Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

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Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

[Moved into a new thread from: Suggestions for the Wiki --admin LadyGeek]
dafioram wrote: Thu Jun 03, 2021 6:51 pm 2. How about we change https://www.bogleheads.org/wiki/After-tax_401(k) to be "Mega Backdoor Roth" as the title? Mega Backdoor is a special case of after-tax and I think after-tax can also apply to other things such as variable deferred annuities (which go in after-tax for non-qualified). We could have a page just for after-tax which compares it against taxable investing as one example as to after-tax being a separate thing from mega backdoor.
After-tax 401(k) is the appropriate name while "Mega Backdoor Roth" is an equivalent term coined by White Coat Investor and documented in this forum thread: The Mega Backdoor Roth IRA

Is there a difference between them?
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Re: Suggestions for the Wiki

Post by retiredjg »

LadyGeek wrote: Sat Jun 05, 2021 7:26 pm
dafioram wrote: Thu Jun 03, 2021 6:51 pm 2. How about we change https://www.bogleheads.org/wiki/After-tax_401(k) to be "Mega Backdoor Roth" as the title? Mega Backdoor is a special case of after-tax and I think after-tax can also apply to other things such as variable deferred annuities (which go in after-tax for non-qualified). We could have a page just for after-tax which compares it against taxable investing as one example as to after-tax being a separate thing from mega backdoor.
After-tax 401(k) is the appropriate name while "Mega Backdoor Roth" is an equivalent term coined by White Coat Investor and documented in this forum thread: The Mega Backdoor Roth IRA

Is there a difference between them?
Yes, there is a difference.

An after-tax account in a 401k is an account (or sub-account if you prefer). It holds after-tax employee contributions to the 401k that are not part of the employee's elective deferrals (which go to traditional 401k or Roth 401k).

Using the "mega-backdoor" refers to the process of moving money from the after-tax account out to Roth IRA or moving the money from the after-tax account to the Roth 401k account (called an in-plan Roth rollover).

If the money stays in the after-tax account indefinitely, no mega-backdoor process has occurred.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

OK, I see the difference now, thanks! I've broken this suggestion into a separate thread. We need a dedicated discussion in order to get a forum consensus on what needs to be changed. I'm deferring to the experts for suggestions.

I've created a draft page. See: User:LadyGeek/Mega-backdoor Roth

Once the page is ready to go "live", we'll have to fix the first sentence in After-tax 401(k) (remove the ", also known as a Mega Backdoor Roth IRA, ") and repoint the search box shortcut "Mega Backdoor Roth" to the new page.

Comments / questions / suggestions are welcome. Wiki editors can edit the page directly.

Update: Corrected draft page name per comments below.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by retiredjg »

I agree that mega-backdoor Roth would be a more descriptive name for the contents of the page.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

Are you proposing to:

1. Change the name of the existing page (After-tax 401(k)) to "Mega-backdoor Roth IRA"?

The alternative name would be in the description as ", also known as an After-tax 401(k), " - or would this be incorrect?

2. Create a new page titled "After-tax investing comparisons" and use it to discuss general investments (not just for 401(k)).

My confusion is that "After-tax 401(k)" refers to the account itself, while "Mega-backdoor Roth IRA" implies the conversion process.

The introductory first paragraph in After-tax 401(k) mixes these two concepts and is unclear to me.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by HomeStretch »

LadyGeek wrote: Sun Jun 06, 2021 7:30 am … I've created a draft page. See: User:LadyGeek/Mega-backdoor Roth IRA
Consider deleting “IRA” from the linked proposed revised wiki page title.

Step 2 of a mega backdoor doesn’t always involve the use of a Roth IRA. Depending on the 401k plan, after-tax 401k contributions may be rolled over in-plan to Roth 401k (rather than converted to a Roth IRA).
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by withrye »

The current state of the Bogleheads wiki is that it has a separate page for both the Non-deductible traditional IRA and the Backdoor Roth.

The relationship between the After-tax 401k and the Mega Backdoor Roth is analogous.

Given the above, I think the most consistent approach is to have two separate pages for the After-tax 401k and the Mega Backdoor Roth. The After-tax 401k page would compare it to a Traditional 401k and Roth 401k options, describe (and link) to the Mega Backdoor Roth as the most appropriate and common use, and potentially walk through the same performance comparison as the Non-deductible traditional IRA page does.

