Roth 401K Question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
elnegativo
Posts: 32
Joined: Sun Aug 28, 2016 3:37 pm

Roth 401K Question

Post by elnegativo » Mon Jan 13, 2020 1:18 pm

My employer recently added a Roth option to our 401K and may amend the plan to allow after-tax contributions.

I can’t make direct Roth IRA contributions. So my plan is to contribute the max pretax and match to the regular 401K and then up to the limit in after-tax to the Roth 401K.

Then on retirement or separation from service, roll the regular 401K to regular IRA (non-taxable event) and then take taxable distributions as needed. At the same time roll the Roth 401K amounts to a Roth IRA (non-taxable event) and then take distributions tax-free as well.

Is that how that works?

Silk McCue
Posts: 3871
Joined: Thu Feb 25, 2016 7:11 pm

Re: Roth 401K Question

Post by Silk McCue » Mon Jan 13, 2020 1:35 pm

Yes it is. Protections from creditors and lawsuits vary from state to state regarding the treatment of 401(k)s and IRAs. You will certainly want to investigate what the best vehicle to hold retirement accounts in will be when that time comes.

Have you been performing Backdoor Roths that was recommended in a post of yours back in 2016?

Cheers

Alan S.
Posts: 8944
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth 401K Question

Post by Alan S. » Mon Jan 13, 2020 2:05 pm

elnegativo wrote:
Mon Jan 13, 2020 1:18 pm
My employer recently added a Roth option to our 401K and may amend the plan to allow after-tax contributions.

I can’t make direct Roth IRA contributions. So my plan is to contribute the max pretax and match to the regular 401K and then up to the limit in after-tax to the Roth 401K.

Then on retirement or separation from service, roll the regular 401K to regular IRA (non-taxable event) and then take taxable distributions as needed. At the same time roll the Roth 401K amounts to a Roth IRA (non-taxable event) and then take distributions tax-free as well.

Is that how that works?
The plan must offer both non Roth after tax contributions and IRRs (in plan Roth rollovers) to do this. If you get the non Roth after tax contributions but no IRRs, ask the plan if you can roll your after tax contributions to your Roth IRA instead? That's just as good, in some respects better than doing IRRs.

The accounting requirements for IRRs are considerable and explains why some plans (including the TSP) offer designated Roth contributions, but no IRRs.

As for the after tax non Roth contribution plan limit, many plans cap these below the Sec 415c limit to reduce the chances for ACP testing failures and allow space for maximum matching contributions and forfeitures.

Topic Author
elnegativo
Posts: 32
Joined: Sun Aug 28, 2016 3:37 pm

Re: Roth 401K Question

Post by elnegativo » Mon Jan 13, 2020 6:03 pm

Alan S. wrote:
Mon Jan 13, 2020 2:05 pm
elnegativo wrote:
Mon Jan 13, 2020 1:18 pm
My employer recently added a Roth option to our 401K and may amend the plan to allow after-tax contributions.

I can’t make direct Roth IRA contributions. So my plan is to contribute the max pretax and match to the regular 401K and then up to the limit in after-tax to the Roth 401K.

Then on retirement or separation from service, roll the regular 401K to regular IRA (non-taxable event) and then take taxable distributions as needed. At the same time roll the Roth 401K amounts to a Roth IRA (non-taxable event) and then take distributions tax-free as well.

Is that how that works?
The plan must offer both non Roth after tax contributions and IRRs (in plan Roth rollovers) to do this. If you get the non Roth after tax contributions but no IRRs, ask the plan if you can roll your after tax contributions to your Roth IRA instead? That's just as good, in some respects better than doing IRRs.

The accounting requirements for IRRs are considerable and explains why some plans (including the TSP) offer designated Roth contributions, but no IRRs.

As for the after tax non Roth contribution plan limit, many plans cap these below the Sec 415c limit to reduce the chances for ACP testing failures and allow space for maximum matching contributions and forfeitures.
I don’t understand what you are saying. If I contribute after-tax dollars to my 401K does there have to be some kind of in-service distribution/rollover to accomplish that? I thought I would just designate the money to the Roth portion of the 401K and that would be it.

Alan S.
Posts: 8944
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth 401K Question

Post by Alan S. » Mon Jan 13, 2020 6:19 pm

If you max out pre tax 401k contributions (19,500 for 2020) you cannot make elective deferral Roth 401k contributions because the total elective deferral limit of 19,500 applies to both.

