Explain contributions to In Plan Roth Rollover and Roth IRA

[Tiny]

TLDR: Can someone explain In-Plan Roth Rollovers when you have and typically contribute the max to a Roth IRA (which is NOT part of my employers 401K plan)?  Like I was a 5 year old? 

Here's the skinny:
For 2024, my employer's 401K plan now offers "in Plan Roth Rollovers" 

I am currently maxing my pretax 401K  (23,000 + 7,500 = $30,500).  I set up my contribution so I hit the maximum by the last paycheck of October or the first paycheck of November.  I have hit the maximum for 2024. 

I typically contribute the max to a Roth IRA (at Fidelity) for the previous year in February or March (so I will contribute the maximum of $8,000 for 2024 in feb/march 2025).  I have not made any Roth contributions FOR 2024 in 2024. 

It sounds like I could continue to contribute to my 401K every paycheck - and the amount will automatically be "rolled over" into a 401K Roth account.  I will pay normal payroll taxes on the contribution (it's no longer a pretax deduction). 

I don't think doing this is a bad idea - I will be contributing 8K in already taxed income to my Fidelity Roth account in a few months. 

What I'm unclear on is if I do the In Plan Roth Rollovers through the end of the year, as an example say I "roll over" $6,500 to the 401K Roth Account,  can I still contribute to my Fidelity Roth and how much can I contribute?   Only $1,500 (to get me to the max roth contribution) or the full $8,000 (so I would have 6,500 in my employers 401K roth account and 8K in my fidelity roth)?   

If I contribute 10K to my "In Plan Roth Rollover" account (aka 401K Roth account) can I still contribute to my Fidelity Roth and how much?   

I did google and read a bunch of stuff - but I couldn't make up my "overthinking it" mind if it was a YES or NO or how it would apply to my situation.

 

[schildi]

When you say "Roth Rollovers", do you mean "RIPC" (= Roth-in-plan-conversion)?

Here is how it works for me (also through Fidelity):

We have two buckets to set contributions for: pre-tax and post tax. These are separate buckets, and I max the pre-tax (regular 401k) with $30,500.

Then, there is the second bucket: post-tax. That's basically post-tax contributions to my 401k, and there, I can put in money until I hit the "annual additions limit", which is the sum of my contributions (post & pre-tax) and what my employer puts in/matches. Google "annual additions limit" for more details, but this year that number is $69,000 (plus catch-up if you are old enough), so for me it's $76,500 (sounds like for you too, based on your post above). Now this limit is separate from the Roth contributions, I can do both.

So I am doing post-tax contributions at the same time that I am doing pre-tax contributions throughout the whole year, until I reach the max. For the post-tax contributions, I had to call Fidelity once, to instruct them to do "automatic RIPCs" (Roth in plan conversions) going forward. With that, the post tax contributions are being automatically converted to "Roth" as soon as they hit the account.

Is this what you are asking?

Example: I can contribute $30,500 to my 401k. Let's say my employed adds $15k. That leaves me another $31k ($30.5k+$15k+$31k=$76.5k) that I can contribute to the RIPC bucket, which in the end is "Roth" money that I can even transfer out of the plan and into my personal Roth IRA at Fidelity.
I can then also contribute another $8k to my Roth IRA directly through the "backdoor Roth".

Hope I didn't misunderstand your question and typed all of this for no reason, LOL.

[minnesotapaintlady]

IRA limits and 401K limits are totally separate.  You can max the pre-tax limit in your 401K, then also contribute post-tax to your 401K and immediately roll to Roth and be fine.

eta: and btw, super jealous.    We can't do in-service rollovers.  Not that I really have enough income for it to matter.

[Tiny]

My employer's 401K is with Schwab. A bunch of years ago a 401K Roth was added to it. I have never contributed to the 401K Roth. There is no employer match.
I contribute to my Fidelity Roth IRA.

Yes - I firmly believe my employer's new benefit is a Roth In Plan Conversion option.

Is this what you are asking?

Yes. I think so.

