they are nearly identical. The big difference is that the individual (non-employer) Roth that you open at a bank/brokerage account has income limits: $146k for single, $230k for MFJ.
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correct, incorrectly stated. Deductions get cut in half, brackets go up. (thatās what I get for posting before coffee!)
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Right, which is why I havenāt made a Roth contribution in years. But I do make IRA contributions and they are immediately converted into Roths. Iāve never understood how that works but trust Morgan Stanley knows what theyāre doing.
I do have a Roth option at my company. Do the Roth conversions at MS limit my ability to make Roth contributions to the 401-K Roth? And is the Roth 401-k limited by my pre-tax contributions to my 401-K?
You can contribute up the the maximum 401k limits in either traditional, Roth or a combination of both that doesnāt exceed those limits. 401k limits are separate from IRA limits. You can contribute to both up to their individual limits.
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I thought the same until I looked up the stat.
In 2022, 89.1% of employers that sponsor a 401(k) plan allowed workers to set aside money in a Roth account, according to a recent poll by the Plan Sponsor Council of America, a trade group.
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So it sounds like the 401-k pre-tax and 401-k Roth combined work against the same annual limit. Got it.
And just to make sure my taxes are super complicated when I retire, I have deferred a ton of income under our deferral plans and have selected a variety of distribution elections.
Iām going to need help when I retire, to say the least.
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Correct.
Hey, sounds like itās a good problem to have. Congratulations on being in a position to save so much.
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A few differences. As blue bayou mentioned, income limits for individual Roth accounts but one can get around that limit by making a non-deductible IRA contribution and then converting it to a Roth. That is only a good idea if one does not already have an existing personal IRA account.
Second, and this is getting down into the weeds, but if you need to withdraw $ from your personal Roth account, you can elect to withdraw only the contributions (basis) and not pay taxes. Withdrawals from Roth 401K are pro-rata so you will be taxed and pay a 10% penalty (I think) on the earnings portion of the withdrawal. Same tax treatment as non-qualified distributions from a 529 plan, for those who are familiar.
Editing to say that a withdrawal is one reason one should pull down the Form 5498. Another reason is in case one ever moves the account to a new brokerage.
Thirdāthe individual Roth that one opens at a brokerage has a contribution limit of maybe $7K vs the $23K limit of the Roth 401K.
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2022? Thatās what I meant by recently. 
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For most folks, itās more advantageous to max out the employer 401k (pre- or post-tax; the post-tax goes into a designated Roth) before making contributions to an individual plan (sometimes called a Roth IRA) thru a bank/broker. (The only exception is if your employer plan has miserable and high cost/fee investment options.)
The employer plan is limited to $23k, regardless of whether itās pre- or post-tax.
Not comfortable enough to opine on whether you can have an individual Roth beyond that.
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It sounds as though MS is handling the backdoor conversion for you, assuming you are over the income limits for individual Roth accounts. I hope they are retaining the Form 5498 for you. I nag my children to pull those down each year but I donāt think they have!
This amount does not reduce the amount you can contribute to an employer Roth 401K.
Is there a reason you are not maxing out the Roth 401K at work?
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Other than those deferrals making me a general unsecured creditor of the company. The company has a lot of hard assets and so Iām not generally worried about it. But some of those deferrals have longer payout elections I made years ago, and it doesnāt take a bad management team long to run a company into the ground. Iād probably take some of those decisions back today if I could, but thatās life.
Am curious why you would say that it is more advantageous to max out the employer Roth 401K before funding the Roth IRA?
It seems to me that the Roth IRA offers more flexibility, specifically as I mentioned in prior post about tax treatment of withdrawals from employer Roth 401K, in addition to no-fee fund choices at say Fidelity.
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I am maxing my 401-k to the annual 401-k limit, including the catch up contributions. But Iām doing all of that pre-tax with no money going into the 401-k Roth. The Roth is all happening after-tax with cash going into an IRA and immediately being flipped to a Roth.
Good heads up on the Form. Iām going to see to that.
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Not all employers offer a post-tax option, i.e., Roth 401k, but where they do, you can get the match.
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Truly NONE of my businessā¦but since you mentioned that you already have a lot in tax-deferred, would it not make sense to contribute to the Roth 401K? In asking this, I assume you have excess funds since you are taking the step to contribute to an individual IRA and then converting it to a Roth IRA.
I realize that this decision depends on many factors, including how many years of runway you will have between retirement and RMD age, other income sources during that period (pension, SS, regular interest and dividends, etc), so you may already have a plan to convert your pre-tax amounts to Roth at that time, knowing/guessing that you will be in a lower tax bracket then than now.
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No income limits/phase out; for example, you could put $23k into an employer post-tax plan. Employer match.
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No I donāt mind at all. I brought it up and between you and @bluebayou this has been clarifying for me about some aspects of this I had an educated guess about but didnāt really know for certain. The question you ask is the big question for me. My colleague, who is our VP of Tax, is plowing money into the 401-k Roth and I havenāt picked his brain about it yet. But Iām assuming itās all about tax planning and flexibility in managing tax liability in retirement. Basically, I need to tap into some paid advice about those āfactorsā. I do have excess funds and need to start taking the picture of my retirement from the school of impressionism to realism.
Super helpful. Of course, as Iāve learned in this thread, you can only do this (401-K Roth contributions) to the extent of the annual limit. Said another way, every dollar I put into the Roth 401-k takes from the amount I can contribute to the 401-k pre-tax. So if Iām maxing pre-tax (assuming thatās the right call otherwise, which I know is a big assumption), then Iām not sacrificing the match.
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Ah, got it. So, ease of administration then?
I have my children doing both, and yes, the conversion from non-deductible IRA to Roth requires more paperwork, especially when the child does not make the contribution and conversion in the same year.
Here is a link on the tax reporting required, for anyone who may be reading along. Excellent summary with pictures!
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Correct. itās $23k max today (and adjusted by inflation every so often), in any combination of pre-and post-tax dollars.
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