA » Thu Nov 14, 2019 1:31 pm

The answer is 0 until you max your IRA and pre tax 401k options, and HSA. It might even fall behind a 529 if there is a state deduction on contributions. This would apply across both spouses if married.

Realistically, you would probably need income of 100k-125k single and 200k plus married before its worth much of anything. Once you get there the value of the feature would largely depend on age.

markcoop
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Re: After tax 401k worth

Post by markcoop » Thu Nov 14, 2019 2:00 pm

MichCPA wrote:
Thu Nov 14, 2019 1:31 pm
The answer is 0 until you max your IRA and pre tax 401k options...
I wouldn't necessarily say max out all pre tax options. My wife has a 401K, but it is a lousy plan. I would rather do the after-tax/convert in my plan than invest in her plan.
Mark

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1789
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Re: After tax 401k worth

Post by 1789 » Thu Nov 14, 2019 2:27 pm

markcoop wrote:
Thu Nov 14, 2019 1:05 pm
1789 wrote:
Thu Nov 14, 2019 12:00 pm
automatic in plan roth rollover feature with in service distributions.
So would you not do it without automatic in plan rollover (I Assume the alternative is to manually do the in plan rollover)?

Does "in service distributions" mean transferring a Roth 401K to a Roth IRA and you can then withdraw contributions?
The key is to be able to take out your contributions for stormy days (stuff happens in life) which you can do in a taxable account. So YES if you are able to take your money out (which means money is distributable --> can be taken out to Roth IRA, and yes it can be taken out from Roth IRA, only contributions
Last edited by 1789 on Thu Nov 14, 2019 2:42 pm, edited 1 time in total.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

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1789
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Re: After tax 401k worth

Post by 1789 » Thu Nov 14, 2019 2:28 pm

anon_investor wrote:
Thu Nov 14, 2019 1:21 pm
1789 wrote:
Thu Nov 14, 2019 12:00 pm
It would not make any sense to put money in taxable account if the 401k after tax comes with automatic in plan roth rollover feature with in service distributions. Please re-read this. Essentially one is funding taxable/after tax 401k after taxes paid. One will grow tax free, the other taxes will be paid to some extend (taxable)

after tax 401k --> automatic roth 401k conversion ---> roth ira OR
after tax 401k --> Roth IRA

So why would it make sense to put money in taxable if one knows that he/she can reach the contributions anytime (as i summarized depending on plan features). Let me know if i missed anything.
I think the one important thing to note is that once the after-tax contributions are converted to roth, they are no longer easily accessible. I believe that even if you can do an in-service distribution to your Roth IRA (not all plans allow for this), those funds have to be held 5 years before they can be accessed without a tax penalty. (edited for clarity)
(added link to article that discusses this 5 year rule)
https://www.schwab.com/resource-center/ ... o-roth-ira

But in the OP's case, it is clear that due to a large taxable account, there is likely no need to access this after-tax contribution that will be converted to roth.

I have the so called "mega backdoor roth" feature in my 401k. And if you can afford to utilize it (meaning you will not need that money for a long time), I think it is a no brainer. You have to pay taxes on that money regardless of what you do with it, so like a regular backdoor roth IRA, this is just gravy especially if you were planning to invest the money anyway. I do not have the "auto roth conversation" feature (I think many Fido administered 401k plans have it). I can manually do it each pay day and it converts the funds before they are invested so I always have $0 taxable growth. Yes, this is a little annoying and I wish I had an auto feature, but the 30 seconds (I can do it on my phone!) of my time twice a month to do this will totally be worth it years from now.

The OP should totally take advantage to the extent that it does not impair the OP's financial stability and lifestyle.
Plan has to allow it. No rules for holding 5 years. We discussed this. You can take your money any time you want from a Roth IRA - only contributions!
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

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Re: After tax 401k worth

Post by 1789 » Thu Nov 14, 2019 2:38 pm

markcoop wrote:
Thu Nov 14, 2019 1:05 pm
1789 wrote:
Thu Nov 14, 2019 12:00 pm
automatic in plan roth rollover feature with in service distributions.
So would you not do it without automatic in plan rollover (I Assume the alternative is to manually do the in plan rollover)?

