Here are the steps i recommend: first After tax contributions > in plan convert to Roth 401k > call your provider roll that over to Roth IRA (this has to manually be done). You want to do Roth IRA because it has more options to trade what you want. In plan Roth 401k are very limited when it comes to investment
For all the high-income earners and super savers, she has excellent advice on tax saving in the long run. Mega backdoor ROTH is the way to go if you don't know what to do with your income.
When you do the conversion to Roth IRA, since the earnings are moved with it, you'd have to pay taxes on that portion which shouldn't amount to much if you do the conversion shortly after the contribution.
Question: In my 401k brokerage account, I am only able to see "pre-tax" and "roth basic" contribution. I don't have the third option, which is the "after-tax" contribution. Does that mean it's not possible for me to do a mega backdoor roth IRA? Thanks!
Thank you for the Video. I have a question though. I have an in plan Roth conversion so my after tax dollars are sitting in Roth 401k. Are my earnings in 'after tax Roth', tax free??? Lets say I have $2000 in after tax dollars converted to Roth and have $500 in earnings. If I now roll it over to my Roth IRA, am I paying taxes on $500 during rollover process? or am I allowed to rollover only the $2000 leaving the earnings? Or If I rollover $2500 into my Roth IRA, will it now be tax free? I am confused. Please advise.
So for 2023 I didn't put any of the $22,500 employee Pre-Tax or Roth 401k in. I put about $55k in after tax to then be converted to my Roth IRA. I still had about $10k in employer contribution go in after tax to get me close to the $66k 2023 limit. Did I cause a problem by not maxing the $22,500 for 2023 as you show in your example? My goal was to get the maximum I could out of my employer plan 401k, even if it was Roth 401k, and into my own Roth IRA account with Vanguard.
@@toyarj37 it’s one of three options in my 401k. Roth, Pre-tax (traditional), and after-tax. You would really only do after-tax if you are able to roll it out into a Roth IRA. Not all plans allow this so check first.
You wouldn’t be paying taxes twice because the traditional contributions and gains were tax-deferred. But yes, when you convert traditional to Roth, it will count as income and you will owe taxes. However, this video was about after-tax contributions to your 401k, which is after you’ve reached the regular annual contribution limit.
Thanks for covering this valuable topic, Rachael. Another tidbit… the overall 401k contribution limit is per plan, not per person! If you can manage to arrange earned income via more than one job, you can put even more into Roth. E.g., if you’ve got a side gig, setup a Solo 401k.
Nope. Not in 401k. Your next best alternative is to use “Backdoor Roth”, which utilizes IRA. You put money into traditional IRA, then immediately roll over to Roth IRA. IRAs have annual limit of $7000 per year, so that’s the max you can put in.
Put all your contribution at your job into the Roth 401k or Roth 403b and when you leave your job you can roll it over into the Roth IRA. Jobs that offer traditional and Roth 401 k keep the funds separate as to not have a tax nightmare. A traditional 401 k should be rolled over into a traditional Ira with no taxes owed and a Roth 401 k can be rolled into a Roth IRA with no taxes owed. You can also give to both at the same time up until the total combined contribution limit
Rachel @campwealth If my company offers inservice distribution of after-tax contributions, do I have to first transfer into a traditional IRA, then backdoor to a Roth IRA? Do I need to start a Rollover IRA and use that account? Or can I just go straight into a Roth IRA? My income is over the Roth IRA limit.
How often do you have to move money from after tax contributions to Roth IRA (within same plan) since after tax contributions are delivered every 2 weeks with paycheck?
depends on your plan.. my plan has automatic daily conversion so everytime I get paid the after-tax portion is automatically converted back into my Roth IRA giving it no time for growth so no taxes to pay
5:06 Why do most choose to do the in-plan Roth 401k conversion since your investment choices are more limited than if they did the 1st option of converting after-tax contributions to a Roth IRA?
because most plan only allows for conversion back into the 401k like my plan ... I don't have the option to move it out to roth ira unless I leave or retire
Yes, contributions can be withdrawn without penalty. Gains cannot be withdrawn until 59-1/2 without penalty. So there is little harm in loading Roth with money you'd otherwise call "investment savings" - you've already paid tax on it. By putting it into Roth your investment returns are tax-free and you can still pull out the principal without penalty.
