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Old 07-22-2021, 09:37 AM   #1
boy wonder
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I am having a post-tax account "back door'd" into an existing ROTH IRA in the same 401K account. My assumption is, I will only have to pay the taxes on the growth and the 10% penalty (<59.5 years old) does not apply. Is my assumption correct?
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Old 07-22-2021, 10:10 AM   #2
BrianL
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You mean you are moving a PRE tax account (401k?) into a Post tax Roth(IRA OR 401K)?
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Old 07-22-2021, 10:37 AM   #3
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No 10% penalty on Roth conversions. Roth IRAs don't exist inside a 401k plan. You could have a Roth option for your 401k though. Roth 401k does not have the income limit for eligibility that a Roth IRA has, so you shouldn't have to back door into the Roth 401k. It's not clear what you have and are trying to accomplish. Most specifics would help.
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Old 07-22-2021, 11:05 AM   #4
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I’m not sure what your really asking. If you are moving from a 401 to a Roth, you will have to pay tax on the full amount you convert to Roth.
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Old 07-22-2021, 11:19 AM   #5
boy wonder
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In my 401K, I have pre-tax, post-tax and ROTH accounts. I moved my post-tax account balance into my ROTH and I'm still contributing to the post-tax, but it is then moved to the ROTH. And, I'm contributing the max amount to the ROTH aside from the post-tax movement. Sorry, I'm not a "financial guy"....
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Old 07-22-2021, 11:39 AM   #6
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Isn’t the post-tax the Roth portion?
I’ve never heard of pre, post tax & then Roth as a third option
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Old 07-22-2021, 12:15 PM   #7
boy wonder
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Originally Posted by HogHunter34 View Post
Isnít the post-tax the Roth portion?
Iíve never heard of pre, post tax & then Roth as a third option
Yes, within my 401K I have these options, not sure about any other 401K. I did pre-tax for years, then did some post-tax to put more than the pre-tax limit. Then, along came ROTH .
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Old 07-22-2021, 12:20 PM   #8
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You won't owe penalty on the conversion. You already paid tax on your after-tax contributions, but you've not paid tax on the earnings on those contributions yet. You'll owe tax on that when you convert it to Roth.
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Old 07-22-2021, 12:37 PM   #9
boy wonder
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Quote:
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You won't owe penalty on the conversion. You already paid tax on your after-tax contributions, but you've not paid tax on the earnings on those contributions yet. You'll owe tax on that when you convert it to Roth.
Thank you!
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Old 07-22-2021, 03:48 PM   #10
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Quote:
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You won't owe penalty on the conversion. You already paid tax on your after-tax contributions, but you've not paid tax on the earnings on those contributions yet. You'll owe tax on that when you convert it to Roth.
This. We contribute the max Roth amount to a standard IRA and convert per our FA's advice. No penalty, just tax on the growth (if any)

Last edited by JonBoy; 07-22-2021 at 03:50 PM.
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Old 07-22-2021, 04:05 PM   #11
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Interesting. I have a 401k with my current employer that has the tax deferred option as well as Roth option. I split mine across both but more toward tax deferred to help offset tax rate
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Old 07-22-2021, 04:33 PM   #12
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Quote:
Originally Posted by HogHunter34 View Post
Interesting. I have a 401k with my current employer that has the tax deferred option as well as Roth option. I split mine across both but more toward tax deferred to help offset tax rate
I'm adding a Roth to our retirement plan at work, and wished I had done it 20 years ago... I would STRONGLY suggest looking at max the Roth, and put any employer match to the regular.
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Old 07-22-2021, 04:59 PM   #13
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Pre-tax makes a lot of sense, IF you will be in a lower tax bracket in retirement.
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Old 07-23-2021, 09:47 AM   #14
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What i understand is that a number of employers now offer multiple options in their 401k:

1. Pretax (normal) $19,500 limit
2. Post tax - $58,000 limit
3. Roth - $19,500 limit

The "strategy" is to contribute more money into Post tax 401k which has a higher limit, then backdoor this amount into the Roth which has a lower limit. Add on the benefit that there is no income limitations for roth 401k like their is for IRAs (for those who make "too much" money!).

