Mega Backdoor Roth setup 34yo $150k+Bonus tax implications?

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  • #91930 Reply

      I got into financial literacy pretty late. Currently 34 and making $150k+Bonus.

      My company allows me to contribute in 3 buckets: pre-tax 401k, Roth 401k and After-tax money. I am currently planning to max out my pre-tax 401k contribution of $23k. I have been reading about Mega Backdoor Roth and wanted to make sure I setup everything correctly. I started contributing in the after-tax bucket just in the last pay cycle. I am planning to contribute about $40k in the after tax bucket, as I hear that the total limit is $69k (allowing for company match to make up the remaining $6k)

      There’s something called as “in-service distribution” and “in-plan conversion”. I was told by HR and Alight (the investment management company) that I can move out (in-service distribution) the after-tax contribution (into external Brokerage like Shwab) only after 1 year as a rule set by my employer.

      If I do an in-plan conversion of my after-tax contribution, then it will count towards my Roth 401K limit and the combined total of pre-tax and Roth 401k is 23k for this year, so I can’t do that.

      I was also told that when I do an in-service distribution/rollover of the after-tax bucket, they will send me 2 checks – First will be for my contribution and second will be for the growth. I will be able to roll over the Contributions check to my Roth IRA in Schwab but I will have to roll over the Growth check to my pre-tax IRA account.

      Does this sound right? I don’t want to get into a situation that I own a bunch of taxes (now or later) and want to be in a position to pull out tax-free growth in retirement at 60. Please advice on the correct way to set it up.

      PS: If I do an in-plan conversion(after-tax bucket to Roth as some of you have mentioned that it doesn’t count towards the annual $23k limit) and if i have negative earnings when I do it. Meaning: The investments lost money, then how would the tax situation be handled as I will have no/negative growth?

      #91931 Reply

        The in-plan Roth conversion does NOT count toward the 401(k) contribution limit.

        Correct – once you can take the after-tax contributions out as in-service distributions, that portion will go into a Roth IRA. You can avoid earnings on after-tax contributions by initiating the transfer each payroll period. Some plans offer that.

        If you lose money (no growth) on that portion, there’s no additional benefit (or consequence).

        #91932 Reply

          Honestly, I’d leave it all in the 401k, including the after tax converted funds.

          #91933 Reply

            The in-plan conversion moves it to the Roth 401k, but that doesn’t count toward your $23k EE max.

            #91934 Reply

              Following- my employer plan has the same rules and I’m less than 1 year in the job so I’ve been wondering the same thing.

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