Timeline for Is there any upside to contributing to the after-tax 401(k) instead of the Roth 401(k) via paycheck deduction?
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| Feb 8, 2021 at 3:35 | comment | added | Franck Dernoncourt | Make sense, thanks! pretty amazing that employers put so many different kind of restrictions e.g. money.stackexchange.com/q/87034/5656 on what can be done in a 401(k) plans. | |
| Feb 8, 2021 at 3:33 | comment | added | TTT | @FranckDernoncourt I assume you mean you have existing pretax amounts, and you're still allowed to convert only the after tax amount- that's great! Perhaps that's plan dependent. In that case, just do whatever makes sense for the first $19,500. Some people recommend doing some pretax and some Roth, and since you're able to get the Roth from the after tax amount, you might decide to lean more heavily on the pretax for the first $19,500. | |
| Feb 8, 2021 at 3:24 | comment | added | Franck Dernoncourt | we can just convert the $10K that was designated after tax (I've done it multiple times) | |
| Feb 8, 2021 at 3:22 | comment | added | TTT | @FranckDernoncourt suppose you have $40K in your Traditional 401(k), and you add $10K in after-tax contributions to your Traditional 401(k). Now if you want to convert $10K from the Traditional to a Roth, I'm pretty sure you can't just convert the $10K that was designated after tax. Instead I think you would have to convert in ratios equivalent to the amounts. So 40/50 = 80% which means you would convert $8K from pretax and $2K from after tax. Then you'd have to pay taxes on the $8K you're converting; the $8K is added to your income in the year you convert it. | |
| Feb 8, 2021 at 3:07 | comment | added | Franck Dernoncourt | thanks! Just to make sure that I understand correctly, what do you mean by "when you convert after tax to Roth, […] you'd have to pro-rate the amount and pay some tax on converting the portion of the pretax amounts"? | |
| Feb 8, 2021 at 3:03 | comment | added | TTT | In general, you would choose pretax vs Roth for the first $19,500 based on your current tax rate and expected future tax rate. If you expect now's rate is higher than in the future, lean pretax, and if you expect future rate to be higher, lean Roth. BUT, when you convert after tax to Roth, if you also have existing pretax funds, you can't just cherry-pick the after tax funds; you'd have to pro-rate the amount and pay some tax on converting the portion of the pretax amounts. So given that, if you intend to convert the after tax to Roth, you may be better doing all Roth prior to that. | |
| Feb 7, 2021 at 20:54 | comment | added | Franck Dernoncourt | thank you, got it. Since contributions to pretax 401(k) and Roth 401(k) are counting toward the same contribution limit (currently $19,500), does it make more sense to max out the pretax 401(k) before doing after-tax contributions (which we would immediately convert to Roth: this conversion doesn't count toward the pretax+Roth contribution limit)? | |
| Feb 7, 2021 at 20:49 | comment | added | TTT | @FranckDernoncourt basically yes, except I didn't say you should max out the pretax 401(k). I would just recommend maxing out (currently $19,500) the 401(k) in general with some combination of Traditional and Roth 401(k) contributions before doing after-tax contributions. If you haven't hit that limit yet, and you want to do after tax contributions, put them into the Roth first. (Except for the contrived scenario when you build up an emergency fund first...) Also yes, generally convert after-tax contributions to a Roth as soon as you can. | |
| Feb 7, 2021 at 20:06 | comment | added | Franck Dernoncourt | Thank you for the information. Just to confirm: your advice is, once one has maxed out the pretax 401(k) contributions, then one should contribute to the after-tax 401(k), and when you go the money is in the after-tax 401(k), convert it into Roth 401(k) or Roth IRA if the retirement plan allows it? | |
| Feb 7, 2021 at 18:58 | history | edited | TTT | CC BY-SA 4.0 |
Add one possible benefit of the after-tax contributions.
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| Feb 7, 2021 at 18:19 | history | edited | TTT | CC BY-SA 4.0 |
Mention other advantages of after tax contributions.
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| Feb 7, 2021 at 18:13 | history | answered | TTT | CC BY-SA 4.0 |