Does "in service distributions" mean transferring a Roth 401K to a Roth IRA and you can then withdraw contributions?
I listed the best scenario (best plan features). Automatic in plan rollover means the money will be deposited immediately converted to a Roth 401k sub bucket. This means no taxes paid if it is done automatic. (you are minimizing the time for your money to sit in a money market account in after tax 401k bucket). if the plan dont have automatic IRR you will have two choices.

1) Do manually and keep money in the plan (this will be hard because you will be doing this every paycheck, but most plans allow automatic IRR now)

2) Take out money directly to a Roth IRA and invest there. (again the frequency and etc of doing this is a bit of work)

What is best scenario:

1) IRR with automatic rollover to Roth 401k sub bucket. Then roll this sub bucket to Roth IRA depending plan rules. I plan to do this once a year

2) Take money to Roth IRA directly without IRR to Roth 401k. The frequency depends plan rules. (Someone mentioned 3 months, someone mentioned once in 2 years> You can even do this every paycheck but its too much work IMO, so letting money sit and doing it once a year or so maybe OK.)
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

anon_investor
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Re: After tax 401k worth

Post by anon_investor » Thu Nov 14, 2019 2:41 pm

1789 wrote:
Thu Nov 14, 2019 2:28 pm
anon_investor wrote:
Thu Nov 14, 2019 1:21 pm
1789 wrote:
Thu Nov 14, 2019 12:00 pm
It would not make any sense to put money in taxable account if the 401k after tax comes with automatic in plan roth rollover feature with in service distributions. Please re-read this. Essentially one is funding taxable/after tax 401k after taxes paid. One will grow tax free, the other taxes will be paid to some extend (taxable)

after tax 401k --> automatic roth 401k conversion ---> roth ira OR
after tax 401k --> Roth IRA

So why would it make sense to put money in taxable if one knows that he/she can reach the contributions anytime (as i summarized depending on plan features). Let me know if i missed anything.
I think the one important thing to note is that once the after-tax contributions are converted to roth, they are no longer easily accessible. I believe that even if you can do an in-service distribution to your Roth IRA (not all plans allow for this), those funds have to be held 5 years before they can be accessed without a tax penalty. (edited for clarity)
(added link to article that discusses this 5 year rule)
https://www.schwab.com/resource-center/ ... o-roth-ira

But in the OP's case, it is clear that due to a large taxable account, there is likely no need to access this after-tax contribution that will be converted to roth.

I have the so called "mega backdoor roth" feature in my 401k. And if you can afford to utilize it (meaning you will not need that money for a long time), I think it is a no brainer. You have to pay taxes on that money regardless of what you do with it, so like a regular backdoor roth IRA, this is just gravy especially if you were planning to invest the money anyway. I do not have the "auto roth conversation" feature (I think many Fido administered 401k plans have it). I can manually do it each pay day and it converts the funds before they are invested so I always have $0 taxable growth. Yes, this is a little annoying and I wish I had an auto feature, but the 30 seconds (I can do it on my phone!) of my time twice a month to do this will totally be worth it years from now.

The OP should totally take advantage to the extent that it does not impair the OP's financial stability and lifestyle.
Plan has to allow it. No rules for holding 5 years. We discussed this. You can take your money any time you want from a Roth IRA - only contributions!
Are you sure that money rolled into a Roth 401k is treated the same as an annual contribution? I think there are 2 different 5 year rules. One that applies to whether growth will be tax free and one that applies to rollovers and whether those funds can be withdrawn like a contribution.
SEE: https://www.kitces.com/blog/understandi ... nversions/

MichCPA
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Re: After tax 401k worth

Post by MichCPA » Thu Nov 14, 2019 2:48 pm

markcoop wrote:
Thu Nov 14, 2019 2:00 pm
MichCPA wrote:
Thu Nov 14, 2019 1:31 pm
The answer is 0 until you max your IRA and pre tax 401k options...
I wouldn't necessarily say max out all pre tax options. My wife has a 401K, but it is a lousy plan. I would rather do the after-tax/convert in my plan than invest in her plan.
You would need to run those numbers carefully. Expense ratios would need to be in the 2%+ range because you would be giving up a deferral of somewhere in the neighborhood of 28% fed + state.

jyoung
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Re: After tax 401k worth

Post by jyoung » Thu Nov 14, 2019 2:54 pm

I think it's a great benefit. My plan automatically switches to after tax when I reach the limit and allows 1 in plan conversion per year. I just keep putting 20% in all year and the company keeps putting a match in pretax up to the combined IRS limit. It's a mindless way to save even more tax advantaged money.

