Cost/benefit of maxing out 401k using mega backdoor

Question

Forgive me if I get the details wrong and if this needs to be split up into multiple posts, but I'm very new to all of this. I'm 22, have ~60k non-emergency money saved up, and got a new job with ~100k/yr salary that lets me contribute up to 25k after tax to my 401k, which, if I did my research correctly, I can then transfer to a Roth IRA using the mega backdoor. So I'm considering living off my savings + whatever is left in my salary to completely max out my 401k + do the mega backdoor. Are there any unforeseen consequences to this that I'm not considering?

Additionally, I have one other big decision to make, which is buying vs. renting housing in Seattle. I'm being encouraged by family to buy, and it makes sense because I do plan on staying in the area for at least the next five years and they tell me my money won't be wasted on rent. However, I'm pretty sure just the down payment would kill any plans I have of doing the above 401k maxing.

Overall my, perhaps naive, line of thinking is that it's a no-brainer and the 401k maxing + mega backdoor is the right way to go. Am I wrong?

Answer 1

Are there any unforeseen consequences to this that I'm not considering?

Most companies will NOT let you do an "in service" 401(k) transfer. If yours does, and yout 401(k) is a "traditional" 401(k), then you would have to pay the tax on both your contribution and the company's contribution when you roll it into a Roth, so you'd need to make sure you had the cash up front to pay the tax (withholding the tax from the transfer negates the tax benefit and will cost you 10% in penalties).

If your 401(k) is a Roth 401(k) then you would only have to pay the tax on the company's contributions which are always pre-tax. However, Roth 401(k) contributions grow tax-free as well, so there's not much benefit of transferring to a Roth IRA (other than being able to access the money before retirement).

Some companies allow for after-tax non-ROTH contributions, which is where the mega-backdoor Roth comes into play. If:

• Your company allows in-service conversions AND
• Your company allows after-tax non-ROTH contributions AND
• Those contributions are accounted for separately from other contributions

THEN a mega-backdoor MIGHT be possible for you.

Also note that for 2018, if you are under 50 years old you can only contribute $18,500 to ALL 401(k)s. The total amount of your contributions AND company contributions (match, "safe harbor", etc.) is $55,000.