Hi Rachael, I maxed out my traditional 401k last year, but was considering additional after-tax contributions. Assuming one can rollover after-tax 401k contributions to a Roth IRA, does the pro-rata rule apply? Also, super early to your channel! Subscriber 275!
If your employer allows for you to roll it into your Roth IRA, great! The pro rata rule will not apply. Pro rata only applies for money moving from Traditional IRA to Roth IRA. Thank you for subscribing :)
@@CampWealth Rachel, thanks for your guidance. I believe you are correct. Although, I am confused by this information www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans This implies the pro rata rule applies to this scenario. Could you clarify the difference between this information and the example shared 6 months ago? Thank you!
I'd rather do a roth conversion from the money already in a tax deffered 403b. Any extra money would go in a third bucket Brokerage account to have more liquidity and withdrawal options.
You have the same liquidity and withdrawal options in your Roth - only the gains are restricted to 59-1/2. You will find that employers who allow the "after-tax" bucket contributions also allow those contributions to be withdrawn at any time without terminating employment - it's not the same as your qualified "direct to Roth" contributions.
Very clear explanation about something that people needlessly make sound more complex.
Thanks for watching! I'm glad it was helpful :)
Agreed, so many over complicated explanations. This is the best one I’ve come across
Here are the steps i recommend: first After tax contributions > in plan convert to Roth 401k > call your provider roll that over to Roth IRA (this has to manually be done). You want to do Roth IRA because it has more options to trade what you want. In plan Roth 401k are very limited when it comes to investment
Very nicely presented, better than a lot of the vids on YT on this topic 👍
Thnk you for explaining very well the mega backdoor roth ira
For all the high-income earners and super savers, she has excellent advice on tax saving in the long run. Mega backdoor ROTH is the way to go if you don't know what to do with your income.
Thank you for the kind words!
This was the best bid I have seen on it
Thank you :)
Excellent explanation! 😀
Thank you! This was probably the easiest to understand explanation I’ve found yet!
So happy it was helpful for you!
Thanks for the video. Is there any way to decide if it’s better to put the extra money in a traditional vs roth 401k based on age, income, etc?
Working on a video that should help with this question :)
When you do the conversion to Roth IRA, since the earnings are moved with it, you'd have to pay taxes on that portion which shouldn't amount to much if you do the conversion shortly after the contribution.
Great explanation. You are a wonderful teacher
Thank you!!
Question: In my 401k brokerage account, I am only able to see "pre-tax" and "roth basic" contribution. I don't have the third option, which is the "after-tax" contribution. Does that mean it's not possible for me to do a mega backdoor roth IRA? Thanks!
You're crushing it Rachel!
Thank you!!
Thank you for the Video. I have a question though. I have an in plan Roth conversion so my after tax dollars are sitting in Roth 401k. Are my earnings in 'after tax Roth', tax free??? Lets say I have $2000 in after tax dollars converted to Roth and have $500 in earnings. If I now roll it over to my Roth IRA, am I paying taxes on $500 during rollover process? or am I allowed to rollover only the $2000 leaving the earnings? Or If I rollover $2500 into my Roth IRA, will it now be tax free? I am confused. Please advise.
So for 2023 I didn't put any of the $22,500 employee Pre-Tax or Roth 401k in. I put about $55k in after tax to then be converted to my Roth IRA. I still had about $10k in employer contribution go in after tax to get me close to the $66k 2023 limit. Did I cause a problem by not maxing the $22,500 for 2023 as you show in your example? My goal was to get the maximum I could out of my employer plan 401k, even if it was Roth 401k, and into my own Roth IRA account with Vanguard.
How did you put in after tax contribution? Do you write a check?
@@toyarj37 it’s one of three options in my 401k. Roth, Pre-tax (traditional), and after-tax. You would really only do after-tax if you are able to roll it out into a Roth IRA. Not all plans allow this so check first.
What is the catch or downside of this strategy? Do we report this to IRS or how do we report this to IRS?
At the moment of the conversion from traditional to Roth, that will count as income? If so, you will be paying taxes twice?
You wouldn’t be paying taxes twice because the traditional contributions and gains were tax-deferred. But yes, when you convert traditional to Roth, it will count as income and you will owe taxes.