Edit: Will your employer continue to match your after tax contributions? The numbers with a lot of these types of situations make my head begin to turn pretty quickly, but a match is a great return I wouldn't want to miss out on.
Last edited by jyoung on Thu Nov 14, 2019 3:22 pm, edited 1 time in total.

Topic Author
Pickle11
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Re: After tax 401k worth

Post by Pickle11 » Thu Nov 14, 2019 3:05 pm

Thanks for all the thoughts so far. I've made a calculation table that I will post after work from a computer.

I think the value is the long term capital gains rate times the terminal value of the investment. Obviously life gets in the way and the money may be needed but 100k or so compounded for 40 years will incur substantial taxes.

Lots of assumptions above about rates of return, future tax rates and brackets but if you never need the money, the gains can be huge.

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1789
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Re: After tax 401k worth

Post by 1789 » Thu Nov 14, 2019 4:08 pm

anon_investor wrote:
Thu Nov 14, 2019 2:41 pm
1789 wrote:
Thu Nov 14, 2019 2:28 pm
anon_investor wrote:
Thu Nov 14, 2019 1:21 pm
1789 wrote:
Thu Nov 14, 2019 12:00 pm
It would not make any sense to put money in taxable account if the 401k after tax comes with automatic in plan roth rollover feature with in service distributions. Please re-read this. Essentially one is funding taxable/after tax 401k after taxes paid. One will grow tax free, the other taxes will be paid to some extend (taxable)

after tax 401k --> automatic roth 401k conversion ---> roth ira OR
after tax 401k --> Roth IRA

So why would it make sense to put money in taxable if one knows that he/she can reach the contributions anytime (as i summarized depending on plan features). Let me know if i missed anything.
I think the one important thing to note is that once the after-tax contributions are converted to roth, they are no longer easily accessible. I believe that even if you can do an in-service distribution to your Roth IRA (not all plans allow for this), those funds have to be held 5 years before they can be accessed without a tax penalty. (edited for clarity)
(added link to article that discusses this 5 year rule)
https://www.schwab.com/resource-center/ ... o-roth-ira

But in the OP's case, it is clear that due to a large taxable account, there is likely no need to access this after-tax contribution that will be converted to roth.

I have the so called "mega backdoor roth" feature in my 401k. And if you can afford to utilize it (meaning you will not need that money for a long time), I think it is a no brainer. You have to pay taxes on that money regardless of what you do with it, so like a regular backdoor roth IRA, this is just gravy especially if you were planning to invest the money anyway. I do not have the "auto roth conversation" feature (I think many Fido administered 401k plans have it). I can manually do it each pay day and it converts the funds before they are invested so I always have $0 taxable growth. Yes, this is a little annoying and I wish I had an auto feature, but the 30 seconds (I can do it on my phone!) of my time twice a month to do this will totally be worth it years from now.

The OP should totally take advantage to the extent that it does not impair the OP's financial stability and lifestyle.
Plan has to allow it. No rules for holding 5 years. We discussed this. You can take your money any time you want from a Roth IRA - only contributions!
Are you sure that money rolled into a Roth 401k is treated the same as an annual contribution? I think there are 2 different 5 year rules. One that applies to whether growth will be tax free and one that applies to rollovers and whether those funds can be withdrawn like a contribution.
SEE: https://www.kitces.com/blog/understandi ... nversions/
I think you meant Roth IRA not Roth 401k, right? They are not same thing and you are right on that one. However, 5 year holding period will cause a penalty only if the distributed money from after tax 401k to Roth IRA has a taxable portion (eg: any earnings portion of after tax account before rolling to Roth IRA... but earnings should not be there if the money doesn't sit at after tax 401k bucket, that is the whole goal. Take it out from there either with IRR or out to Roth IRA). So this money which is rolled over to a Roth IRA can be taken out before 5 year w/o penalty. Of course there is an order of distributions from Roth IRA. Direct contributions/earnings/rollovers etc...

