401(k) "after-tax" contributions

[robderron]

I just found out that my Schwab 401(k) has a non-Roth "after-tax" arrangement and need help understanding it. Last year I ended up contributing beyond 19.5k and rather than getting cut-off at the IRS limit the small extra unexpectedly ended up in this "after-tax" portion of my 401(k) plan. A call to the brokerage led me to discovering this after-tax feature.

Background: I'm 48M, relatively high-income (approaching 200k with bonus), have zero Roth assets but make above the MAGI limit and plan to start backdoor Rothing this year (6k) once I transfer my current tIRA holdings into my 401(k) which I've confirmed with a Schwab rep is allowed in my plan.

With this "after-tax" option I'm of the understanding that I'm able to eventually convert the after-tax contribution/principle to my Roth IRA when I leave my current employer. If so, then after maxing my 401(k) at 19.5k and getting the employer match, I have about 28k of headroom left to contribute after-tax dollars per year (given the 58k max limit for 2021) which I can later convert to Roth. Is this correct? I get the impression from the Schwab rep that this is not the same as a Mega Backdoor Roth option.

For my lifestyle after living expenses, anything left over from my paycheck goes straight into a taxable brokerage account. But down the road it'd be nice to have flexibility between tax-deferred, taxable, and tax-free buckets once I'm retired so I'd like to bulk up my tax-free bucket while I can. Right now I'll still be putting a smaller leftover amounts into taxable after the 401(k), backdoor Roth, and this after-tax setup (assuming this is what I hope it is) given how much I've minimized my expenses.

This video's 6 year old, but I wonder if it's still relevant:

or if there are new rules since then which makes leveraging this after-tax less advantageous.

 

[robderron]

Thanks for the feedback.

Got a reply from Schwab that my 401(k) does not have a true-up, unfortunately. I'm allowed one after-tax withdrawal/rollover per plan year (in-plan Roth conversion not allowed, which I guess simply means there's no "Roth 401(k)" component in my employer's plan?).

So with this in mind, what's the best way to go about it? I currently contribute 12 - 13% which would take me just a hair over 19.5k (unless I get a bonus payout), then the employer match adds on about 10k. In theory I could have upped my contribution to 28 - 29% to get me to the 58k range but without a true-up, how do others in a similar situation navigate this?

With a raise coming my MAGI is likely going to be above 140k this year so I'd have to backdoor Roth, which is another 6k into my Roth bucket.

I assume at my income level contributing to a tIRA is off-limits, although I'd have to keep it empty anyway for the backdoor due to pro-rata. I also don't have access to an HSA so that's out of the picture. Bigger picture is once I've done the 58k + 6k, anything leftover goes into a taxable account.

 

[breety]

@robderron

Last year I ended up contributing beyond 19.5k and rather than getting cut-off at the IRS limit the small extra unexpectedly ended up in this "after-tax" portion of my 401(k) plan

Verify if your employer matches after-tax contributions, and/or if they true up the match, those would be caveats for how to contribute throughout the year to avoid missing out on any matching if you max out the pre-tax+Roth portion early

With this "after-tax" option I'm of the understanding that I'm able to eventually convert the after-tax contribution/principle to my Roth IRA when I leave my current employer.

Check if your 401k plan allows for in-service withdrawal/rollover to a Roth IRA, or if it allows for in-plan Roth conversion (after-tax 401k to Roth 401k) - that would be a plan that allows for MBD Roth

Your proposed way is another option - the difference there is that when you leave your employer, you can roll the after-tax contributions to a Roth IRA and keep the pre-tax earnings separate to rollover into a tIRA

I usually recommend this article for learning about MBD Roth

If so, then after maxing my 401(k) at 19.5k and getting the employer match, I have about 28k of headroom left to contribute after-tax dollars per year (given the 58k max limit for 2021) which I can later convert to Roth. Is this correct?

Yes, the 58k limit applies to 19.5k (pre-tax+Roth 401k employee contributions) + employer contributions + employee after-tax contributions

 

[catherinenosleep]

@robderron Make sure you convert after tax to Roth immediately. Some companies 401k would do that for you automatically but you need to enable it. Otherwise after tax gain is taxed as income and would be worse than capital gain rate had you just invested the money at a brokerage.

Assuming you can do this mega backdoor, at your income, you should be maxing out 58k 401k via mega backdoor, 6k Roth IRA (this requires backdoor Roth IRA for you), and 3.5k HSA (if it applies).

Like the other comment mentioned, make sure you understand how your company match works. Most places match based on monthly contribution. So you need to make sure there’s room to contribute at least the match percentage each month before you hit the 58k ceiling.