You should describe Roth deferrals as just that, not describe them as after tax even though they are.

The term "after tax 401k contributions" refers to non Roth contributions. These are sometimes also called "employee contributions". You can then roll them (with allocated earnings) to your Roth 401k, and this is the IRR I referred to. You need to find out if your plan includes IRRs or not. It probably does, but in some cases it does not.

Some plans even offer an automatic IRR as soon as you make the non Roth after tax contributions. You could specify that option and the plan will automatically take care of the IRR (rollover to Roth 401k) for you.

Topic Author
elnegativo
Posts: 32
Joined: Sun Aug 28, 2016 3:37 pm

Re: Roth 401K Question

Post by elnegativo » Mon Jan 13, 2020 8:52 pm

That clears it up. Thanks.

User avatar
willthrill81
Posts: 15207
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Roth 401K Question

Post by willthrill81 » Mon Jan 13, 2020 9:35 pm

Just so you know, Roth 401k plans don't make sense for most people. But it might for you. You would need to provide many more details about your situation before we could evaluate it though.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

basspond
Posts: 1272
Joined: Wed Nov 27, 2013 4:01 am

Re: Roth 401K Question

Post by basspond » Mon Jan 13, 2020 10:30 pm

Another thing to know that when you disperse you 401k account any after tax amounts can be transferred to a Roth.

canonayu
Posts: 11
Joined: Thu Jul 27, 2017 1:07 pm

Re: Roth 401K Question

Post by canonayu » Tue Jan 14, 2020 1:48 am

willthrill81 wrote:
Mon Jan 13, 2020 9:35 pm
Just so you know, Roth 401k plans don't make sense for most people. But it might for you. You would need to provide many more details about your situation before we could evaluate it though.
What about someone with low income like me in the 12 percent bracket. I am supposed to get a pension too, but they keep trying to stop the pension for everyone.

lakpr
Posts: 3530
Joined: Fri Mar 18, 2011 9:59 am

Re: Roth 401K Question

Post by lakpr » Tue Jan 14, 2020 9:53 am

canonayu wrote:
Tue Jan 14, 2020 1:48 am
willthrill81 wrote:
Mon Jan 13, 2020 9:35 pm
Just so you know, Roth 401k plans don't make sense for most people. But it might for you. You would need to provide many more details about your situation before we could evaluate it though.
What about someone with low income like me in the 12 percent bracket. I am supposed to get a pension too, but they keep trying to stop the pension for everyone.
Things are a bit tricky with the 12% bracket. The reason is that, if you make a Traditional 401k contribution, your income for the year might drop low enough to capture the Retirement Savers Credit and the Earned Income Tax Credit, which mean anywhere from a 10% to 50% immediate return on money, tax free.

If your income is near the top of the 12% bracket, then perhaps the Savers credit will only be $200 at most and the EITC is out of reach; in that case contributing whatever you can within the 12% bracket to Roth 401k makes sense.

You have to run the numbers both ways in a tax software to be sure.

canonayu
Posts: 11
Joined: Thu Jul 27, 2017 1:07 pm

Re: Roth 401K Question

Post by canonayu » Tue Jan 14, 2020 3:52 pm

at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.

User avatar
willthrill81
Posts: 15207
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Roth 401K Question

Post by willthrill81 » Tue Jan 14, 2020 4:26 pm

canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
jriding
Posts: 167
Joined: Tue Jan 15, 2013 2:06 pm
Location: CO

Re: Roth 401K Question

Post by jriding » Tue Jan 14, 2020 6:10 pm

willthrill81 wrote:
Tue Jan 14, 2020 4:26 pm
canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
When considering Roth vs Traditional 401(k) contributions, would not one also want to consider future tax brackets resulting from required minimum distributions? As opposed to only considering the safe withdrawal rate during pre-RMD years?

User avatar
willthrill81
Posts: 15207
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Roth 401K Question

Post by willthrill81 » Tue Jan 14, 2020 6:25 pm

jriding wrote:
Tue Jan 14, 2020 6:10 pm
willthrill81 wrote:
Tue Jan 14, 2020 4:26 pm
canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
When considering Roth vs Traditional 401(k) contributions, would not one also want to consider future tax brackets resulting from required minimum distributions? As opposed to only considering the safe withdrawal rate during pre-RMD years?
That is a consideration, but it's not likely to change the situation very much. When RMDs kick in at age 72, they are only about 4% of the balance of your tax-deferred accounts (excluding HSAs, which have no RMDs). While the percentage you must withdraw goes up, the withdrawals themselves reduce the balance of your accounts. Now if you're still getting some inflation-adjusted growth, this will likely make the inflation-adjusted withdrawals go up somewhat until you're in your mid-80s or so when your tax-deferred balances will likely be shrinking in real dollars.

