Mega backdoor: After-tax 401k to Roth 401k

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pancake19
Posts: 120
Joined: Thu Jan 16, 2014 1:46 pm

Mega backdoor: After-tax 401k to Roth 401k

Post by pancake19 »

Hi all

I've been doing mega backdoor for several years now going from a Vanguard 401k to a Vanguard Roth IRA.

This month when I went to initiate it, I saw a button online (usually I have to call in) that said in-plan conversion to Roth. I clicked it and went through the steps. Several days later, it told me it was completed.

Now that I review what they did, they converted my after tax 401K balance to a roth 401k balance. This is not what I usually do and not what the usual instructions for a mega backdoor. I called in and they said there is no difference (other than the money now being in 401k and not in a Roth).

Is this correct? Has anyone else does this? I guess the decision is just the pros and cons of 401K vs IRA, but this way is so much easier than calling I think I'd keep doing this unless there are issues...
retiredjg
Posts: 45391
Joined: Thu Jan 10, 2008 12:56 pm

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by retiredjg »

This is called an "in-plan Roth rollover" (IRR) and is simply another permitted way to accomplish the mega-backdoor. Since it is easier and faster, it could be even better. Many people here do this.
nif
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Joined: Mon Mar 02, 2020 8:46 pm

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by nif »

You are fine.
Topic Author
pancake19
Posts: 120
Joined: Thu Jan 16, 2014 1:46 pm

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by pancake19 »

thanks both :)

i think the only / biggest downside is roth IRA money is easier to withdraw before retirement, but not that worried either way
pasadena
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Joined: Sat Jul 02, 2016 1:23 am
Location: PNW

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by pasadena »

It's just another way of doing it. By remaining in the 401(k), you get more protection from creditors, but you're also not starting the 5-years clock, and your plan may make it more difficult to withdraw the money. You also potentially benefit from better funds, and/or have to pay more fees. Look at all of that and decide if you want to keep the money in the 401(k) or not.

Automatic conversion is good - no gains so no tax, and nothing to do once it's set up. You can still ask them to rollover the money to your Roth IRA at any time (if your plan allows this, which it sounds like it does).
retiredjg
Posts: 45391
Joined: Thu Jan 10, 2008 12:56 pm

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by retiredjg »

pancake19 wrote: Tue Sep 14, 2021 3:24 pm thanks both :)

i think the only / biggest downside is roth IRA money is easier to withdraw before retirement, but not that worried either way
The law allows this separate IRR Roth 401k account to be rolled over to Roth IRA. Not all plans do allow that option so you have to find out.

An ideal situation would be to use the convert button every payday and then once a year, roll it out to Roth IRA. :happy
MrJedi
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Joined: Wed May 06, 2020 11:42 am

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by MrJedi »

I prefer the 401k option myself since it's automatic and minimizes taxable earnings prior to conversion. My 401k has cheaper options than what's available in a retail IRA too.

Access prior to leaving my employer is a nonfactor to me. If I need this money, it must mean I do not have a job anymore and thus would have access to it. Technically these amounts are still allowed to be distributable by the IRS, but the plan has to account for it and allow for it. My plan does not allow this (once converted to Roth 401k it is locked in while in-service).
pasadena
Posts: 1511
Joined: Sat Jul 02, 2016 1:23 am
Location: PNW

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by pasadena »

retiredjg wrote: Tue Sep 14, 2021 3:49 pm
pancake19 wrote: Tue Sep 14, 2021 3:24 pm thanks both :)

i think the only / biggest downside is roth IRA money is easier to withdraw before retirement, but not that worried either way
The law allows this separate IRR Roth 401k account to be rolled over to Roth IRA. Not all plans do allow that option so you have to find out.

An ideal situation would be to use the convert button every payday and then once a year, roll it out to Roth IRA. :happy
A friend of mine has her 401(k) at Vanguard and was able to enroll in automatic conversions. Might also be an option for OP.
BernardShakey
Posts: 370
Joined: Tue Jun 25, 2019 10:52 pm
Location: CA

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by BernardShakey »

pancake19 wrote: Tue Sep 14, 2021 3:13 pm Hi all

I've been doing mega backdoor for several years now going from a Vanguard 401k to a Vanguard Roth IRA.

This month when I went to initiate it, I saw a button online (usually I have to call in) that said in-plan conversion to Roth. I clicked it and went through the steps. Several days later, it told me it was completed.

Now that I review what they did, they converted my after tax 401K balance to a roth 401k balance. This is not what I usually do and not what the usual instructions for a mega backdoor. I called in and they said there is no difference (other than the money now being in 401k and not in a Roth).

Is this correct? Has anyone else does this? I guess the decision is just the pros and cons of 401K vs IRA, but this way is so much easier than calling I think I'd keep doing this unless there are issues...
One thing to remember is that the Roth 401k has a RMD requirement at age 72. Roth IRA does not. Of course, you have a lot of time to roll the Roth 401k over into the Roth IRA before RMDs come into play.
An important key to investing is having a well-calibrated sense of your future regret.
inspector00
Posts: 102
Joined: Sun Jun 30, 2013 9:08 pm

Re: Mega backdoor: After-tax 401k to Roth 401k

Post by inspector00 »

I do convert from aftertax to Roth 401(k) since it's very easy compared to moving money to Roth IRA. There are pros/cons to 401(k) vs IRA but not that much of a difference so taking the convenient option makes the most sense for me.
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