Example: I can contribute $30,500 to my 401k. Let's say my employed adds $15k. That leaves me another $31k ($30.5k+$15k+$31k=$76.5k) that I can contribute to the RIPC bucket, which in the end is "Roth" money that I can even transfer out of the plan and into my personal Roth IRA at Fidelity.
I can then also contribute another $8k to my Roth IRA directly through the "backdoor Roth".

I can't easily do a Backdoor Roth outside of my employers 401K - I have an old large Roll Over IRA at Fidelity.   Is doing a back door Roth the only way I could contribute to my Fidelity Roth if I contribute to my employer's Roth 401K via the new benefit? 

as an aside:  YIKES, are the taxes on the Roth in Plan Conversion based on the really huge 401K balance I currently have (like it would be if I was doing a roll over from my large IRA at Fidelity to a my Roth at Fidelity)?  The explanation about the benefit made it sound like I would just pay the regular payroll taxes on the contribution (basically a post tax contribution) and JUST the contribution money would be rolled over to the Roth account. 

Maybe I don't want to take advantage of this benefit....
I am so confused.

[Tiny]

Oct 30, 2024 14:07:10 GMT -5 minnesotapaintlady said:

IRA limits and 401K limits are totally separate.  You can max the pre-tax limit in your 401K, then also contribute post-tax to your 401K and immediately roll to Roth and be fine.

eta: and btw, super jealous.    We can't do in-service rollovers.  Not that I really have enough income for it to matter.

Yeah, my employer keeps adding benefits that I can barely take advantage of.     The game plan for the last 5 years was to max my 401K ASAP (usually by mid november) and then when no more contributions were coming out of my paycheck - I would "save up" the extra money so I could contribute it to my Fidelity Roth.  In the past I'd get a Thanksgiving Bonus and then a Holiday Bonus and then a seniority bonus and there use to be a vacation day "buy back" benefit.  All of those either put money into my 401K OR I would allocate it to my Roth.  Over the last 5 years the Thanksgiving Bonus and the vacation day "buy back" have gone away.  And the Holiday Bonus has gotten smaller.  



I'm mostly trying to figure out the best way to get 8K into a Roth for 2024. I do have an extra 10K cash I'm been holding on to along with the 8K I could put into my Fidelity Roth for 2024. if I could get 8K plus 10K into a Roth for 2024... that would be amazing.   I was kind of hoping I could set my 401K contribution to something astronomical high and get 10K into a 401K Roth from my paychecks between now and the end of the year and live off the 10K cash I have. I was hoping I could then contribute 8K in cash to my Fidelity Roth.

 

[minnesotapaintlady]

Oct 30, 2024 18:53:23 GMT -5 Tiny said:

My employer's 401K is with Schwab. A bunch of years ago a 401K Roth was added to it. I have never contributed to the 401K Roth. There is no employer match.
I contribute to my Fidelity Roth IRA.

Yes - I firmly believe my employer's new benefit is a Roth In Plan Conversion option.

Is this what you are asking?

Yes. I think so.

Example: I can contribute $30,500 to my 401k. Let's say my employed adds $15k. That leaves me another $31k ($30.5k+$15k+$31k=$76.5k) that I can contribute to the RIPC bucket, which in the end is "Roth" money that I can even transfer out of the plan and into my personal Roth IRA at Fidelity.
I can then also contribute another $8k to my Roth IRA directly through the "backdoor Roth".

I can't easily do a Backdoor Roth outside of my employers 401K - I have an old large Roll Over IRA at Fidelity.   Is doing a back door Roth the only way I could contribute to my Fidelity Roth if I contribute to my employer's Roth 401K via the new benefit? 

as an aside:  YIKES, are the taxes on the Roth in Plan Conversion based on the really huge 401K balance I currently have (like it would be if I was doing a roll over from my large IRA at Fidelity to a my Roth at Fidelity)?  The explanation about the benefit made it sound like I would just pay the regular payroll taxes on the contribution (basically a post tax contribution) and JUST the contribution money would be rolled over to the Roth account. 

Maybe I don't want to take advantage of this benefit....
I am so confused.

You don't convert your traditional 401K or IRA money when doing an after tax-conversion of 401K contributions to Roth. It's a completely separate bucket of funds.  If you only put $1000 into after-tax 401K and roll that out to a Roth you only pay taxes on that portion (which was after tax with no growth, so there are none).