The Mega Backdoor Roth page would describe the relevant overview, definitions, and details. The Cautions and Form 8606 section are not directly applicable, as the Mega Backdoor Roth has no analogous "pro rata" rule regarding other pre-tax IRA dollars and the reporting for a Mega Backdoor Roth happens directly on Form 1040 using Form 1099-R as a source document.

Edit to add: The principle risk of only having one page in which the After-tax 401k and Mega Backdoor Roth are discussed together is that these terms are often conflated, leading to potentially costly investing errors. I have anecdotally come across folks on the internet who are excited about having access to an After-tax 401k option with their plan provider, which is necessary but not sufficient to complete the Mega Backdoor Roth. If the investor cannot perform the in-service conversion or rollover to a Roth account, they are essentially stuck with money in an After-tax 401k that acts very similarly to a Non-deductible traditional IRA. I worry that creating a single page that subtly describes the After-tax 401k and Mega Backdoor Roth in the same sentence would perpetuate this source of confusion.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

^^^ That makes perfect sense, thanks. (I still don't feel confident updating the pages on my own.)
HomeStretch wrote: Sun Jun 06, 2021 7:57 am
LadyGeek wrote: Sun Jun 06, 2021 7:30 am … I've created a draft page. See: User:LadyGeek/Mega-backdoor Roth IRA
Consider deleting “IRA” from the linked proposed revised wiki page title.

Step 2 of a mega backdoor doesn’t always involve the use of a Roth IRA. Depending on the 401k plan, after-tax 401k contributions may be rolled over in-plan to Roth 401k (rather than converted to a Roth IRA).
Thanks, I've renamed the page and updated my earlier post. See: User:LadyGeek/Mega-backdoor Roth

Right now, it's a direct copy of After-tax 401(k) - intended as a quick starting point. Any and all content is free to be modified.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by retiredjg »

LadyGeek wrote: Sun Jun 06, 2021 7:51 am Are you proposing to:

1. Change the name of the existing page (After-tax 401(k)) to "Mega-backdoor Roth IRA"?
Yes, but prefer the change to "Mega-backdoor Roth", for the reasons already mentioned.

The alternative name would be in the description as ", also known as an After-tax 401(k), " - or would this be incorrect?
That would be incorrect. But since people do get the terms confused, if people search on "after-tax 401k" the search could be directed to the Mega-backdoor Roth" page.

2. Create a new page titled "After-tax investing comparisons" and use it to discuss general investments (not just for 401(k)).
I don't see a need for this page myself.

My confusion is that "After-tax 401(k)" refers to the account itself, while "Mega-backdoor Roth IRA" implies the conversion process.

The introductory first paragraph in After-tax 401(k) mixes these two concepts and is unclear to me.
The introductory paragraph does need to be improved. Let's see what others suggest.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

retiredjg wrote: Sun Jun 06, 2021 8:40 am
LadyGeek wrote: Sun Jun 06, 2021 7:51 am Are you proposing to:

1. Change the name of the existing page (After-tax 401(k)) to "Mega-backdoor Roth IRA"?
Yes, but prefer the change to "Mega-backdoor Roth", for the reasons already mentioned.
Agree. I'll change the page name and provide the relevant search redirects once the dust has settled.
retiredjg wrote: Sun Jun 06, 2021 8:40 am
LadyGeek wrote: Sun Jun 06, 2021 7:51 amThe alternative name would be in the description as ", also known as an After-tax 401(k), " - or would this be incorrect?
That would be incorrect. But since people do get the terms confused, if people search on "after-tax 401k" the search could be directed to the Mega-backdoor Roth" page.
OK, it will be left-out. I'll change the search redirects as noted above.
retiredjg wrote: Sun Jun 06, 2021 8:40 am
LadyGeek wrote: Sun Jun 06, 2021 7:51 am2. Create a new page titled "After-tax investing comparisons" and use it to discuss general investments (not just for 401(k)).
I don't see a need for this page myself.
OK.
retiredjg wrote: Sun Jun 06, 2021 8:40 am
LadyGeek wrote: Sun Jun 06, 2021 7:51 amMy confusion is that "After-tax 401(k)" refers to the account itself, while "Mega-backdoor Roth IRA" implies the conversion process.