However, this video was about after-tax contributions to your 401k, which is after you’ve reached the regular annual contribution limit.
Thanks for covering this valuable topic, Rachael.
Another tidbit… the overall 401k contribution limit is per plan, not per person! If you can manage to arrange earned income via more than one job, you can put even more into Roth. E.g., if you’ve got a side gig, setup a Solo 401k.
Nice job, if employer doesn’t allow mega backdoor Roth conversion, are there any alternatives?
Nope. Not in 401k.
Your next best alternative is to use “Backdoor Roth”, which utilizes IRA. You put money into traditional IRA, then immediately roll over to Roth IRA.
IRAs have annual limit of $7000 per year, so that’s the max you can put in.
Thank you, Rachael.
@@ashwinpotlapelly9115 do I look like a Rachel to you ? 😛
Thank you@@kshitiz06 😀😀. I was thinking that original UA-camr replied it.
Put all your contribution at your job into the Roth 401k or Roth 403b and when you leave your job you can roll it over into the Roth IRA. Jobs that offer traditional and Roth 401 k keep the funds separate as to not have a tax nightmare. A traditional 401 k should be rolled over into a traditional Ira with no taxes owed and a Roth 401 k can be rolled into a Roth IRA with no taxes owed. You can also give to both at the same time up until the total combined contribution limit
This is very helpful!
What is a roth basic?
Rachel @campwealth If my company offers inservice distribution of after-tax contributions, do I have to first transfer into a traditional IRA, then backdoor to a Roth IRA? Do I need to start a Rollover IRA and use that account? Or can I just go straight into a Roth IRA? My income is over the Roth IRA limit.
How do I get i touch with your group .
Great video! 💯
How often do you have to move money from after tax contributions to Roth IRA (within same plan) since after tax contributions are delivered every 2 weeks with paycheck?
depends on your plan.. my plan has automatic daily conversion so everytime I get paid the after-tax portion is automatically converted back into my Roth IRA giving it no time for growth so no taxes to pay
@@Yugiboiithank you
5:06 Why do most choose to do the in-plan Roth 401k conversion since your investment choices are more limited than if they did the 1st option of converting after-tax contributions to a Roth IRA?
Roth IRA has small amount limit and your income need to be qualified.
because most plan only allows for conversion back into the 401k like my plan ... I don't have the option to move it out to roth ira unless I leave or retire
my company offers auto in plan convert after tax contribution to the Roth 401K, but when the conversion trigger? immediately? quarterly or yearly?
Amazing! This is plan-specific, so you'll have to reach out to your HR or 401k plan with this question.
Great video! I'm way too broke to do this though lol
How to move from Roth 401k to Roth IRA?
when you left the employer
Can you withdraw mega backdoor contributions at any time without tax penalties? Similar to regular Roth IRA contributions?
After 59 1/2 yes
Yes, contributions can be withdrawn without penalty. Gains cannot be withdrawn until 59-1/2 without penalty. So there is little harm in loading Roth with money you'd otherwise call "investment savings" - you've already paid tax on it. By putting it into Roth your investment returns are tax-free and you can still pull out the principal without penalty.
so good!!
Hi Rachael, I maxed out my traditional 401k last year, but was considering additional after-tax contributions. Assuming one can rollover after-tax 401k contributions to a Roth IRA, does the pro-rata rule apply?
Also, super early to your channel! Subscriber 275!
If your employer allows for you to roll it into your Roth IRA, great! The pro rata rule will not apply. Pro rata only applies for money moving from Traditional IRA to Roth IRA.
Thank you for subscribing :)
@@CampWealth Rachel, thanks for your guidance. I believe you are correct. Although, I am confused by this information www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans This implies the pro rata rule applies to this scenario. Could you clarify the difference between this information and the example shared 6 months ago? Thank you!
I'd rather do a roth conversion from the money already in a tax deffered 403b. Any extra money would go in a third bucket Brokerage account to have more liquidity and withdrawal options.
You have the same liquidity and withdrawal options in your Roth - only the gains are restricted to 59-1/2. You will find that employers who allow the "after-tax" bucket contributions also allow those contributions to be withdrawn at any time without terminating employment - it's not the same as your qualified "direct to Roth" contributions.
Most jobs don’t allow this gotta get a solo 401 k
Nice job