[schildi]

Oct 30, 2024 18:53:23 GMT -5 Tiny said:

The back door Roth for me is only because of income limits, it has nothing to do with the 401k after tax RIPC. Completely separate bucket.

[schildi]

Oct 30, 2024 18:53:23 GMT -5 Tiny said:

as an aside:  YIKES, are the taxes on the Roth in Plan Conversion based on the really huge 401K balance I currently have (like it would be if I was doing a roll over from my large IRA at Fidelity to a my Roth at Fidelity)?  The explanation about the benefit made it sound like I would just pay the regular payroll taxes on the contribution (basically a post tax contribution) and JUST the contribution money would be rolled over to the Roth account. 

Maybe I don't want to take advantage of this benefit....
I am so confused.

There should be no taxes on the RIPC, I never had to pay taxes and have been doing it for years. It should be automatically converted as soon as the money hits the account, so there should be no gains to be taxed. I never had an issue with it.

Having the "mega backdoor Roth" option (what this is called) has really helped my Roth balance to catch up with the pre-tax 401k. 

If you are not sure or scared, do it with a small-ish amount and try it. It's a great benefit that you probably should not let go if you can, somehow!

[teen persuasion]

Oct 30, 2024 18:53:23 GMT -5 Tiny said:

My employer's 401K is with Schwab. A bunch of years ago a 401K Roth was added to it. I have never contributed to the 401K Roth. There is no employer match.
I contribute to my Fidelity Roth IRA.

Yes - I firmly believe my employer's new benefit is a Roth In Plan Conversion option.

Is this what you are asking?

Yes. I think so.

Example: I can contribute $30,500 to my 401k. Let's say my employed adds $15k. That leaves me another $31k ($30.5k+$15k+$31k=$76.5k) that I can contribute to the RIPC bucket, which in the end is "Roth" money that I can even transfer out of the plan and into my personal Roth IRA at Fidelity.
I can then also contribute another $8k to my Roth IRA directly through the "backdoor Roth".

I can't easily do a Backdoor Roth outside of my employers 401K - I have an old large Roll Over IRA at Fidelity.   Is doing a back door Roth the only way I could contribute to my Fidelity Roth if I contribute to my employer's Roth 401K via the new benefit? 

as an aside:  YIKES, are the taxes on the Roth in Plan Conversion based on the really huge 401K balance I currently have (like it would be if I was doing a roll over from my large IRA at Fidelity to a my Roth at Fidelity)?  The explanation about the benefit made it sound like I would just pay the regular payroll taxes on the contribution (basically a post tax contribution) and JUST the contribution money would be rolled over to the Roth account. 

Maybe I don't want to take advantage of this benefit....
I am so confused.

As schildi  said, what you are talking about in your 401k is informally called a Mega Backdoor Roth. A Backdoor Roth is in an IRA (when you can't contribute to a Roth IRA thru the front door due to AGI limitations); Mega Backdoor Roth is in your 401k.

Its Mega because you can contribute much more than your normal 401k traditional or Roth contributions, it is IN ADDITION to those. You are actually making after-tax contributions, which can fill the space between your $30.5k limit + employer's match and the upper limit of $76.5k total (if 50+ adding catch up). 

All that after-tax contribution amount has been taxed (no deduction), so if you have the ability to convert easily you should do it. It essentially gives you more Roth space, if you have the funds to contribute.

One drawback I've heard of depends on how your employer's plan segregates pretax and Roth portions, and whether you can invest them differently. Many people complain because their plan treats it as one pool, and just figures out the percentage that is pretax vs Roth - everything is invested the same. Usually you want all stocks in Roth (so it grows more, tax free), and bonds in pretax only (so it grows less, it'll be OI on withdrawal), but a single pool prevents you from investing that way. You have to decide if that limitation is a deal breaker or not.

[teen persuasion]

Here's bogleheads' wiki entry on the Mega Backdoor Roth

[Tiny]

I got an email from Schwab:

I don't want to do the first one: 

There are two types of in-plan Roth rollovers:  

One-time rollovers of existing eligible balances.

