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Rolling after tax funds from traditional 401K to a Roth

Posted on 4/15/22 at 9:13 am
Posted by Ramblin Wreck
Member since Aug 2011
3899 posts
Posted on 4/15/22 at 9:13 am
I was looking at my company's savings plan website and noticed that I can roll the after tax contributions in my savings plan to a Roth. My income is above the limits to have a Roth, so didn't know this was an option. I looked at a few websites to find the negatives of doing this, but almost all of the info I saw was geared more towards rolling over pretax contributions or for people with more than 5 years before retirement. I did see that the funds can't be removed without a tax penalty for five years. I'm 55, so there is no incentive for me to roll anything over to access funds without a penalty since I will be 59 1/2 before the 5 year rule takes effect. Questions - if I roll over my after tax funds, will I avoid having to pay income tax on the earnings I make between now and when I withdraw them? What are the positives and negatives to doing this? I have about $300K after tax funds eligible for this.
Posted by molsusports
Member since Jul 2004
36140 posts
Posted on 4/15/22 at 11:04 am to
quote:

I have about $300K after tax funds eligible for this.


Clarify this part.

As in your personal 401k contributions were into a Roth 401k?

As I understand the mega backdoor Roth it would be your employer's after tax match contributions that you could move into a Roth vehicle without creating a taxable event for yourself. But this may or may not be possible.

For a MBR to be possible my understanding is first your employer and the company running the 401k have to specifically allow this (which most do not) and secondly it has to be done in the same year (e.g December of 2021 you move the after tax employer contributions to a Roth vehicle).

Since the maximum "match" an employer can make is around 30k (for 2021) it would be hard to understand how this could be a larger amount without generating a significant taxable event.
Posted by Jag_Warrior
Virginia
Member since May 2015
4129 posts
Posted on 4/15/22 at 1:56 pm to
Just for personal knowledge/curiosity, I’d like to understand this better too. A company that I used to work for had a traditional 401k, a Roth 401k and an after tax savings plan. Only the traditional received the company match. Is what you have a Roth 401k or an after tax savings plan?
Posted by Ramblin Wreck
Member since Aug 2011
3899 posts
Posted on 4/15/22 at 4:53 pm to
To clarify a bit, everything I have is in a traditional 401K employee savings plan. I was unaware that the company even offered a Roth. I do have company matching contributions, but it is all in the traditional 401K. The after tax dollars in my plan that I'm asking about are a combination of designated after tax contributions made early in my career (I started off pretty green so just split my contributions 50-50 after tax and pretax the first few years I worked) and from designated pretax contributions made later each year that become taxed when I had already maxed out the allowable pretax contributions. The same percentage continued to be put in the savings plan from my pay, but it would become taxed and designated as after tax once the maximum had been reached. I also wonder how the earnings would be treated from the base after tax contributions. In other words, I'm sure the $300K listed as after tax is the total of the actual after tax deposits plus earnings from them. How the earnings would be treated brings up other questions.
Posted by OilfieldTrash
Somewhere Abroad
Member since Jun 2009
128 posts
Posted on 4/15/22 at 6:27 pm to
The Man won’t let you convert the full amount to a Roth. He will Post 86 your arse and you will be left with a decision whether to get two checks 1) for your Roth and 2) for your IRA or take one check for the Roth and pay taxes on the increase in ordinary income based on Post 86 earnings. I have done both of them.

Also anyone who is not taking full advantage of this if your employer allows it is missing out.

Key is too max out on IRS limits before meeting IRS contribution income limit for the year.
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