The introductory first paragraph in After-tax 401(k) mixes these two concepts and is unclear to me.
The introductory paragraph does need to be improved. Let's see what others suggest.
I'll wait.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by AnEngineer »

HomeStretch wrote: Sun Jun 06, 2021 7:57 am
LadyGeek wrote: Sun Jun 06, 2021 7:30 am … I've created a draft page. See: User:LadyGeek/Mega-backdoor Roth IRA
Consider deleting “IRA” from the linked proposed revised wiki page title.

Step 2 of a mega backdoor doesn’t always involve the use of a Roth IRA. Depending on the 401k plan, after-tax 401k contributions may be rolled over in-plan to Roth 401k (rather than converted to a Roth IRA).
Additionally, while the page mentions both, more could be done to call out the two forms, as many who know about mega backdoor Roth IRA seem to not be aware of the mega backdoor Roth 401k version.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by lakpr »

Would this thread be more appropriate in the Forum Issues and Administration, than personal finance? There is nothing "personal", as in affecting a specific person, in this discussion.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by dafioram »

withrye wrote: Sun Jun 06, 2021 8:11 am The current state of the Bogleheads wiki is that it has a separate page for both the Non-deductible traditional IRA and the Backdoor Roth.

Given the above, I think the most consistent approach is to have two separate pages for the After-tax 401k and the Mega Backdoor Roth. The After-tax 401k page would compare it to a Traditional 401k and Roth 401k options, describe (and link) to the Mega Backdoor Roth as the most appropriate and common use, and potentially walk through the same performance comparison as the Non-deductible traditional IRA page does.

The Mega Backdoor Roth page would describe the relevant overview, definitions, and details. The Cautions and Form 8606 section are not directly applicable, as the Mega Backdoor Roth has no analogous "pro rata" rule regarding other pre-tax IRA dollars and the reporting for a Mega Backdoor Roth happens directly on Form 1040 using Form 1099-R as a source document.
I second the motion.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

dafioram wrote: Sun Jun 06, 2021 9:14 am
withrye wrote: Sun Jun 06, 2021 8:11 am The current state of the Bogleheads wiki is that it has a separate page for both the Non-deductible traditional IRA and the Backdoor Roth.

Given the above, I think the most consistent approach is to have two separate pages for the After-tax 401k and the Mega Backdoor Roth. The After-tax 401k page would compare it to a Traditional 401k and Roth 401k options, describe (and link) to the Mega Backdoor Roth as the most appropriate and common use, and potentially walk through the same performance comparison as the Non-deductible traditional IRA page does.

The Mega Backdoor Roth page would describe the relevant overview, definitions, and details. The Cautions and Form 8606 section are not directly applicable, as the Mega Backdoor Roth has no analogous "pro rata" rule regarding other pre-tax IRA dollars and the reporting for a Mega Backdoor Roth happens directly on Form 1040 using Form 1099-R as a source document.
I second the motion.
Agreed. the current "aftertax 401k" is in the category for "employer sponsored accounts" which it is. Maybe some bits about hte "megabackdoor" process needs to be stripped out and simplified. one can have an aftertax 401k account without the rest, and there are certain tax implications to that.

Then separate, there could be a "megabackdoor" process/strategy page, that talks about how to do it with either a rollover to Roth IRA or an in-plan roth conversion.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

I took a shot at expanding the introduction of the Mega Backdoor Roth article draft. It's similar to the way things are presented in the Backdoor Roth article's intro.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by retiredjg »

okwriter wrote: Tue Jun 08, 2021 6:53 am I took a shot at expanding the introduction of the Mega Backdoor Roth article draft. It's similar to the way things are presented in the Backdoor Roth article's intro.
I like this. Well done!



1. I have a question about the term "after-tax 401k". I'm not sure that is a thing. I'm not sure it isn't either. Does anybody know for sure? I always refer to it as an after-tax account in the 401k.

2. A couple of links seem to go to the wrong place. I think you intended to link to the 401k page where there is a decent definition of after-tax 401k.