Remember that if your marginal tax rate when you contribute the funds is the same as your marginal tax rate when you withdraw the funds, then there is no advantage to either tax-deferred or Roth accounts; the after-tax amount will be identical.

If you retire before age 72, doing Roth conversions up to the top of your current bracket (whatever that may be) is generally a good move. This reduces your tax-deferred balances and your future RMDs.

Also, the decision is impacted by which bracket you're currently in. If you're currently in the 22% bracket and think that you'll likely be in the 12% in retirement, then tax-deferred contributions are almost a no-brainer due to the 10% arbitrage opportunity. But if you're currently in the 24% bracket and expect to be in the 22% in retirement, the decision is more nuanced. For a married filing jointly couple in that situation, I would probably favor Roth contributions due to the problem created when one spouse passes away and the survivor is suddenly thrust into a higher tax bracket due to RMDs. But in the 22% vs. 12% situation, this isn't a problem since the worst-case scenario is that the survivor returns to the 22% bracket.

And don't forget that there can be opportunities to reduce your tax-deferred balances without paying taxes at all or much in taxes. QCDs are an option once you're 70.5 if you're charitably minded. And if you encounter significant medical expenses, those exceeding 10% of your AGI can be deducted, which means that you can pay for big LTC expenses using tax-deferred funds and not pay much in taxes on those funds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
jriding
Posts: 167
Joined: Tue Jan 15, 2013 2:06 pm
Location: CO

Re: Roth 401K Question

Post by jriding » Tue Jan 14, 2020 7:01 pm

willthrill81 wrote:
Tue Jan 14, 2020 6:25 pm
jriding wrote:
Tue Jan 14, 2020 6:10 pm
willthrill81 wrote:
Tue Jan 14, 2020 4:26 pm
canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
When considering Roth vs Traditional 401(k) contributions, would not one also want to consider future tax brackets resulting from required minimum distributions? As opposed to only considering the safe withdrawal rate during pre-RMD years?
That is a consideration, but it's not likely to change the situation very much. When RMDs kick in at age 72, they are only about 4% of the balance of your tax-deferred accounts (excluding HSAs, which have no RMDs). While the percentage you must withdraw goes up, the withdrawals themselves reduce the balance of your accounts. Now if you're still getting some inflation-adjusted growth, this will likely make the inflation-adjusted withdrawals go up somewhat until you're in your mid-80s or so when your tax-deferred balances will likely be shrinking in real dollars.

Remember that if your marginal tax rate when you contribute the funds is the same as your marginal tax rate when you withdraw the funds, then there is no advantage to either tax-deferred or Roth accounts; the after-tax amount will be identical.

If you retire before age 72, doing Roth conversions up to the top of your current bracket (whatever that may be) is generally a good move. This reduces your tax-deferred balances and your future RMDs.

Also, the decision is impacted by which bracket you're currently in. If you're currently in the 22% bracket and think that you'll likely be in the 12% in retirement, then tax-deferred contributions are almost a no-brainer due to the 10% arbitrage opportunity. But if you're currently in the 24% bracket and expect to be in the 22% in retirement, the decision is more nuanced. For a married filing jointly couple in that situation, I would probably favor Roth contributions due to the problem created when one spouse passes away and the survivor is suddenly thrust into a higher tax bracket due to RMDs. But in the 22% vs. 12% situation, this isn't a problem since the worst-case scenario is that the survivor returns to the 22% bracket.

And don't forget that there can be opportunities to reduce your tax-deferred balances without paying taxes at all or much in taxes. QCDs are an option once you're 70.5 if you're charitably minded. And if you encounter significant medical expenses, those exceeding 10% of your AGI can be deducted, which means that you can pay for big LTC expenses using tax-deferred funds and not pay much in taxes on those funds.
Excellent points, thank you for the detailed response. I did this analysis recently and determined that worst (or is it best? 8-) ) case RMDs would put us in the same bracket as we are currently. As you point out, Roth conversions during those pre-SS/pension years will be the critical move.
Last edited by jriding on Tue Jan 14, 2020 9:35 pm, edited 1 time in total.

