Do you know that 401k Roth is not the same as 401k after tax?

Apple
jobs224

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jobs224
Nov 2, 2021 17 Comments

I thought 401k after tax is the same as 401k Roth, but I found out later, 401k after tax means that any further gain is subject to tax, while 401k Roth means further gain is not subject to tax.

So the 401k pre tax and 401k after tax only differ by whether you pay some tax now...

For some reason, I was supposed to have more money in the Roth portion instead of the "after tax" portion, but last I checked, only about 1/6 of my 401k is in Roth. The other is in after tax. They said if I transfer over to Roth, I'd have to pay tax for the gain so far. So that means we have to keep on converting to Roth the moment we get it in after tax when we get new money into 401k? That is so complicated.

I planed to take them out when my tax bracket is near 0 when I retire after 60 or 65, but the Fidelity workplace planner told me when I get social security, then it is easy to go over the limit for 0 tax.

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TOP 17 Comments
  • Yes... If you contribute to after-tax, you should convert immediately to a Roth IRA or 401k. Yes it is very confusing, and generally after-tax is not used except for the megabackdoor after exhausting the 401k or Roth 401k

    Not sure what your gains or current tax rate is, but may very well be still best to do the conversion and pay the tax. Perhaps you can discuss with the brokerage if anything can be recharacterized, but I'm guessing not since you are sitting on those gains
    Nov 2, 2021 2
  • You should fill Roth or pretax first. After you reach the limit for that, start putting it in after tax and converting. This strategy is called โ€œmega backdoor Rothโ€.
    Nov 2, 2021 2
  • Dell / Eng
    hrdwre !=๐Ÿ’€

    Go to company page Dell Eng

    hrdwre !=๐Ÿ’€
    I literally have to call fidelity every two weeks to move my after tax over to my Roth account to convert it. Itโ€™s a pain in the ass that they canโ€™t automate this process. Side benefit, you get out of your employers shitty mutual fund selections and can options trade with it. Now excuse me while I yolo last paycheck into RIOT leaps.
    Nov 2, 2021 1
    • Apple
      jobs224

      Go to company page Apple

      jobs224
      OP
      yes, I thought I had to do something similar, as they said, it depends on what your 401k plan is... it may go into after-tax or Roth, depending on how your plan is set up... so my holy God... then the people who knows and do this will save all the tax, while the people who don't get to pay all the tax? It is like if you are part of us and know how to play the game with our rule, you win. Otherwise, pay up.
      Nov 5, 2021
  • Amazon
    flintlock

    Go to company page Amazon

    flintlock
    OP you fucked it up. You were supposed to roll over to Roth right after contributing, before there were any gains.
    Nov 3, 2021 2
  • I would say the valid complaint here is that 401k administrators should offer automatic in-plan conversion from after tax to Roth, and they should heavily push you toward setting that up when you configure contributions to the after tax account. Thereโ€™s no much point in the after tax account other than conversion to Roth so itโ€™s kind of a foot gun.
    Nov 3, 2021 1
    • Amazon
      flintlock

      Go to company page Amazon

      flintlock
      Fidelity offers automatic conversion BUT you have to call them to get it set up (can't be done via UI) and you have to KNOW to call them to set it to--you can enable automatic contribution to after tax in the UI but there is no indication that's a dumb thing to do unless you also phone in to get the automatic conversation set up.

      One of those cases where what you don't know can hurt you
      Nov 3, 2021