New Roth IRA contribution or Roth Conversion?
I have a significant portion of my retirement portfolio in tax-deferred 401K. For new contributions, I do intend to only contribute to Roth 401K and after-tax 401K with the mega backdoor Roth conversion that my plan allows.
The question I have is If it is better to continue contributing to the after-tax 401K or if it is better to use those funds to Roth convert existing tax-deferred money.
Thanks.
Permalink Submitted by Alan - IRA critic on Tue, 2023-06-20 23:16
The mega back door is better. You pay no taxes, do not create a 5 year waiting period to avoid the 10% recapture tax, and you do not draw down your pre tax retirement assets. Conversely, with a taxable conversion you owe tax on the amount converted, create a 5 year waiting period because the conversion is taxable, and you are not funding the Roth with new retirement money, you are converting from the pre tax account. Of course, if you are in a low enough bracket you might convert some after you have maxed out the mega back door.