JBTX
Posts: 5769
Joined: Wed Jul 26, 2017 12:46 pm

Re: Roth 401K Question

Post by JBTX » Tue Jan 14, 2020 7:56 pm

willthrill81 wrote:
Tue Jan 14, 2020 4:26 pm
canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
It is SO much more complicated than that.

Silk McCue
Posts: 3871
Joined: Thu Feb 25, 2016 7:11 pm

Re: Roth 401K Question

Post by Silk McCue » Tue Jan 14, 2020 8:18 pm

JBTX wrote:
Tue Jan 14, 2020 7:56 pm
willthrill81 wrote:
Tue Jan 14, 2020 4:26 pm
canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
It is SO much more complicated than that.
Exactly what level of detail is required when trying to share a concept with someone. Does every possibility need to be provided. Multiple paragraphs with pros and cons.

Rather than say “It is SO much more complicated than that” how about adding to the conversation with all of the detail you find necessary to fix the perceived shortcoming.

Cheers

JBTX
Posts: 5769
Joined: Wed Jul 26, 2017 12:46 pm

Re: Roth 401K Question

Post by JBTX » Tue Jan 14, 2020 8:31 pm

Silk McCue wrote:
Tue Jan 14, 2020 8:18 pm
JBTX wrote:
Tue Jan 14, 2020 7:56 pm
willthrill81 wrote:
Tue Jan 14, 2020 4:26 pm
canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
It is SO much more complicated than that.
Exactly what level of detail is required when trying to share a concept with someone. Does every possibility need to be provided. Multiple paragraphs with pros and cons.

Rather than say “It is SO much more complicated than that” how about adding to the conversation with all of the detail you find necessary to fix the perceived shortcoming.

Cheers

1. The statement is literally true only before 2026
2. Just because you are in a certain tax bracket doesn't mean that is your marginal rate, which is what is relevant. Social security, Medicare, ACA can all affect marginal rates
3. Just focusing on before and after rates ignores the fact that you can put more in a Roth, and assumes you put tax savings in taxable, which raises marginal rate, slightly.
4 Completely ignores estate planning issues
5. When you factor in any or several of those, plus the fact some will have other income in retirement, including pensions, may become divorced or lose a spouse, won't be in a position to retire very early and do large Roth conversions, it is just a much more complicated picture

User avatar
willthrill81
Posts: 15207
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Roth 401K Question

Post by willthrill81 » Tue Jan 14, 2020 8:33 pm

Silk McCue wrote:
Tue Jan 14, 2020 8:18 pm
JBTX wrote:
Tue Jan 14, 2020 7:56 pm
willthrill81 wrote:
Tue Jan 14, 2020 4:26 pm
canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
It is SO much more complicated than that.
Exactly what level of detail is required when trying to share a concept with someone. Does every possibility need to be provided. Multiple paragraphs with pros and cons.
That's the problem with a lot of the questions asked here, especially from new folks: there isn't a really good short answer. But we can't go around posting page after page to all of them with all of the caveats, assumptions, variables, etc. etc.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
elnegativo
Posts: 32
Joined: Sun Aug 28, 2016 3:37 pm

Re: Roth 401K Question

Post by elnegativo » Tue Jan 14, 2020 9:49 pm

basspond wrote:
Mon Jan 13, 2020 10:30 pm
Another thing to know that when you disperse you 401k account any after tax amounts can be transferred to a Roth.
Just the investments or capital gains and earnings too? If the latter, why am trying to learn about IRRs and such. Shouldn't I just pick a fund or funds for my after tax dollars and capital gains to keep segregated from my pre-tax investments and roll to Roth IRA and tIRA respectively at retirement?

lakpr
Posts: 3530
Joined: Fri Mar 18, 2011 9:59 am

Re: Roth 401K Question

Post by lakpr » Tue Jan 14, 2020 10:02 pm

Whether you choose the distribution to an external Roth IRA or do an in plan Roth rollover, the earnings (capital gains and dividends) from the after tax portion must accompany the rollover. IRS rules prohibit leaving capital gains only or dividends only in the 401k plan and only convert your after tax contribution.

If you take a partial distribution/IRR from your after tax 401k, it is deemed to be a proportional withdrawal of contributions and growth.

