Automated In-plan conversions of after-tax to Roth 401k - disadvantages?

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ved
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Automated In-plan conversions of after-tax to Roth 401k - disadvantages?

Post by ved » Sun Jul 14, 2019 8:25 pm

Hi all,

My company allows unlimited conversions of after-tax 401k to Roth 401k or to Roth IRA.
I have been converting to Roth IRA - call the custodian once every few months and convert to Roth IRA - with usually a small taxable gains.

Now, I see that the company is allowing automated conversions of the after-tax to Roth 401k.
The advantage obviously is that there will not be any taxable gains (but it is a minor gain for me, as I have only about $200 to $300 in gains over the year).

What could be the disadvantages of converting to Roth 401k, instead of Roth IRA?

Thanks

decapod10
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Re: Automated In-plan conversions of after-tax to Roth 401k - disadvantages?

Post by decapod10 » Sun Jul 14, 2019 8:37 pm

Not too many . Any disadvantage of the 401k vs IRA is currently not a big issue because you can rollover your Roth 401k to Roth IRA upon separation from your employer. This avoids RMDs, allows for early withdrawals of contributions, etc (which are the big advantages of the IRA vs 401k).

The main ones that can’t be avoided are

1. Fund choice. If your 401k Fund options are garbage, then IRA may be preferable

2. If you like to use your move your IRA around to take advantage of brokerage sign up bonuses

3. If you don’t want all your money at once place and want to divide it among different brokers.

4. If the law changes and you can’t roll over your 401k to IRA anymore

401k has one advantage over IRA, my understanding is they have better protection against creditors

lakpr
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Re: Automated In-plan conversions of after-tax to Roth 401k - disadvantages?

Post by lakpr » Sun Jul 14, 2019 9:59 pm

decapod10 wrote:
Sun Jul 14, 2019 8:37 pm
401k has one advantage over IRA, my understanding is they have better protection against creditors
This is actually a HUGE advantage. If you are found liable for a judgment (God forbid), money in 401k cannot even be included in the list of your assets that the creditors can file a claim against. With IRAs, the assets can be claimed against, and the owner of the IRA has to make an affirmative defense (in most states that offer a semblance of protection) before they can be excluded. ERISA protections are rock solid.

One of the best examples given on this forum is that of OJ Simpson. Even after he was found liable for the death of Ron Goldman, his NFL pension assets could not be touched by Fred Goldman and his family. Now the pension is not quite a 401k, but both are covered by the same ERISA law. Remember that ERISA law was drafted in the 1970s, but the 401k plans appeared only late 80's. This, in the State of California, which is absolutely the worst state in the nation when it comes to protecting IRA assets.

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1955Chevy
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Re: Automated In-plan conversions of after-tax to Roth 401k - disadvantages?

Post by 1955Chevy » Mon Jul 15, 2019 11:22 am

Another possible advantage for the 401(k) would be lower fees. My megacorp 401(k) has much lower institutional expense ratios than anything I could find is a personal IRA. YMMV.

I love my auto conversion from after-tax to Roth 401k - out of sight out of mind.
"Investment success accrues not so much to the brilliant as to the disciplined." | Bernstein

decapod10
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Re: Automated In-plan conversions of after-tax to Roth 401k - disadvantages?

Post by decapod10 » Mon Jul 15, 2019 2:55 pm

1955Chevy wrote:
Mon Jul 15, 2019 11:22 am
Another possible advantage for the 401(k) would be lower fees. My megacorp 401(k) has much lower institutional expense ratios than anything I could find is a personal IRA. YMMV.

I love my auto conversion from after-tax to Roth 401k - out of sight out of mind.
Yeah, I’m hoping ours will allow automatic conversions as well. The last time I was on the phone with my brokerage at the beginning of the year, he checked but it was a no go unfortunately.

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Duckie
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Re: Automated In-plan conversions of after-tax to Roth 401k - disadvantages?

Post by Duckie » Mon Jul 15, 2019 4:16 pm

ved wrote:What could be the disadvantages of converting to Roth 401k, instead of Roth IRA?
In some 401k plans the assets are spread across both pre-tax and Roth sub-accounts. Which means you can't specify what goes where, e.g bonds only in pre-tax and only stocks in Roth. To some people that would be a disadvantage.

Alan S.
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Re: Automated In-plan conversions of after-tax to Roth 401k - disadvantages?

Post by Alan S. » Mon Jul 15, 2019 8:39 pm

You might verify that the Roth 401k will maintain a separate sub account for the IRRs emanating from the after tax sub account. They must do that if they are to maintain the "distributable" nature of these funds. The rest of the Roth 401k including IRRs from pre tax money is only distributable upon separation or attainment of certain other events.

If you request an in service distribution from your Roth 401k from the distributable amounts from the IRRs, the amount of earnings included should only be the earnings on these IRRs after the IRR is done. Other Roth 401k earnings are not distributable, so they should not be included in determining the taxable amount. But you will have SOME taxable earnings.

Conversely, all earnings in your Roth IRA come out last, so any Roth IRA distributions up to the amount of your Roth IRA will be non taxable at anytime.

With respect to all the accounting, the plan is responsible for it when they hold the account. If instead you transfer to a Roth IRA, you are responsible for constant updating of your Roth IRA basis amounts and even the years in which the Roth rollovers were done. If you do the accounting correct you have full control of the taxable result of any distributions. If you leave the money in the plan you may never know for sure what that 1099R is going to look like before you receive it. I think if I expected to need distributions before the Roths are qualified, I would prefer both the beneficial ordering rules of the Roth IRA, and control of your own tax reporting on Form 8606. Of course, most bogleheads do not need to tap these accounts until they are qualified.

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