3. I wonder if a small mention should be made that "after-tax 401k" is not the same thing as "Roth 401k" because there is constant confusion about that.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

retiredjg wrote: Tue Jun 08, 2021 7:15 am 1. I have a question about the term "after-tax 401k". I'm not sure that is a thing. I'm not sure it isn't either. Does anybody know for sure? I always refer to it as an after-tax account in the 401k.
Well.. in the modern age, some recordkeepers refer to it as an after-tax "sub account" (or "account") but it really is just accounting. If one was going to adopt a plan, and open non-prototype accounts at a brokerage. One would typically open 3 accounts to start (Pretax, aftertax, Roth). If they allowed rollovers into their personal 401k and distributions of rollovers they might open 2 more (rollover pretax, rollover roth). this simplifies the accounting, if you know what you put it, to an account, then its easy to track the gains in that account. Also, for distribution purposes things are simplified. If a plan allowed "inplan Roth conversions" and allowed pre-59.5 distributions from after tax sources, one might have an account called "Roth from Aftertax" after you did a conversion, because the distributions while working might still apply, even though you did a conversion.

So depending on how the 401k plan is setup, one might actually have "accounts" or it might just be "accounting". (in what is called a "pooled account" from the brokerage perspective)

There are actually two types of "after-tax" contributions. "Pre-1987" after-tax contributions can potentially be recovered and converted to Roth without any of the associated earnings if the recordkeeper has tracked these dollars. (most people don't have these just due to time now)

Then there was a law change, so most people are familiar with "Post-1986" after tax contributions. These are are what everyone is familiar with, they are subject to the basis recovery rules that force the pro rata share of earnings and contributions. (IRS notice 87-13)... However, there are the later notices that allow one to split those distributions into two checks and send the basis to Roth and the earnings to a Pretax IRA.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fizxman »

Soon2BXProgrammer wrote: Tue Jun 08, 2021 7:29 am
retiredjg wrote: Tue Jun 08, 2021 7:15 am 1. I have a question about the term "after-tax 401k". I'm not sure that is a thing. I'm not sure it isn't either. Does anybody know for sure? I always refer to it as an after-tax account in the 401k.
Well.. in the modern age, some recordkeepers refer to it as an after-tax "sub account" (or "account") but it really is just accounting. If one was going to adopt a prototype plan, and open naked accounts at a brokerage. One would typically open 3 accounts to start (Pretax, aftertax, Roth). If they allowed rollovers into their personal 401k and distributions of rollovers they might open 2 more (rollover pretax, rollover roth). this simplifies the accounting, if you know what you put it, to an account, then its easy to track the gains in that account. Also, for distribution purposes things are simplified. If a plan allowed "inplan Roth conversions" and allowed pre-59.5 distributions from after tax sources, one might have an account called "Roth from Aftertax" after you did a conversion, because the distributions while working might still apply, even though you did a conversion.

So depending on how the 401k plan is setup, one might actually have "accounts" or it might just be "accounting".

There are actually two types of "after-tax" contributions. "Pre-1987" after-tax contributions can potentially be recovered and converted to Roth without any of the associated earnings if the recordkeeper has tracked these dollars. (most people don't have these just due to time now)

Then there was a law change, so most people are familiar with "Post-1986" after tax contributions. These are are what everyone is familiar with, they are subject to the basis recovery rules that force the pro rata share of earnings and contributions. (IRS notice 87-13)... However, there are the later notices that allow one to split those distributions into two checks and send the basis to Roth and the earnings to a Pretax IRA.
For what it's worth, mine at Charles Schwab is called "Employee After Tax Voluntary".
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by retiredjg »

Just to be clear, I'm not saying it ("after-tax 401k") needs to be changed. When I read it, I just wondered if that is the correct term or not.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

retiredjg wrote: Tue Jun 08, 2021 8:21 am Just to be clear, I'm not saying it ("after-tax 401k") needs to be changed. When I read it, I just wondered if that is the correct term or not.
i think people use it for short hand, but its really an aftertax account in a 401k plan.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by jason2459 »

Under Earnings on after-tax contributions, may want to note that if someone rolls over the earnings to a traditional IRA then that may cause pro rata issues if also doing or will be doing in the future backdoor Roth contributions.

Unless I missed that potential issue.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

jason2459 wrote: Tue Jun 08, 2021 9:05 am Under Earnings on after-tax contributions, may want to note that if someone rolls over the earnings to a traditional IRA then that may cause pro rata issues if also doing or will be doing in the future backdoor Roth contributions.

Unless I missed that potential issue.
Yes one strategy is to "rollback" those back into the 401k. to get back to zero.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by AnEngineer »

fizxman wrote: Tue Jun 08, 2021 7:50 am For what it's worth, mine at Charles Schwab is called "Employee After Tax Voluntary".
I believe I've seen it called "after-tax deferred" as well.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by jakehefty17 »

I'd suggest a section early on the page for determining if your 401k plan will allow for Mega-Backdoor Roth.