You can convert any eligible before-tax and/or after-tax balances you hold in the 401(k) Plan to Roth
savings anytime. One-time rollovers let you choose when and how much to convert. There is no limit on
the number of requests you can make. Requests are generally processed within 10 business days.
You can request a one-time in-plan Roth rollover online at workplace.schwab.com. Select the Manage
Account tab and then In-Plan Roth Rollover to get started.
Note: If you want to specify the investment fund(s) to be converted for a one-time in-plan Roth rollover
of an existing balance, you should instead call xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
to request a paper form on which you can write the investment fund(s) to be rolled over.

This is the one I was thinking would be a good idea (as I have 5 more paychecks and perhaps 2 small "bonus" checks coming this year): 

Automatic rollovers of future after-tax contributions.*

If you elect to make after-tax contributions through payroll deductions, those after-tax contributions will
be automatically converted to Roth 401(k) within your 401(k) Plan account unless you elect otherwise.
This may help limit your future tax liability by reducing the time your after-tax contributions have to
generate any taxable earnings before conversion. It may also be more convenient for you than requesting
individual rollovers.

Important: If you have accumulated after-tax balances in the 401(k) Plan by the time you sign up for
automatic rollovers, a portion of each automatic rollover you request may include a taxable distribution.
This is required by income tax regulations. Find out more by logging in to workplace.schwab.com and
then selecting Manage Account > In-Plan Roth Rollover. Be sure to also talk to your tax advisor to
understand how after-tax contributions and automatic rollovers could work together and how changes to
your elections could impact your tax liability.

I'm not sure I can get 8K (from payroll deductions from current pay)  into this 401K Roth by the end of the year.       Say I only get 5K into the 401K Roth -  can I still contribute (with out doing a "backdoor" thing) to my Fidelity Roth IRA and how much could I contribute to it? 


Maybe a missing peice of information is that my income should be under the $146,000 limit for a Roth (or just a bit over it).  

[minnesotapaintlady]

Oct 30, 2024 23:01:51 GMT -5 Tiny said:

I got an email from Schwab:

I don't want to do the first one: 

There are two types of in-plan Roth rollovers:  

One-time rollovers of existing eligible balances.

You can convert any eligible before-tax and/or after-tax balances you hold in the 401(k) Plan to Roth
savings anytime. One-time rollovers let you choose when and how much to convert. There is no limit on
the number of requests you can make. Requests are generally processed within 10 business days.
You can request a one-time in-plan Roth rollover online at workplace.schwab.com. Select the Manage
Account tab and then In-Plan Roth Rollover to get started.
Note: If you want to specify the investment fund(s) to be converted for a one-time in-plan Roth rollover
of an existing balance, you should instead call xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
to request a paper form on which you can write the investment fund(s) to be rolled over.

This is the one I was thinking would be a good idea (as I have 5 more paychecks and perhaps 2 small "bonus" checks coming this year): 

Automatic rollovers of future after-tax contributions.*

If you elect to make after-tax contributions through payroll deductions, those after-tax contributions will
be automatically converted to Roth 401(k) within your 401(k) Plan account unless you elect otherwise.
This may help limit your future tax liability by reducing the time your after-tax contributions have to
generate any taxable earnings before conversion. It may also be more convenient for you than requesting
individual rollovers.

Important: If you have accumulated after-tax balances in the 401(k) Plan by the time you sign up for
automatic rollovers, a portion of each automatic rollover you request may include a taxable distribution.
This is required by income tax regulations. Find out more by logging in to workplace.schwab.com and
then selecting Manage Account > In-Plan Roth Rollover. Be sure to also talk to your tax advisor to
understand how after-tax contributions and automatic rollovers could work together and how changes to
your elections could impact your tax liability.

I'm not sure I can get 8K (from payroll deductions from current pay)  into this 401K Roth by the end of the year.       Say I only get 5K into the 401K Roth -  can I still contribute (with out doing a "backdoor" thing) to my Fidelity Roth IRA and how much could I contribute to it? 


Maybe a missing peice of information is that my income should be under the $146,000 limit for a Roth (or just a bit over it).  