Now, if you are going to rollover to an external IRA, it MAY BE possible to roll the contributions only to Roth IRA, and growth to Traditional IRA. Then, turn around and roll that Traditional ITA back into the 401k plan.

Topic Author
elnegativo
Posts: 32
Joined: Sun Aug 28, 2016 3:37 pm

Re: Roth 401K Question

Post by elnegativo » Tue Jan 14, 2020 10:32 pm

Either:

1. This topic is exceedingly more complicated than I think it is or
2. I am a lot dumber than I think I am

because I don't feel like I am getting anywhere. Let me try again.

I have no money in Roth anything and I want some.

I can't contribute to a Roth IRA directly.

My employer has a Roth 401K option.

My employer may allow after tax contributions.

Assuming my employer does allow, can I

1. put the maximum pre-tax amount plus the match into the regular 401K?
2 at the same time put the limit of after tax money into (however that is accomplished) the Roth401K?
3. on retirement roll all of the pre-tax portion plus capital gains to a traditional IRA in a non-taxable event?
4. on retirement roll all of the roth 401K portion plus capital gains to a roth IRa in a non-taxable event?
5. if the answer to 4 is "Yes" will the withdrawals from the roth IRA then be non-taxable?

sawdust60
Posts: 259
Joined: Tue Jul 17, 2018 12:06 pm

Re: Roth 401K Question

Post by sawdust60 » Tue Jan 14, 2020 11:10 pm

Nothing wrong with having some Roth.

And yes, Roth will not be taxed again.

The key in determining whether it is the best is being able to identify when you will pay the taxes in some future year if you go the pretax route.

So you make a guess. Do some modeling.

Considerations:
1. Marginal tax rates can be different with social security income.
- see the wiki: taxation of social security
2. Heirs tax rates?
3. When you pay the tax on Roth funds, you effectively move those funds into the Roth. That is one of the ways Roth can be better, even if the marginal tax rate is not higher.
4. Roth can provide additional flexibility, e.g. non-penalty withdrawal or avoiding withdrawals at higher tax rates.
5. Medicare IRMAA penalty starts at age 63, before the top of the 22% bracket. It is effectively an additional tax, adding about 4%, but it is step scale.
6. Tax rates could be low. Years with high medical expenses or qualified charitable distributions.
7. What opportunities will you have in future years to favor pretax due to your having higher income and/or marginal tax rates.
8. Remember that if you are going to have a large pretax balance, subject to RMD, marginal tax rates may be the correct comparison. But you need to understand what your income sources will be and how Roth can help.
9. Sometimes Roth is used instead of 529.
10. What else to consider for Roth option in 401k vs Roth IRA?

lakpr
Posts: 3530
Joined: Fri Mar 18, 2011 9:59 am

Re: Roth 401K Question

Post by lakpr » Tue Jan 14, 2020 11:28 pm

elnegativo wrote:
Tue Jan 14, 2020 10:32 pm
Either:

1. This topic is exceedingly more complicated than I think it is or
2. I am a lot dumber than I think I am

because I don't feel like I am getting anywhere. Let me try again.

I have no money in Roth anything and I want some.

I can't contribute to a Roth IRA directly.

My employer has a Roth 401K option.

My employer may allow after tax contributions.

Assuming my employer does allow, can I

1. put the maximum pre-tax amount plus the match into the regular 401K?
2 at the same time put the limit of after tax money into (however that is accomplished) the Roth401K?
3. on retirement roll all of the pre-tax portion plus capital gains to a traditional IRA in a non-taxable event?
4. on retirement roll all of the roth 401K portion plus capital gains to a roth IRa in a non-taxable event?
5. if the answer to 4 is "Yes" will the withdrawals from the roth IRA then be non-taxable?
Let me try once more.

1.Yes
2. Yes, but: if you do not convert reasonably soon to the Roth 401k or Roth IRA, it will attract gains and dividends? Those gains and dividends MUST also be converted. If you don't convert the after tax sub account to Roth IRA within the 401k plan (and the plan must treat and account for the after tax amounts separately), then the sub account behaves like a non deductible IRA. Contributions non-deductible, all growth taxable. To keep that growth to yourself tax free, you should convert in Oman or rollover to external Roth IRA. And, when rolling over externally, both contributions AND growth should be rolled over together. IRS would not allow the plan to rollover only contributions or only growth.
3. May be. See answer for 2. If you contribute to pretax 401k directly, that amount is indeed transferable to a t-IRA and is a non taxable event. If that "pretax" amount resulted from growth on after tax contributions, then largely no. They must go into the same external account where after tax contributions are ending up. 401k plan rules state that contributions and growth in the after-tax account must stay in the plan together, and must leave the plan together. In that case, sorry, part of the rollover becomes a taxable event uf destination is an external Roth IRA.