Does your 401k plan allow for After-Tax contributions? If yes, read through your plan documentation for After-Tax Withdrawals or Conversions and whether or not they're allowed. Specifically, are they allowed without a "triggering event". Triggering events include job loss, retirement, or death, and are typical for many types of contracts.

It's imperative that any rules and restrictions involved are thoroughly understood prior to attempting a Mega-Backdoor Roth.

The rules regarding After-tax 401k withdrawals vary greatly between employer plans. Some allow for in-plan conversions (into Roth 401k account), which is typically the preferred method. Other plans require a Rollover into a Roth IRA account. Still other plans may not allow for After-Tax 401k contributions or withdrawals. Read your 401k plan documentation, often referred to as a Summary Plan Description, for details.

Potential examples of rules or restrictions that may surround withdrawals are:
Suspension of After-Tax contributions for a specified timeframe after receiving the distribution.
Suspension of After-Tax matching contributions for a specified period after receiving the distribution.
Requiring contacting Human Resources to resume making After-Tax contributions to your plan.

These examples are taken from my particular experience... but I think it's important that people realize they need to read their plan. We can't know what their plan requires. Important enough to make a section out of. Feel free to use anything here, or reorganize/rework it as needed.

I'm glad this page is being added, as the current After-tax 401k page is a bit muddled with information regarding this process. The process is comparable to the Backdoor Roth IRA process, and the pages should reflect that similarly. Currently there's a page for After-Tax IRA, and a page for the Backdoor Roth IRA. So there should be separate pages for After-Tax 401k and the Mega-Backdoor Roth.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

Okwriter's updates to the Mega-backdoor Roth draft page suddenly made all of this discussion clear to me. I still don't have the confidence to update these pages myself, but it was a big help.

Going further, I think we'll need to align the After-tax 401(k) page to this discussion. I created a new draft page. See: User:LadyGeek/After-tax 401(k) So far, it's just a copy of the current "live" page.
lakpr wrote: Sun Jun 06, 2021 9:12 am Would this thread be more appropriate in the Forum Issues and Administration, than personal finance? There is nothing "personal", as in affecting a specific person, in this discussion.
Good point, as wiki discussions are always of a general nature. We need to bend the rules a bit because it's more important to have the discussion located where it's relevant and does the most good - and attracts the right experts. The administration forum draws my attention, for example, but it's not appropriate for a personal finance discussion.

Personal Finance is for discussing taxes, employer retirement plans, credit cards, insurance, and estate planning. Investing is also under the Personal Finance "umbrella", but we need a separate forum to focus on portfolio management. See: Financial planning, but I digress.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

LadyGeek wrote: Tue Jun 08, 2021 3:13 pm I still don't have the confidence to update these pages myself, but it was a big help.
Can you make my account have wiki priviledges?
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

Soon2BXProgrammer wrote: Tue Jun 08, 2021 3:16 pm
LadyGeek wrote: Tue Jun 08, 2021 3:13 pm I still don't have the confidence to update these pages myself, but it was a big help.
Can you make my account have wiki priviledges?
Yes, I can. Thanks! Your account now has wiki editing privileges. Look for a PM containing the details.
jakehefty17 wrote: Tue Jun 08, 2021 12:56 pm I'd suggest a section early on the page for determining if your 401k plan will allow for Mega-Backdoor Roth.
I added your section to the draft page: User:LadyGeek/Mega-backdoor Roth (Does your 401(k) plan allow after-tax contributions?)

How's it look?
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by retiredjg »

Just putting OKwriter's first paragraph in (and taking what is there out) would be enough to suit my concerns with the page as it existed before these discussions started. However, the links need to go to the 401k page not the after-tax 401k page.

Suggestions have been made to cover more details, but I think too many details make such pages overwhelming rather than helpful.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

I'm all for simplicity. You're suggesting that the User:LadyGeek/Mega-backdoor Roth draft page is a direct replacement for After-tax 401(k) and nothing else needs to be done?

In that case, Okwriter's links should go to the 401(k) page.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

Thanks! Based on the suggestions I changed "After-tax 401(k)" to "After-tax 401(k) account", and fixed the link. Also added a sentence about not confusing it with Roth 401(k).
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by tomsense76 »

Thank you for working on this! :D
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Rainmaker41
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Rainmaker41 »

On a related note for another page, the Prioritizing Investments wiki page has as step 6 of funding priority:

"Contribute the remainder of the maximum employee contribution to the work-based plan, including an After-tax 401(k) (Mega Backdoor Roth), if available."

