Roth Catch-Up 401(k) vs. Mega Backdoor

[pasadena]

I was thinking about next year's plan (new job offer!) and the new rule about making catch-up contributions to Roth instead of pre-tax.

Assuming the plan allows for mega-backdoor contributions (after-tax --> automatic Roth conversion) but the employee can't max it out due to HCE limitations, is there any advantage/disadvantage of foregoing the catch-up and just doing more backdoor?

For example, say I can either do:

- $7,500 roth catch-up + $25,000 mega-backdoor, or
- $32,500 mega-backdoor

Is one better than the other, and if so, why? If it matters, the context would be early retirement using the rule of 55.

[hand]

I would think it depends whether you think your tax rate will go up or down in retirement.
For most people it will drop, so paying taxes later is better than the mega-backdoor Roth option where you pay taxes now.

Best option is of course to do both

[flyingcows]

I was thinking about next year's plan (new job offer!) and the new rule about making catch-up contributions to Roth instead of pre-tax.

Assuming the plan allows for mega-backdoor contributions (after-tax --> automatic Roth conversion) but the employee can't max it out due to HCE limitations, is there any advantage/disadvantage of foregoing the catch-up and just doing more backdoor?

For example, say I can either do:

- $7,500 roth catch-up + $25,000 mega-backdoor, or
- $32,500 mega-backdoor

Is one better than the other, and if so, why? If it matters, the context would be early retirement using the rule of 55.

How do you know HCE limits would apply in new employers plan? In my experience those limits are only applied if the plan fails to meet certain conditions. Years ago I made much less than I do today, yet I had "HCE" limits with that company plan and could only contribute up to 6% to the 401k. Haven't had that issue at last few employers due to their plan structure, I'm able to fill up all of the plan space without issue

[pasadena]

I would think it depends whether you think your tax rate will go up or down in retirement.
For most people it will drop, so paying taxes later is better than the mega-backdoor Roth option where you pay taxes now.

Best option is of course to do both

Next year, catch-up contributions will have to be Roth. This is part of the SECURE 2.0 act. I will obviously still max-out my pre-tax contributions first.

[pasadena]

I was thinking about next year's plan (new job offer!) and the new rule about making catch-up contributions to Roth instead of pre-tax.

Assuming the plan allows for mega-backdoor contributions (after-tax --> automatic Roth conversion) but the employee can't max it out due to HCE limitations, is there any advantage/disadvantage of foregoing the catch-up and just doing more backdoor?

For example, say I can either do:

- $7,500 roth catch-up + $25,000 mega-backdoor, or
- $32,500 mega-backdoor

Is one better than the other, and if so, why? If it matters, the context would be early retirement using the rule of 55.

How do you know HCE limits would apply in new employers plan? In my experience those limits are only applied if the plan fails to meet certain conditions. Years ago I made much less than I do today, yet I had "HCE" limits with that company plan and could only contribute up to 6% to the 401k. Haven't had that issue at last few employers due to their plan structure, I'm able to fill up all of the plan space without issue

I know because they told me. Employee contributions are limited to a certain % of your eligible salary. With that, I know that I will be able to max-out my pre-tax and catch-up contributions, then do *some* after-tax for the mega-backdoor, but I won't be able to max out the whole $77.5k.

You're right that I'm assuming this is because of they want to avoid failing the nondiscrimination tests, but either way, it's a limit.

[firebirdparts]

A dollar is a dollar, so if I understood the question correctly, it would depend on what the process is for getting your 401k out at early retirement age. Do you like that process or not, and which provider do you like.

Maybe I didn't understand the question.

[whodidntante]

After tax contributions are more likely to be returned to you, and it doesn't matter if the plan is a safe harbor plan or not. See my many posts on the topic. Catch-up contributions will not be returned.

So I would do catch-up contributions.

[pasadena]

After tax contributions are more likely to be returned to you, and it doesn't matter if the plan is a safe harbor plan or not. See my many posts on the topic. Catch-up contributions will not be returned.

So I would do catch-up contributions.

That's a good point. I didn't think of that. Thank you.