BUT, certain plans MAY allow split of the contributions and growth. IF you are lucky enough to work for such a company, you will get two checks, one you can deposit in Roth IRA and the other in t-IRA. Then, turn around and roll back that t-IRA to the 401k plan.
4. Yes
5. Subject to the age 59.5 rule, yes. If you are younger than that age at the time of withdrawal, then the withdrawals are treated as first contributions being pulled out. YOU need to keep track if when and how much did you contribute to the Roth 401k before the rollover. If the IRS comes sniffing you should be able to substantiate the contribution date, and the contribution date is at least 5 years old (remember that the amount came into Roth 401k through an in plan Roth conversion of after tax contributions and growth, so the Roth IRA 5 year rule applies).

Bottom line is, if you are going to use after tax 401k route to Roth 401k/Roth IRA, you must convert as soon as possible and as frequently as you contribute. There is simply no way you can set a contribution amount or percentage and forget about it until retirement. Just as you wouldn't keep adding to a non-deductible Traditional IRA but not do the conversion step.

APX32
Posts: 18
Joined: Sat May 27, 2017 1:22 pm

Re: Roth 401K Question

Post by APX32 » Tue Jan 14, 2020 11:42 pm

elnegativo wrote:
Tue Jan 14, 2020 10:32 pm
Either:

1. This topic is exceedingly more complicated than I think it is or
2. I am a lot dumber than I think I am

because I don't feel like I am getting anywhere. Let me try again.

I have no money in Roth anything and I want some.

I can't contribute to a Roth IRA directly.

My employer has a Roth 401K option.

My employer may allow after tax contributions.

Assuming my employer does allow, can I

1. put the maximum pre-tax amount plus the match into the regular 401K?
2 at the same time put the limit of after tax money into (however that is accomplished) the Roth401K?
3. on retirement roll all of the pre-tax portion plus capital gains to a traditional IRA in a non-taxable event?
4. on retirement roll all of the roth 401K portion plus capital gains to a roth IRa in a non-taxable event?
5. if the answer to 4 is "Yes" will the withdrawals from the roth IRA then be non-taxable?
Regarding #4, whether on retirement or any other time prior to retirement, when you roll over the funds in the AT Roth 401k to a Roth IRA, the contributions will not be taxed, but the gains will. To prevent a taxable event, you would need to roll over the gains separately into a traditional IRA. Here’s some math:

1. You have accumulated $120k in your AT Roth 401k.
2. $100k are your contributions and $20k are capital gains.
3. You can roll over the entire amount to a Roth IRA and pay taxes on the $20k. Or
4. Roll over $100k tax free into a Roth IRA and $20k into a traditional IRA and pay no taxes.

Here’s is the benefit. Suppose you are a high earner who can contribute most or all of the $27,500 AT limit and do the Roth conversion as your plan allows it. This greatly overcomes the puny $6000 (+$1000 if over 50) cap on IRAs. You can, in 5 years, accumulate almost a couple of decades worth of contributions into a Roth. Combined with the regular backdoor, this is a great opportunity to fund a Roth and overcome the contribution limits (hence being known as the Mega backdoor Roth), and once money lands there, it’s tax free forever (unless future legislation changes it).

BoglesRazor
Posts: 35
Joined: Fri Jan 03, 2020 11:02 am

Re: Roth 401K Question

Post by BoglesRazor » Wed Jan 15, 2020 12:02 am

ither:

1. This topic is exceedingly more complicated than I think it is or
2. I am a lot dumber than I think I am

because I don't feel like I am getting anywhere. Let me try again.

I have no money in Roth anything and I want some.

I can't contribute to a Roth IRA directly.

My employer has a Roth 401K option.

My employer may allow after tax contributions.