Yes, you can still directly contribute to your Roth IRA (assuming your AGI is under 146K).  Again, the limits are completely separate and don't affect one another. Having said that, there's nothing "better" with Roth money from an after-tax 401K conversion, so if you only have 8K to invest you may as well just put it in the Roth IRA.  It's more about having the "extra" space for people that have maxed everything out already.

[Tiny]

Oct 30, 2024 20:43:21 GMT -5 teen persuasion said:

Oct 30, 2024 18:53:23 GMT -5 Tiny said:

As schildi  said, what you are talking about in your 401k is informally called a Mega Backdoor Roth. A Backdoor Roth is in an IRA (when you can't contribute to a Roth IRA thru the front door due to AGI limitations); Mega Backdoor Roth is in your 401k.

Its Mega because you can contribute much more than your normal 401k traditional or Roth contributions, it is IN ADDITION to those. You are actually making after-tax contributions, which can fill the space between your $30.5k limit + employer's match and the upper limit of $76.5k total (if 50+ adding catch up). 

All that after-tax contribution amount has been taxed (no deduction), so if you have the ability to convert easily you should do it. It essentially gives you more Roth space, if you have the funds to contribute.

One drawback I've heard of depends on how your employer's plan segregates pretax and Roth portions, and whether you can invest them differently. Many people complain because their plan treats it as one pool, and just figures out the percentage that is pretax vs Roth - everything is invested the same. Usually you want all stocks in Roth (so it grows more, tax free), and bonds in pretax only (so it grows less, it'll be OI on withdrawal), but a single pool prevents you from investing that way. You have to decide if that limitation is a deal breaker or not.

OMG.  I had to read that multiple times along with the info in the Wiki link before I actually "read it" and understood it.   That clears up one "mystery" for me (mega back door/back door) .    I still need to read the rest of the wiki.  it's late and I'm tired.  Will pick it up again tomorrow.    

[Tiny]

Oct 30, 2024 23:27:09 GMT -5 minnesotapaintlady said:

Oct 30, 2024 23:01:51 GMT -5 Tiny said:

I got an email from Schwab:

I don't want to do the first one: 
This is the one I was thinking would be a good idea (as I have 5 more paychecks and perhaps 2 small "bonus" checks coming this year): 
I'm not sure I can get 8K (from payroll deductions from current pay)  into this 401K Roth by the end of the year.       Say I only get 5K into the 401K Roth -  can I still contribute (with out doing a "backdoor" thing) to my Fidelity Roth IRA and how much could I contribute to it? 


Maybe a missing peice of information is that my income should be under the $146,000 limit for a Roth (or just a bit over it).  

Yes, you can still directly contribute to your Roth IRA (assuming your AGI is under 146K).  Again, the limits are completely separate and don't affect one another. Having said that, there's nothing "better" with Roth money from an after-tax 401K conversion, so if you only have 8K to invest you may as well just put it in the Roth IRA.  It's more about having the "extra" space for people that have maxed everything out already.

I do understand that highlighted part.     I can contribute up to 75% of my paycheck to the 401K.      I already have the 8K I was going to contribute to my Fidelity Roth (I'm just sitting on the cash and was debating when I would make the contribution)  I also have 10K to 15K in Ally CDs that will mature soon and which I didn't have a plan for. 

I was thinking I would contribute as much as I can to the after tax 401K and have it automatically rollover to the Roth between now and the end of the year.  I will use the cash from Ally to cover my expenses as needed.  I will then also contribute another 8K to my Fidelity Roth.     Which should result in being able to stuff slightly more than 8K into a Roth for 2024.     ok, it won't be a BIG amount but it's still something.  woohoo!   

ADDED:  And I have 10K to buy I-Bonds with after January 1st.  That will put me at my goal amount in I-bonds.     

All the extra cash is from the sale of house back in 2021.  Interest rates were going up so I sat on the cash and did short term safe investments (I also paid cash to put a new roof on my house and some other big expense maintenance things).   kind of glad I've got some liquid cash handy.    If I didn't have the "extra" cash - I wouldn't have started this topic.