Hey Fellas - quick question -

I max'ed out my 401k contributions - Pre-Tax and Roth - and since then have been adding money After-Tax to my plan. My plan admin said I have the option to convert after-tax source to Roth. Does anyone have thoughts on if I should be doing this? Pros and Cons?

Thank you!

You should absolutely be doing that. Your gains will grow tax-free. There's no downside that I can see.

In fact, if you can spare it you should consider adding some after-tax contributions to your Roth in every paycheck. (Aka Mega backdoor Roth contributions)

The only 'downside' is you would owe tax on any gains these funds have made since you contributed them (i.e. if you contributed $1000 and it grew to $1005, you would owe tax on the $5 gain)

The major upside would be you will never owe tax on any of the gains ever again. So you should Roth convert the after tax money as early and often as they let you. Some plans let you do them every paycheck, others only let you do them once a year so you would want to build up the funds before making the conversion.

Some plans even let you roll the gains into traditional IRAs to defer until withdrawn. Mine does but the process requires sending paperwork to vanguard so only worthwhile to do once a year or so since it takes time.

Appreciate the feedback.!

Just be careful. If you're close to the limit that extra can knock you out of Roth IRA contributions. Or put you into the next tax bracket on your conversion which if you split and did later it might not.

You should absolutely do this. Mega back door Roth

hypeiv said:

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The only 'downside' is you would owe tax on any gains these funds have made since you contributed them (i.e. if you contributed $1000 and it grew to $1005, you would owe tax on the $5 gain)

The major upside would be you will never owe tax on any of the gains ever again. So you should Roth convert the after tax money as early and often as they let you. Some plans let you do them every paycheck, others only let you do them once a year so you would want to build up the funds before making the conversion.

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If your plan converts automatically then the first paragraph shouldn't be a concern. You get paid, the 401k contribution comes out, and then the plan automatically converts the after tax portion to Roth. No time for gains so no tax consequence. That's what my plan does. It's the ultimate set and forget.

Not every plan allows Roth conversions. The fact that yours does is a huge blessing and I encourage you to take advantage of it. Lot of websites/blogs on "mega back door Roth" that can help you understand it more.

The 2023 401k contribution limit is $22,500. But the overall limit is $66,000. The overall limit includes any employer matching. That difference of $43,500 can be made up of after tax conversions + employer match. If you are able to max out to $66k, you will have over $1,000,000 to your 401k in just a few years assuming normal growth rates. The majority will be on the tax free (at distribution) Roth side. Pretty good nest egg.