Assuming my employer does allow, can I

1. put the maximum pre-tax amount plus the match into the regular 401K?
2 at the same time put the limit of after tax money into (however that is accomplished) the Roth401K?
3. on retirement roll all of the pre-tax portion plus capital gains to a traditional IRA in a non-taxable event?
4. on retirement roll all of the roth 401K portion plus capital gains to a roth IRa in a non-taxable event?
5. if the answer to 4 is "Yes" will the withdrawals from the roth IRA then be non-taxable?
I don't know what you exact situation is or how old you are amongst other details. However, I just opened my first 401K last year and I chose the Roth 401K also (although some members here told me it was a mistake). Well I can't exactly convert to traditional and I still want to stick with Roth 401k so oh well. Anyway, my plan (which is sort of crappy) does not allow in service rollouts. I also have a very low amount in my Roth IRA so partly I chose Roth 401K for also the intent to rollover to IRA when I leave the company (not that I plan on leaving in the near future). I think the question here is, are you maxing out at $19,500 for 2020? If so, why do you want to use the pre-tax option right now? You can just calculate the distribution from your paycheck once your company offers the Roth 401K and just bypass rolling funds over from a traditional. I only had 6 months of my 401K last year so it took a lot out of my biweekly paycheck, but I had enough savings to live on.

User avatar
willthrill81
Posts: 15207
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Roth 401K Question

Post by willthrill81 » Wed Jan 15, 2020 1:46 am

OP, if you want 'some' Roth assets, why not just do a backdoor Roth IRA?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

retiredjg
Posts: 39039
Joined: Thu Jan 10, 2008 12:56 pm

Re: Roth 401K Question

Post by retiredjg » Wed Jan 15, 2020 8:39 am

elnegativo wrote:
Tue Jan 14, 2020 10:32 pm
1. This topic is exceedingly more complicated than I think it is or
2. I am a lot dumber than I think I am
I think what you have not realized is that the after-tax contributions go into a third separate account - the after-tax account.

So your 401k plan could have 3 accounts - traditional 401k (which is pre-tax), Roth 401k (which is post-tax), and the after-tax account which you would want to roll to either Roth 401k (In Plan Roth Rollover) or out to Roth IRA.

The traditional and Roth accounts share the same $19k limit.

1. put the maximum pre-tax amount plus the match into the regular 401K?
Yes.

2 at the same time put the limit of after tax money into (however that is accomplished) the Roth401K?
No. Since you have put all of your $19k elective deferral into pre-tax, you cannot put anything into Roth 401k. If the plan does offer an after-tax account, you could put money there and maybe roll it into Roth 401k or out to Roth IRA.

3. on retirement roll all of the pre-tax portion plus capital gains earnings to a traditional IRA in a non-taxable event?
Yes.

4. on retirement roll all of the roth 401K portion plus capital gains earnings to a roth IRa in a non-taxable event?
Yes.
5. if the answer to 4 is "Yes" will the withdrawals from the roth IRA then be non-taxable?
Maybe. Some.

- The earnings that have occurred inside the Roth 401k account would still be taxable unless you are 59.5 years old AND your first contribution to Roth IRA (not Roth 401k) occurred at least 5 tax years before.

- Every in-plan Roth rollover or Roth conversion would have a 5 tax year clock. If those clocks have not finished running, they would follow the money into the Roth IRA. Some money would be available tax and penalty free and some would not. It is complicated.

retiredjg
Posts: 39039
Joined: Thu Jan 10, 2008 12:56 pm

Re: Roth 401K Question

Post by retiredjg » Wed Jan 15, 2020 8:54 am

APX32 wrote:
Tue Jan 14, 2020 11:42 pm
Regarding #4, whether on retirement or any other time prior to retirement, when you roll over the funds in the AT Roth 401k to a Roth IRA, the contributions will not be taxed, but the gains will. To prevent a taxable event, you would need to roll over the gains separately into a traditional IRA. Here’s some math:

1. You have accumulated $120k in your AT Roth 401k.
2. $100k are your contributions and $20k are capital gains.
3. You can roll over the entire amount to a Roth IRA and pay taxes on the $20k. Or
4. Roll over $100k tax free into a Roth IRA and $20k into a traditional IRA and pay no taxes.
Maybe it's semantics, but it appears to me you are confusing Roth 401k with an after-tax account in the 401k. They are not the same thing.

What you are saying is correct if talking about the after-tax account in a 401k. The earnings in the after-tax account would be taxable if/when rolled into Roth IRA.