It is my understanding that it is desirable to contribute to an after-tax 401(k) as a part of the Mega Backdoor Roth process, but, if the plan does not support the MBR, the advisability of using the after-tax 401(k), rather than a taxable account with tax-efficient assets, is questionable. The earnings on the after-tax 401(k) are taxed as ordinary income at withdrawal, whereas long-term capital gains rates on a taxable account stock fund are lower.

So, I would suggest clarifying the language of step 6 to read something like:

"Contribute the remainder of the maximum employee contribution to the work-based plan. If the plan additionally provides an after-tax 401(k) option which enables the Mega Backdoor Roth, utilize this after maxing out the regular employee contribution limit for the tax year." (link to Mega Backdoor Roth page, note complexity/warning?, etc.)

Possibly it may help to separate the Mega Backdoor Roth element to a separate step, to avoid confusion for the majority of those with access to 401(k)-style plans which do not support Mega Backdoor Roth functionality. I'm not sure though.
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Soon2BXProgrammer
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

Rainmaker41 wrote: Tue Jun 08, 2021 4:29 pm On a related note for another page, the Prioritizing Investments wiki page has as step 6 of funding priority:

"Contribute the remainder of the maximum employee contribution to the work-based plan, including an After-tax 401(k) (Mega Backdoor Roth), if available."

It is my understanding that it is desirable to contribute to an after-tax 401(k) as a part of the Mega Backdoor Roth process, but, if the plan does not support the MBR, the advisability of using the after-tax 401(k), rather than a taxable account with tax-efficient assets, is questionable. The earnings on the after-tax 401(k) are taxed as ordinary income at withdrawal, whereas long-term capital gains rates on a taxable account stock fund are lower.

So, I would suggest clarifying the language of step 6 to read something like:

"Contribute the remainder of the maximum employee contribution to the work-based plan. If the plan additionally provides an after-tax 401(k) option which enables the Mega Backdoor Roth, utilize this after maxing out the regular employee contribution limit for the tax year." (link to Mega Backdoor Roth page, note complexity/warning?, etc.)

Possibly it may help to separate the Mega Backdoor Roth element to a separate step, to avoid confusion for the majority of those with access to 401(k)-style plans which do not support Mega Backdoor Roth functionality. I'm not sure though.
I understand your points, and I'll have to think about this.

Your taxing points are correct. There is a balance though, especially if the participant thinks this job/position/401k is a "temporary" stay of a few years. I wouldn't hesitate to loading up with aftertax contributions if i was planning to leave the employer in a reasonable amount of time...
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Rainmaker41
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Rainmaker41 »

Soon2BXProgrammer wrote: Tue Jun 08, 2021 4:32 pm
I understand your points, and I'll have to think about this.

Your taxing points are correct. There is a balance though, especially if the participant thinks this job/position/401k is a "temporary" stay of a few years. I wouldn't hesitate to loading up with aftertax contributions if i was planning to leave the employer in a reasonable amount of time...
Yeah, simplicity & good enough for most cases versus completeness & accuracy is always a trade-off with guides like this.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by HomeStretch »

retiredjg wrote: Tue Jun 08, 2021 3:38 pm Just putting OKwriter's first paragraph in (and taking what is there out) would be enough to suit my concerns with the page as it existed before these discussions started. However, the links need to go to the 401k page not the after-tax 401k page.

Suggestions have been made to cover more details, but I think too many details make such pages overwhelming rather than helpful.
+1
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

jason2459 wrote: Tue Jun 08, 2021 9:05 am Under Earnings on after-tax contributions, may want to note that if someone rolls over the earnings to a traditional IRA then that may cause pro rata issues if also doing or will be doing in the future backdoor Roth contributions.