Here is an example: Assume one is 30 years old (<59.5) and just opened his his Roth IRA account when he starts investing in after tax 401k so he doesn't have any direct Roth IRA contributions or any previous rollovers in this account so far. He will start rolling his after tax 401k to this Roth IRA. Lets assume he doesn't do this every paycheck as he is a lazy person. He accumulates 5200$ after a year which he knows that 200$ is total gains and 5000$ is his contributions. He rolls 5200$ out to Roth IRA. Plan provider will report this gains in form 1099R as 200$ is taxable income. He will pay taxes on 200$. Assume, one week later he needs 1000$. When he pulls out 1000$ from his Roth IRA, money will come from 200$ (earnings) and 800$ (rollovers). At this point there is a 10% penalty on 200$. If he would had 1000$ direct Roth IRA contributions then that would come out before these ones. So anything that is transferred there with some earnings from after tax to Roth IRA will have a 10% penalty ONLY ON THE EARNINGS. There will not be taxes on the non-taxable Roth rollover from after tax to Roth IRA. Hence it is ideal to minimize the time sitting in after tax 401k bucket before rolling out to Roth IRA.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

markcoop
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Re: After tax 401k worth

Post by markcoop » Thu Nov 14, 2019 4:17 pm

MichCPA wrote:
Thu Nov 14, 2019 2:48 pm
markcoop wrote:
Thu Nov 14, 2019 2:00 pm
MichCPA wrote:
Thu Nov 14, 2019 1:31 pm
The answer is 0 until you max your IRA and pre tax 401k options...
I wouldn't necessarily say max out all pre tax options. My wife has a 401K, but it is a lousy plan. I would rather do the after-tax/convert in my plan than invest in her plan.
You would need to run those numbers carefully. Expense ratios would need to be in the 2%+ range because you would be giving up a deferral of somewhere in the neighborhood of 28% fed + state.
Not sure I understand. I can understand if you think a regular 401K (my wife's plan) is better than a Roth 401K (my plan after conversion), but that really is a another discussion altogether (traditional vs Roth). But assuming for a moment they are comparable, then you are not giving up anything. In fact, I'd be giving up the difference in fees by using my wife's lousy plan.
Last edited by markcoop on Thu Nov 14, 2019 5:38 pm, edited 1 time in total.
Mark

anon_investor
Posts: 577
Joined: Mon Jun 03, 2019 1:43 pm

Re: After tax 401k worth

Post by anon_investor » Thu Nov 14, 2019 4:38 pm

1789 wrote:
Thu Nov 14, 2019 4:08 pm
anon_investor wrote:
Thu Nov 14, 2019 2:41 pm
1789 wrote:
Thu Nov 14, 2019 2:28 pm
anon_investor wrote:
Thu Nov 14, 2019 1:21 pm
1789 wrote:
Thu Nov 14, 2019 12:00 pm
It would not make any sense to put money in taxable account if the 401k after tax comes with automatic in plan roth rollover feature with in service distributions. Please re-read this. Essentially one is funding taxable/after tax 401k after taxes paid. One will grow tax free, the other taxes will be paid to some extend (taxable)

after tax 401k --> automatic roth 401k conversion ---> roth ira OR
after tax 401k --> Roth IRA

So why would it make sense to put money in taxable if one knows that he/she can reach the contributions anytime (as i summarized depending on plan features). Let me know if i missed anything.
I think the one important thing to note is that once the after-tax contributions are converted to roth, they are no longer easily accessible. I believe that even if you can do an in-service distribution to your Roth IRA (not all plans allow for this), those funds have to be held 5 years before they can be accessed without a tax penalty. (edited for clarity)
(added link to article that discusses this 5 year rule)
https://www.schwab.com/resource-center/ ... o-roth-ira

But in the OP's case, it is clear that due to a large taxable account, there is likely no need to access this after-tax contribution that will be converted to roth.