What you said is incorrect if talking about Roth 401k. The earnings that have occurred in the Roth 401k are not taxable when rolled into Roth IRA. However, those earnings might be taxable and even subject to penalty if you take them out of the Roth IRA too young or too soon.

an_asker
Posts: 2603
Joined: Thu Jun 27, 2013 2:15 pm

Re: Roth 401K Question

Post by an_asker » Wed Jan 15, 2020 9:11 am

JBTX wrote:
Tue Jan 14, 2020 8:31 pm
Silk McCue wrote:
Tue Jan 14, 2020 8:18 pm
JBTX wrote:
Tue Jan 14, 2020 7:56 pm
willthrill81 wrote:
Tue Jan 14, 2020 4:26 pm
canonayu wrote:
Tue Jan 14, 2020 3:52 pm
at most I will get the 200 dollar credit and no earned income credit, and that is if I put a lot of money to get low enough for the savers tax credit which is hard at my level.
Keep in mind that apart from non-portfolio income sources like SS benefits or a pension, it takes over $2.5 million of tax-deferred (i.e. traditional) assets to produce enough taxable income to reach the top of the 12% bracket, assuming 4% withdrawals.
It is SO much more complicated than that.
Exactly what level of detail is required when trying to share a concept with someone. Does every possibility need to be provided. Multiple paragraphs with pros and cons.

Rather than say “It is SO much more complicated than that” how about adding to the conversation with all of the detail you find necessary to fix the perceived shortcoming.

Cheers

1. The statement is literally true only before 2026
2. Just because you are in a certain tax bracket doesn't mean that is your marginal rate, which is what is relevant. Social security, Medicare, ACA can all affect marginal rates
3. Just focusing on before and after rates ignores the fact that you can put more in a Roth, and assumes you put tax savings in taxable, which raises marginal rate, slightly.
4 Completely ignores estate planning issues
5. When you factor in any or several of those, plus the fact some will have other income in retirement, including pensions, may become divorced or lose a spouse, won't be in a position to retire very early and do large Roth conversions, it is just a much more complicated picture
I was just thinking about something that I had never considered - a widow(er) would be filing taxes as a single person so that top of the 12% marginal would be hit much quicker than filing jointly!

Topic Author
elnegativo
Posts: 32
Joined: Sun Aug 28, 2016 3:37 pm

Re: Roth 401K Question

Post by elnegativo » Wed Jan 15, 2020 9:37 pm

This is making sense now. Thanks everyone.

basspond
Posts: 1272
Joined: Wed Nov 27, 2013 4:01 am

Re: Roth 401K Question

Post by basspond » Thu Jan 16, 2020 4:15 am

elnegativo wrote:
Tue Jan 14, 2020 9:49 pm
basspond wrote:
Mon Jan 13, 2020 10:30 pm
Another thing to know that when you disperse you 401k account any after tax amounts can be transferred to a Roth.
Just the investments or capital gains and earnings too? If the latter, why am trying to learn about IRRs and such. Shouldn't I just pick a fund or funds for my after tax dollars and capital gains to keep segregated from my pre-tax investments and roll to Roth IRA and tIRA respectively at retirement?
Your entire Roth capital gains and earnings, but there are Rules that the account has to be at least 5 years old from your first contribution or you are over 59.5. However, the aftertax account is only your contributions.

retiredjg
Posts: 39039
Joined: Thu Jan 10, 2008 12:56 pm

Re: Roth 401K Question

Post by retiredjg » Thu Jan 16, 2020 7:48 am

elnegativo wrote:
Tue Jan 14, 2020 9:49 pm
basspond wrote:
Mon Jan 13, 2020 10:30 pm
Another thing to know that when you disperse you 401k account any after tax amounts can be transferred to a Roth.
Just the investments or capital gains and earnings too? If the latter, why am trying to learn about IRRs and such. Shouldn't I just pick a fund or funds for my after tax dollars and capital gains to keep segregated from my pre-tax investments and roll to Roth IRA and tIRA respectively at retirement?
You are trying to learn about IRRs and such because you want the money in the after-tax account to get into Roth sooner rather than later.

The longer it stays in the after-tax account, the more earnings accrue. Those earnings have not been taxed. The sooner you get them into Roth status, the less tax you pay to get them there and the longer they have to grow tax free.

Unless you are something like 5 years from retirement or leaving the company, you should not put money into the after-tax account and just let it sit there. You should try to get it moved into Roth 401k or Roth IRA at least once a year if you can.

Post Reply