In Plan Roth Conversion (Mega Back Door Roth) vs Standard Roth Conversion from TIRA?
Employer allows for additional contributions to my 401k (an option for those who have maxed out the over age 50+ 26k limit), via an after-tax salary deferral into a pre-tax 401k, and immediately convert those after-tax dollars to a Roth (In plan roth conversion). We expect our Marginal rate to be 35% this year (Effective rate of 21%) and 24% (eff rate of 8.3%) in 2022 and 22% over the following three years.
My question: Given 2021 is expected to be our LAST highest tax rate year (retiring early in 2022), does it make sense to do the in-plan conversion and pay the higher taxes on the conversion THIS year….OR….forego that and just convert some portion of my TIRA NEXT year when in a lower tax situation?
This is a last ditch effort to get an additional $25k – employer limit) into a Roth acct prior to retire – just not sure if it makes sense to do it this way. As always, I may also be missing something…
Permalink Submitted by Alan - IRA critic on Thu, 2021-09-23 20:28
Yes, the big thing you are missing is when in an in Roth rollover (IRR) is done with after tax contributions, there is no tax due for the IRR except for any earnings on the after tax contribution. I would proceed to max out your after tax contributions this year and do the IRR this year, since there is proposal in Congress to eliminate the conversion of any after tax dollars for good. So you should make your max after tax contributions and roll them into your designated Roth this year while you still have the chance. Again, there should be little or no tax due for the IRR.
Permalink Submitted by Blue_Sky on Fri, 2021-09-24 00:29
After further consideration I was coming to the same conclusion but also wanted confirmation to proceed. Very much appreciated!!