I have the so called "mega backdoor roth" feature in my 401k. And if you can afford to utilize it (meaning you will not need that money for a long time), I think it is a no brainer. You have to pay taxes on that money regardless of what you do with it, so like a regular backdoor roth IRA, this is just gravy especially if you were planning to invest the money anyway. I do not have the "auto roth conversation" feature (I think many Fido administered 401k plans have it). I can manually do it each pay day and it converts the funds before they are invested so I always have $0 taxable growth. Yes, this is a little annoying and I wish I had an auto feature, but the 30 seconds (I can do it on my phone!) of my time twice a month to do this will totally be worth it years from now.

The OP should totally take advantage to the extent that it does not impair the OP's financial stability and lifestyle.
Plan has to allow it. No rules for holding 5 years. We discussed this. You can take your money any time you want from a Roth IRA - only contributions!
Are you sure that money rolled into a Roth 401k is treated the same as an annual contribution? I think there are 2 different 5 year rules. One that applies to whether growth will be tax free and one that applies to rollovers and whether those funds can be withdrawn like a contribution.
SEE: https://www.kitces.com/blog/understandi ... nversions/
I think you meant Roth IRA not Roth 401k, right? They are not same thing and you are right on that one. However, 5 year holding period will cause a penalty only if the distributed money from after tax 401k to Roth IRA has a taxable portion (eg: any earnings portion of after tax account before rolling to Roth IRA... but earnings should not be there if the money doesn't sit at after tax 401k bucket, that is the whole goal. Take it out from there either with IRR or out to Roth IRA). So this money which is rolled over to a Roth IRA can be taken out before 5 year w/o penalty. Of course there is an order of distributions from Roth IRA. Direct contributions/earnings/rollovers etc...

Here is an example: Assume one is 30 years old (<59.5) and just opened his his Roth IRA account when he starts investing in after tax 401k so he doesn't have any direct Roth IRA contributions or any previous rollovers in this account so far. He will start rolling his after tax 401k to this Roth IRA. Lets assume he doesn't do this every paycheck as he is a lazy person. He accumulates 5200$ after a year which he knows that 200$ is total gains and 5000$ is his contributions. He rolls 5200$ out to Roth IRA. Plan provider will report this gains in form 1099R as 200$ is taxable income. He will pay taxes on 200$. Assume, one week later he needs 1000$. When he pulls out 1000$ from his Roth IRA, money will come from 200$ (earnings) and 800$ (rollovers). At this point there is a 10% penalty on 200$. If he would had 1000$ direct Roth IRA contributions then that would come out before these ones. So anything that is transferred there with some earnings from after tax to Roth IRA will have a 10% penalty ONLY ON THE EARNINGS. There will not be taxes on the non-taxable Roth rollover from after tax to Roth IRA. Hence it is ideal to minimize the time sitting in after tax 401k bucket before rolling out to Roth IRA.
Maybe I am reading it wrong, but I think there are 2 scenarios:

1. the "after-tax" contribution rolled into roth IRA, I thought this amount now converted to roth, was subject to a 5 year holding period before it could be withdrawn, otherwise you would be hit with some kind of penalty (10%?).

2. the "after-tax" contribution is converted in-plan to roth 401k, then rolled into a roth IRA, I thought this amount also is subject to a 5 year holding period before it could be withdrawn, otherwise there will be some kind of tax penalty.

I am not talking about the growth. And the issue is really more about not being able to access the funds (like you would in a taxable account) if you need to immediately. Which is to say, the "mega backdoor roth" is only a good option for funds that one does not need to access. A moot point for the OP since the OP said there is a large taxable account to draw from for expenses + spouse's income.

nolesrule
Posts: 1346
Joined: Thu Feb 26, 2015 10:59 am

Re: After tax 401k worth

Post by nolesrule » Thu Nov 14, 2019 6:10 pm

After-tax contributions converted to Roth are not subject to a 5 year clock. However, any earnings or pre-tax money converted in the same year as the after-tax conversion is subject to a 5 year clock and would be withdrawn before the after-tax money from the same conversion year in Roth withdrawal ordering rules.

