This is only applicable for those who has After Tax contribution. Instead of waiting for years to retire and go for MegaBackdoor, you can convert right away and grow tax free
If you have mix of contributions in 401k, say 25% Roth, 30% After tax and 55% traditional, your growth is pro-rated to this contribution until retirement.
If you use Automated in plan Roth Conversion, all after tax are moved to Roth account right away and any growth on that is not taxed for ever.
Read the thread if your plan has after tax. Key: Both your company and provider has to offer this.
Yeah, megabackdoor has been letting your after-tax paycheck contribution to be rolled into a roth 401k (or ira).
There’s also backdoor roth - you are doing that too right?
Vanguard might also let you trade individual stocks, if you are using vanguard. I am surprised many people don’t know VBO option.
Not sure i understood. IRAs are separate from 401ks.
For backdoor, you need to separate things, yes. People roll their traditional ira to 401k, and then do non-deductible contribution to their traditional ira and convert to roth ira.
Mega backdoor is different.
Roth 401k and ROTH IRA always grows tax free. You can withdraw contirbutions any time (some conditions may apply), but earnings would be subject to taxes and penalties if done before retirement age.
If they keep different account to trace the investments, then it is great. If they have one account for 401k that consists of all contributions, pro-rata is applied.
Any way, you need to check up with your providers how they account.
Automated in plan roth conversion enables direct roth first day onwards. This means, individuals can invest appx 35k/year in roth every year apart from Roth IRA $5500.
This means investing through after tax 401k (with auto roll over) is far better than investing in taxable accounts as you can completely get the money tax free.
This is the main difference for being offering at your company or not: 35K (after tax 401K) vs 5.5K (IRA). I believe recent change allow company to convert automatically everyday instead of once a quarter event (where you need to pay tax for the gain in that quarter).
We have Backdoor Roth $5500 and then additionally after tax $35k (possible). With recent changes, we do not incur any capital gain as this is transferred immediately to Roth IRA. Any growth in Roth IRA is not taxable in future (with current law). This means every year individuals can contribute $40.5k Roth.
The main benefit is growth with power of compounding 20 years to 40 years range is huge even at 7% level.
Can you guys show me the math why paying tax upfront with a Roth is better than deferring in traditional? How come my math seems to show it’s way better with traditional?
IT’s not about that. It’s about using what you can use. I fill my pretax, then i fill my roth. with after tax, i pay taxes if i realize gains. with roth, i do not.