Unless I missed that potential issue.
Thanks for this point. I've added it to the Earnings section, along with a couple of methods to minimize taxable earnings.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by TedSwippet »

Is there a preferred phrasing and capitalisation for this activity? Currently, all of the following appear in the page:
  • Mega-backdoor Roth
  • Mega backdoor Roth
  • Mega Backdoor Roth
  • "Mega Back Door" Roth
Although clearly all the same thing, settling on just one seems desirable. The first matches the (current) page name.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

The third phrasing (Mega Backdoor Roth) is what appears in the original source as well as a couple of other links cited.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

Perhaps, but we need to follow Wikipedia guidelines for page and section titles. See: Wikipedia:Manual of Style - Wikipedia (Capital letters)
Wikipedia article titles and section headings use sentence case, not title case;
For consistency, it's best to stick with one convention.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

Sure. I don't have a strong preference between "mega-backdoor Roth" and "mega backdoor Roth".
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

There was some support for having a separate after-tax 401k page, so I made an edit to the other draft. I think it incorporates the comments.

User:LadyGeek/Mega-backdoor Roth

User:LadyGeek/After-tax 401(k)

They have no sections in common. The after-tax 401(k) page has only the contribution limits table; everything else was stripped out since it's already in the mega-backdoor Roth page. And the phrasing now matches the title ("mega-backdoor Roth").

If this looks ok, I think both pages may be ready to go live.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

okwriter wrote: Tue Jun 08, 2021 9:37 pm There was some support for having a separate after-tax 401k page, so I made an edit to the other draft. I think it incorporates the comments.

User:LadyGeek/Mega-backdoor Roth

User:LadyGeek/After-tax 401(k)

They have no sections in common. The after-tax 401(k) page has only the contribution limits table; everything else was stripped out since it's already in the mega-backdoor Roth page. And the phrasing now matches the title ("mega-backdoor Roth").

If this looks ok, I think both pages may be ready to go live.
Do you mind if i take a swing at flushing out the after-tax page with facts that are about the after tax account. Like taxation?

On the megabackdoor Roth page, it could be noted that https://www.irs.gov/pub/irs-drop/n-14-54.pdf is the notice that allows the splitting of basis and gains.

I didn't check but i'm highly confident that these line nubmers are wrong: " Report it as a rollover on Form 1040 lines 16a and 16b just like you would a direct rollover. "

also we probably should mention on the aftertax page, that it is describing "post 1986" aftertax contributions since the older type have different rules..... (some retirees have "pre 1987" aftertax contributions still in employer sponsored plans, my father is a great example)

let me know if you want me to take a swing at any of these types of updates.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

Soon2BXProgrammer wrote: Tue Jun 08, 2021 9:51 pm
okwriter wrote: Tue Jun 08, 2021 9:37 pm There was some support for having a separate after-tax 401k page, so I made an edit to the other draft. I think it incorporates the comments.

User:LadyGeek/Mega-backdoor Roth

User:LadyGeek/After-tax 401(k)

They have no sections in common. The after-tax 401(k) page has only the contribution limits table; everything else was stripped out since it's already in the mega-backdoor Roth page. And the phrasing now matches the title ("mega-backdoor Roth").

If this looks ok, I think both pages may be ready to go live.
Do you mind if i take a swing at flushing out the after-tax page with facts that are about the after tax account. Like taxation?

On the megabackdoor Roth page, it could be noted that https://www.irs.gov/pub/irs-drop/n-14-54.pdf is the notice that allows the splitting of basis and gains.

I didn't check but i'm highly confident that these line nubmers are wrong: " Report it as a rollover on Form 1040 lines 16a and 16b just like you would a direct rollover. "

also we probably should mention on the aftertax page, that it is describing "post 1986" aftertax contributions since the older type have different rules..... (some retirees have "pre 1987" aftertax contributions still in employer sponsored plans, my father is a great example)

let me know if you want me to take a swing at any of these types of updates.
Sure, feel free to edit/rework. It's a collaborative wiki :)
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

okwriter wrote: Tue Jun 08, 2021 9:58 pm Sure, feel free to edit/rework. It's a collaborative wiki :)
User:LadyGeek/After-tax 401(k)

i made a few changes to the above. i will look at both pages in more detail tomorrow.

i did notice there are some duplicative text on https://www.bogleheads.org/wiki/401(k) page. Once we are done with the main two pages, we should just read the main page to make sure it reads the same.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

Great idea LadyGeek. I had been thinking the same thing for a while.
withrye wrote: Sun Jun 06, 2021 8:11 am The current state of the Bogleheads wiki is that it has a separate page for both the Non-deductible traditional IRA and the Backdoor Roth.

The relationship between the After-tax 401k and the Mega Backdoor Roth is analogous.