MathIsMyWayr
Posts: 1098
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

Re: After tax 401k worth

Post by MathIsMyWayr » Thu Nov 14, 2019 6:54 pm

1789 wrote:
Thu Nov 14, 2019 12:00 pm
It would not make any sense to put money in taxable account if the 401k after tax comes with automatic in plan roth rollover feature with in service distributions. Please re-read this. Essentially one is funding taxable/after tax 401k after taxes paid. One will grow tax free, the other taxes will be paid to some extend (taxable)

after tax 401k --> automatic roth 401k conversion ---> roth ira OR
after tax 401k --> Roth IRA

So why would it make sense to put money in taxable if one knows that he/she can reach the contributions anytime (as i summarized depending on plan features). Let me know if i missed anything.
The space of an after-tax 401k (Mega backdoor Roth) is as big as $37k - employer match. It is much bigger than a meager $6k for Roth IRA. You may also contribute to both. Tax-advantaged space is limited both in size and in contribution time window.

pyld76
Posts: 272
Joined: Thu Feb 09, 2012 4:15 pm

Re: After tax 401k worth

Post by pyld76 » Thu Nov 14, 2019 8:33 pm

Have an after tax 401k. Don’t have a Roth 401k in my plan. Have a 5% HCE limit on the after tax. I max it. If you have filled all the pre-tax buckets (401k, HSA) it is a no-brainer. Allows you to get money above beyond the 6k you can backdoor into a Roth. I’ve favored it “over” taxable since it because feasible.

Topic Author
Pickle11
Posts: 17
Joined: Mon Dec 07, 2015 8:28 pm

Re: After tax 401k worth

Post by Pickle11 » Thu Nov 14, 2019 9:32 pm

Thanks for all the discussion.


As I previously inferred, way too many assumptions about returns, future tax rates and various speculation but if you can let the balance run for 35 years. The first three years of max contributions will result in tremendous tax savings at terminal value. Also, assuming these are the last dollars pulled out of your ira a 30 year old could assume 40 to 50 years of compounding.

This may become a generational strategy if parents could trust offspring to let the money compound for their entire working life. That's another story...




Calculations assume you stay at job with this feature for 3 years and max the aftertax contribution.


Pretax 19,500
Match 3,000

After tax Contribution per Year 34,500
Years Contributed 3
Converted from Taxable 103,500

Growth
Returns on Principal
Years Invested
Return 5 10 15 25 30 35
2% 10,772 22,666 35,797 66,303 83,976 103,489
3% 16,485 35,595 57,750 113,206 147,722 187,735
4% 22,424 49,705 82,898 172,414 232,192 304,920
5% 28,595 65,091 111,669 246,988 343,821 467,408
6% 35,006 81,853 144,544 340,709 490,951 692,010
7% 41,664 100,100 182,060 458,239 684,368 1,001,526
8% 48,575 119,949 224,820 605,317 937,985 1,426,783

After Tax Assuming LT Gain tax of 12%

Net Tax Savings compared to taxable- Above table x 12%.
Years Invested
Return 5 10 15 25 30 35 Value Per Year Worked (3 years)
2% 1,292.68 2,719.91 4,295.68 7,956.33 10,077.11 12,418.63 4,139.54
3% 1,978.18 4,271.44 6,929.96 13,584.72 17,726.60 22,528.17 7,509.39
4% 2,690.83 5,964.63 9,947.72 20,689.69 27,863.00 36,590.43 12,196.81
5% 3,431.42 7,810.87 13,400.29 29,638.53 41,258.52 56,088.91 18,696.30
6% 4,200.76 9,822.33 17,345.25 40,885.03 58,914.16 83,041.20 27,680.40
7% 4,999.69 12,012.02 21,847.17 54,988.71 82,124.21 120,183.14 40,061.05
8% 5,829.05 14,393.85 26,978.34 72,638.06 112,558.20 171,213.98 57,071.33


As I previously inferred, way too many assumptions about returns, future tax rates and various speculation but if you can let the balance run for 35 years. The first three years of max contributions will result in tremendous tax savings at terminal value. Also, assuming these are the last dollars pulled out of your ira a 30 year old could assume 40 to 50 years of compounding.

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