To the OPs question, there is no penalty for converting anything to Roth.
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Old 07-23-2021, 09:50 AM   #15
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Quote:
Originally Posted by boy wonder View Post
Pre-tax makes a lot of sense, IF you will be in a lower tax bracket in retirement.
my goal in retirement is to have several source of income so i can manage my tax bracket within reason. i fully expect to have as much or more income in retirement but be in a lower bracket.

now who knows what the income tax rates will be when i retire. again can't predict that so just trying to have multiple sources of income.
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Old 07-23-2021, 10:01 AM   #16
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Should go match employers full match, then put into IRA.

Quote:
Originally Posted by BrianL View Post
I'm adding a Roth to our retirement plan at work, and wished I had done it 20 years ago... I would STRONGLY suggest looking at max the Roth, and put any employer match to the regular.
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Old 07-23-2021, 01:30 PM   #17
boy wonder
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Quote:
Originally Posted by TeamAmerica View Post
What i understand is that a number of employers now offer multiple options in their 401k:

1. Pretax (normal) $19,500 limit
2. Post tax - $58,000 limit
3. Roth - $19,500 limit

The "strategy" is to contribute more money into Post tax 401k which has a higher limit, then backdoor this amount into the Roth which has a lower limit. Add on the benefit that there is no income limitations for roth 401k like their is for IRAs (for those who make "too much" money!).

To the OPs question, there is no penalty for converting anything to Roth.
This is my strategy, but I can't come up with a way to be in a lower tax bracket .
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Old 07-24-2021, 07:55 PM   #18
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Quote:
Originally Posted by boy wonder View Post
This is my strategy, but I can't come up with a way to be in a lower tax bracket .
Roth, muni bonds, life insurance. You need sources of tax free income in retirement that are flexible.

I'm talking about your retirement tac bracket just for clarity. Make as much money now as you can bracket be darned.
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Old 07-24-2021, 08:25 PM   #19
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First of all listen to Shane - he does this for a living - remember this - the higher your tax bracket it means you are making more money! That is a GOOD thing

Converting to a Roth is the marketing push right now - listen to any financial planner radio show etc and it is the big push.

Here is the other side of converting to a Roth - Once you give a dollar to the IRS you will NEVER see that dollar again. IF you keep that dollar on a tax deferred basis then that dollar remains yours until you withdraw it - what is that dollar doing over all those years until you withdraw it??? Earning interest for you and not for the IRS.

The theory behind a Roth is that your tax bracket will be higher once you retire so go ahead an pay tax on it today and convert. Truth is that most folks will be in a LOWER tax bracket in retirement because they are not working any longer and not earning as much income. Yes the Democrats may raise taxes but as soon as a Republican is elected they will lower taxes. Guessing what future tax brackets may be is fools gold IMO.

So my approach over my 68 years of life has been to hold onto my dollar as long as I can so it is earning me interest rather than hand it to the government just in case taxes are higher when I need to use it - think about it

Last edited by Huntingfool; 07-24-2021 at 08:29 PM.
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Old 07-24-2021, 08:37 PM   #20
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Quote:
Originally Posted by TeamAmerica View Post
my goal in retirement is to have several source of income so i can manage my tax bracket within reason. i fully expect to have as much or more income in retirement but be in a lower bracket.

now who knows what the income tax rates will be when i retire. again can't predict that so just trying to have multiple sources of income.
This has always been my plan also. I don't need a lot of money to live on during the year so I will withdraw just enough from my taxable accounts to stay in the lowest bracket and then top it off with withdrawals from my ROTH account should I need extra. I plan to stay in the lowest tax brackets.

I understand that at some point minimum distributions will kick in but until that time that is my plan.
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Old 07-25-2021, 04:33 AM   #21
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Yeah it’s best to draw low % (2-4%) annually from tax deferred as your livable income day to day then when you need a lump supplement for major expenses take that out of your Roth so you avoid added tax impact
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