The email about a new option in my husband's 401K plan has this in the title: "automatic post-1986 after-tax in-plan Roth conversion"
This terminology is so confusing! But it is time for us to learn about the mega backdoor Roth via after-tax 401K contributions now that we have access to this automatic conversion feature. We already max the pre-tax 401K contributions and two back-door Roth IRAs.
If we start doing this, the extra money we put in will not be exclusively for retirement. We will want to feel we can use it for a future house downpayment or home remodeling or college for our kids.
This is allowed, right? As long as we only withdraw contributions (with careful recordkeeping), and not gains, there would be no penalty if we take the after-tax contributions out before retirement, right?
I think this would be a better place to house intermediate-term savings (to be used in 1-15 years) than a taxable account because any interest/dividends/growth will be tax-free.
Anything I am misunderstanding?
after-tax contributions to Roth 401K
Re: after-tax contributions to Roth 401K
Maybe and not exactly.leeks wrote: ↑Thu May 13, 2021 10:13 am If we start doing this, the extra money we put in will not be exclusively for retirement. We will want to feel we can use it for a future house downpayment or home remodeling or college for our kids.
This is allowed, right? As long as we only withdraw contributions (with careful recordkeeping), and not gains, there would be no penalty if we take the after-tax contributions out before retirement, right?
If you put money into a 401k after-tax account and then convert it to Roth 401k, I think the law allows that money to be distributed. However, the discussions here have not been clear (to me) if the plan must allow it or not.
Let's assume that you can get access to this money. The rules for distribution from Roth 401k are different from Roth IRA.
- Roth IRA requires that contributions are distributed before earnings.
Roth 401k requires a distribution to contain a pro-rated amount of contributions and earnings that have occurred in Roth 401k, until age 59.5.
Withdrawals from Roth IRA prior to when the Roth IRA is qualified (59.5 and IRA 5 years old) require that you have good records of how and when each dollar got into the Roth IRA.
So the first place you have to go for information on this is to your plan provider or HR people.
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Re: after-tax contributions to Roth 401K
Ah, that is useful, thanks retiredjg.retiredjg wrote: ↑Thu May 13, 2021 2:31 pmMaybe and not exactly.leeks wrote: ↑Thu May 13, 2021 10:13 am If we start doing this, the extra money we put in will not be exclusively for retirement. We will want to feel we can use it for a future house downpayment or home remodeling or college for our kids.
This is allowed, right? As long as we only withdraw contributions (with careful recordkeeping), and not gains, there would be no penalty if we take the after-tax contributions out before retirement, right?
If you put money into a 401k after-tax account and then convert it to Roth 401k, I think the law allows that money to be distributed. However, the discussions here have not been clear (to me) if the plan must allow it or not.
Let's assume that you can get access to this money. The rules for distribution from Roth 401k are different from Roth IRA.
You can get around this by transferring/rollover the Roth 401k to Roth IRA and then use Roth IRA rules for distribution. This separates the earnings that occur inside Roth 401k from the contributions.
- Roth IRA requires that contributions are distributed before earnings.
Roth 401k requires a distribution to contain a pro-rated amount of contributions and earnings that have occurred in Roth 401k, until age 59.5.
Withdrawals from Roth IRA prior to when the Roth IRA is qualified (59.5 and IRA 5 years old) require that you have good records of how and when each dollar got into the Roth IRA.
So the first place you have to go for information on this is to your plan provider or HR people.
Yes we are checking the withdrawal options with HR & Vanguard but it is helpful to know what questions to ask.
We could just directly take contributions out of either of our Roth IRAs actually. It would be a number of years before the after-tax "extra" 401K contributions would exceed our existing and ongoing contributions to Roth IRAs. So perhaps we would consider each extra 401K contribution as freeing up (emotionally) an equal amount of Roth IRA contributions that could be withdrawn without guilt for pre-retirement spending.
Re: after-tax contributions to Roth 401K
If you want access to the funds while still working at that company, you should not convert the after-tax funds to Roth 401(k). You should do in-service distributions of the after-tax funds to your Roth IRA.
Re: after-tax contributions to Roth 401K
This depends on the plan. At my employer, we can still rollover to a Roth IRA after doing an in-plan conversion from after-tax to Roth.
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