Given the above, I think the most consistent approach is to have two separate pages for the After-tax 401k and the Mega Backdoor Roth. The After-tax 401k page would compare it to a Traditional 401k and Roth 401k options, describe (and link) to the Mega Backdoor Roth as the most appropriate and common use, and potentially walk through the same performance comparison as the Non-deductible traditional IRA page does.

The Mega Backdoor Roth page would describe the relevant overview, definitions, and details. The Cautions and Form 8606 section are not directly applicable, as the Mega Backdoor Roth has no analogous "pro rata" rule regarding other pre-tax IRA dollars and the reporting for a Mega Backdoor Roth happens directly on Form 1040 using Form 1099-R as a source document.

Edit to add: The principle risk of only having one page in which the After-tax 401k and Mega Backdoor Roth are discussed together is that these terms are often conflated, leading to potentially costly investing errors. I have anecdotally come across folks on the internet who are excited about having access to an After-tax 401k option with their plan provider, which is necessary but not sufficient to complete the Mega Backdoor Roth. If the investor cannot perform the in-service conversion or rollover to a Roth account, they are essentially stuck with money in an After-tax 401k that acts very similarly to a Non-deductible traditional IRA. I worry that creating a single page that subtly describes the After-tax 401k and Mega Backdoor Roth in the same sentence would perpetuate this source of confusion.
+100 nailed it.

The After-tax 401k page should be relatively simple, describing the mechanics of the account and how it compares to traditional and Roth 401k sub-accounts.

The MBR page should cover at least (off the top of my head):
  • 401k features necessary to perform this maneuver (after-tax account, combined with in-service withdrawals or in-plan Roth conversions) and how to tell if your plan has them
  • Mechanics of performing a MBR, depending on the type of plan features you have, and the tax consequences of each
  • Similarities and differences with a (traditional IRA-based) Backdoor Roth
  • MBR in a Solo 401k - plans that allow this, appropriate uses, impacts to traditional versus Roth decisions, etc.
My time will be limited this month but I'll try to contribute as best as I can.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by dafioram »

After-tax. Thoughts on adding the follow?
1.its mentioned that after-tax is like nondeductible ira. which it is but we could also add that its doesnt get included in pro rata when doing the backdoor (if after tax left in 401k.
2. As soon2bx said you can still sorta so the backdoor if you can do after tax and you are retiring soon (so you can roll out after tax and then roth convert it) or if you have some vesting requirement before having roth conversion ability in the 401k
dafioram
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by dafioram »

megaback page.

It has a paragraph saying its different from backdoor, but maybe we could move this to the top and put it in as a "This page should not be confused with the backdoor Roth..."
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

dafioram wrote: Tue Jun 08, 2021 11:10 pm After-tax. Thoughts on adding the follow?
1.its mentioned that after-tax is like nondeductible ira. which it is but we could also add that its doesnt get included in pro rata when doing the backdoor (if after tax left in 401k.
2. As soon2bx said you can still sorta so the backdoor if you can do after tax and you are retiring soon (so you can roll out after tax and then roth convert it) or if you have some vesting requirement before having roth conversion ability in the 401k
I have the following in the taxation section of the aftertax page:
Due to the lack of deduction and ordinary income taxation, the tax characteristics are similar to a nondeductible IRA. If the money grows over long periods of time, the tax characteristics might be less favorable then investing in a taxable account. An investor might choose to to make after-tax contributions if they have a plan to convert them to Roth, ideally timing is yearly, but if an investor is leaving a company within a few years, it might still be beneficial to make contributions.
Thoughts? feedback?

I wasn't entire sure your expectations from your comment #1, please clarify.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

dafioram wrote: Tue Jun 08, 2021 11:22 pm megaback page.

It has a paragraph saying its different from backdoor, but maybe we could move this to the top and put it in as a "This page should not be confused with the backdoor Roth..."
Have added a notice on top and a section at the end.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by dafioram »

okwriter wrote: Wed Jun 09, 2021 2:00 am
dafioram wrote: Tue Jun 08, 2021 11:22 pm megaback page.

It has a paragraph saying its different from backdoor, but maybe we could move this to the top and put it in as a "This page should not be confused with the backdoor Roth..."
Have added a notice on top and a section at the end.
That looks good. Can you remove the paragraph in the first section that mentions backdoor now that we have the warning and separate section is unnecessary?
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