401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

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Topic Author
investmax
Posts: 82
Joined: Thu Mar 11, 2021 8:00 pm

401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by investmax »

Hi BogleHeads,

I am married filing jointly , I plan to contribute nearly 19.5K to my traditional 401K this year and we have contributed 6K to my wifes Traditional IRA. This year because of my income being in the phase out zone, we may not be able to claim deductions for the full amount of 6K, so I feel we will need to file 8606, for the non-deductible portion for my wife. In my case i have a Roth IRA, which i put in 6K through the Backdoor IRA mechanism.

I also have access to After-Tax contributions in my Employer 401K account. I am planning to make a tiny contribution to it this year. I have the option of doing the in-plan rollovers to a Roth 401(k) account in the Employer plan. Also I can take in-service withdrawals to the mega backdoor Roth IRA.

Now all 3 accounts, my Employer 401K, my Roth IRA and my traditional IRA (which has $0, as this was used to convert to Roth IRA) are all maintained by Vanguard.

I am trying to decide between doing the in-plan rollovers to a Roth 401(k) account vs taking in-service withdrawals to the mega backdoor Roth IRA.

Pros of 401K : Less effort. I can set this up automatically to rollover to a Roth 401(k). In case of in-service withdrawals to the mega backdoor Roth IRA I have to call Vanguard every month to initiate this transfer.
401K has some decent Vanguard index funds. This includes the S&P500 index which I mostly invest in. In vanguard IRA I have much better choices of funds and I invest in VTSAX so far in my Roth IRA.

I am also planning to buy a house sometime this year or next year, so I am considering the option to withdraw some funds from my 401K/Roth for the downpayment. From my 401K plan I can take a loan of 50K and pay it back. Other option is doing a hardship withdrawal from my 401K. I assume I need to do the same from my Roth IRA.

Is there any suggestions over which is option is better. Firstly overall and secondly from the perspective of house downpayment premature withdrawal

Thanks
gtwhitegold
Posts: 503
Joined: Fri Sep 21, 2012 1:55 pm

Re: 401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by gtwhitegold »

If you are going to need the money to purchase a property soon, you're probably better off not putting it in your tax advantaged accounts in the first place. Especially if you are already able to make after tax contributions to your 401k. Why don't you save the money?

If you are still going forward with using your retirement accounts for a home purchase, I would suggest that you consider the 401k loan before you make withdrawals from your IRA accounts. That way you will be able to keep your investment basis in your retirement accounts.

Your third option is to withdraw from your Roth IRA account. You can withdraw whatever your basis is plus $11,000 if you have that much invested, but this would be my last choice out of the three unless your job isn't very secure.
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noraz123
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Re: 401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by noraz123 »

gtwhitegold wrote: Thu May 13, 2021 12:11 am If you are going to need the money to purchase a property soon, you're probably better off not putting it in your tax advantaged accounts in the first place. Especially if you are already able to make after tax contributions to your 401k. Why don't you save the money?
I disagree with this. Contributing to your Roth 401k or Roth IRA will be tax protected from dividends up to the point of withdrawal.

Plus you have an option value. Should OP decide not to buy a house, you can keep the investments in a tax advantaged account.
Rose
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Joined: Fri Nov 13, 2015 11:16 am

Re: 401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by Rose »

See these sites below:
https://www.financialfinesse.com/2021/0 ... -roth-ira/
https://thefinancebuff.com/mega-backdoo ... h-ira.html

Some take aways:
With in service rollover to Roth 401K:
- earning will be taxed (vs can be rolled over to traditional IRA and may have option to roll back to 401k after)
- can't access before 59 1/2.

With rollover to Roth IRA:
- if value of earning drops after deposit in traditional IRA, may recharacterize to lower tax paid
Topic Author
investmax
Posts: 82
Joined: Thu Mar 11, 2021 8:00 pm

Re: 401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by investmax »

Rose wrote: Thu May 13, 2021 9:22 am Some take aways:
With in service rollover to Roth 401K:
- earning will be taxed (vs can be rolled over to traditional IRA and may have option to roll back to 401k after)
My plan will automatically transfer the after tax amount to the Roth 401K bucket after it hits the after tax account. Hence there is very little chance of earnings and gains. In case of Roth IRA transfer, I would need to call up, every time the money hits the after tax account and then it will take a few business days for this money to show up in my Vanguard Roth IRA account. The process is certainly more streamlined for the Roth 401K in plan rollover
Topic Author
investmax
Posts: 82
Joined: Thu Mar 11, 2021 8:00 pm

Re: 401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by investmax »

gtwhitegold wrote: Thu May 13, 2021 12:11 am If you are going to need the money to purchase a property soon, you're probably better off not putting it in your tax advantaged accounts in the first place. Especially if you are already able to make after tax contributions to your 401k. Why don't you save the money? --> Fair point.

If you are still going forward with using your retirement accounts for a home purchase, I would suggest that you consider the 401k loan before you make withdrawals from your IRA accounts. That way you will be able to keep your investment basis in your retirement accounts. --> Makes sense thank you.

Your third option is to withdraw from your Roth IRA account. You can withdraw whatever your basis is plus $11,000 if you have that much invested, but this would be my last choice out of the three unless your job isn't very secure. ---> Okay. One question here is there any 5 year lock period or something before I withdraw money from Roth IRA?
gtwhitegold
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Joined: Fri Sep 21, 2012 1:55 pm

Re: 401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by gtwhitegold »

investmax wrote: Thu May 13, 2021 11:02 am Okay. One question here is there any 5 year lock period or something before I withdraw money from Roth IRA?
The article linked below may be of assistance. You won't pay a penalty if your Roth IRA is less than 5 years old, but you will pay taxes on any earnings withdrawn if you use the money to purchase an initial home.

https://www.nerdwallet.com/article/inve ... a-buy-home
okwriter
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Joined: Mon Apr 12, 2021 2:00 pm

Re: 401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by okwriter »

investmax wrote: Wed May 12, 2021 11:48 pm In case of in-service withdrawals to the mega backdoor Roth IRA I have to call Vanguard every month to initiate this transfer.
Check if your plan charges a transaction fee for this. Mine has a $20 fee per transfer, so it makes more sense to do it once a year rather than every month. In this case you could invest the after-tax 401k in a money market or stable value fund to minimize taxable earnings before you transfer.

I would prefer Roth IRA over Roth 401k because the principal can be withdrawn at any time. For details see https://fairmark.com/retirement/roth-ac ... -overview/ under 'Order of distributions' and 'Treatment of distributions'.
Topic Author
investmax
Posts: 82
Joined: Thu Mar 11, 2021 8:00 pm

Re: 401K After tax bucket : Rollover to Roth 401K vs in-service withdrawals to a Roth IRA

Post by investmax »

okwriter wrote: Thu May 13, 2021 2:56 pm Check if your plan charges a transaction fee for this. Mine has a $20 fee per transfer, so it makes more sense to do it once a year rather than every month. In this case you could invest the after-tax 401k in a money market or stable value fund to minimize taxable earnings before you transfer.
This is a good point. I need to check this. I hope that is not the case since it is VG to VG
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