This is a very powerful tool, if one’s 401K program allows it. We were able to build up a significant amount in our 401K’s this way without hassle. We called the administrator to set it up, and then they automatically took a certain percentage out of our paycheck after tax and immediately converted it to the Roth. Easy as can be.
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When you say after tax - you’re saying you’re not getting the upfront deduction like a normal 401k?
So if you paid tax up front - and now are moving to a Roth - how is this an advantage?
Or what am I missing?
Is it just you can go beyond the limits - so you put more money than normally allowed that can then grow tax free?
Or why wouldn’t you just contribute to your Roth 401k, per which Fidelity, has no limit on contribution - “Unlike Roth IRAs, there are no income caps on Roth contributions in a workplace savings account like a 401(k).”
Just trying to understand - I’m sure I’m missing something here…
Thanks
This is if you want to contribute more. We maxed out our 401K Roths every year, but were still able to do the mega backdoor Roth. So if one has extra money that they want to invest, no reason to put it in a taxable brokerage account, just mega backdoor Roth it and the gains will never be taxed. It is very convenient after retirement when we want to draw from a different pot and not add to our tax burden.
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We are so jealous of those who have employers offering the option for mega-backdoor Roths. It can be up to an extra $38-45k a year into tax-free investing after fully funding your 401(k) (if I remember the limits correctly) depending on your age.
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Does this article help?
To attempt to answer your questions, and I may get this wrong…
BusDriver is not converting to an individual Roth at Fidelity or the like, but instead handling all of this within the employer plan.
No, you would not realize the tax savings of contributing employer 401(k) plan. The advantage is that you will be able to contribute more to a Roth 401(k) than you can to an individual Roth account. And even more if the employer allows Mega Backdoor Roth contributions.
Individual Roth accounts have income limitations. One can get around the limits by contributing to a non-deductible IRA and then converting to a Roth, but that can be messy and expensive if one has any existing funds in an IRA. (Backdoor Roth.) My son does this (with my help at tax filing time). It’s only an extra $7K, but since his employer does not allow the Mega Backdoor, it’s all he has in addition to the $23K he can contribute to his Roth 401(k) b/c his company does not offer the Mega Backdoor Roth.
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thank you
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It’s a great deal, for sure. We did have to take into account employer contributions and other things into consideration in the max amount, so we were limited by that. But if one has extra after tax money to invest, why not do it for tax free growth and convenient withdrawals?
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I have had several people DM me asking about the impact of rising rates on fixed income investments.
While buy and hold to maturity investors in bonds experience minimal principal risk, they are exposed to significant opportunity losses which is a meaningful financial risk for those investing for income (vs long term capital appreciation).
For example, if an investor buys a bond maturing in 20 years that yields 3% and the market in 2 years has bonds yielding 5% the owner of the 3% bond will experience an opportunity cost of 2% day after day, year after year for 18 years until their bonds mature and they can reinvest at the prevailing higher rates. Market yields reflect broader economic trends and incorporate inflation so when rates move higher fixed income investors are harmed as their income is static (fixed).
From Investopedia…
“Existing fixed-income investments lose attractiveness and value if interest rates increase, but they become more valuable and attractive to investors if rates decrease.”
When people “invest” they typically aren’t just looking for preservation of capital. Meaning the goal isn’t just to get your money back but earn a return consistent with the associated risk of the investment. Stated differently Investing is not as simple as putting your money under your mattress and claiming success when it’s still there in the morning.
This is exactly why the universal advice amongst financial professionals is a multi asset diversified portfolio weighted towards equities when building a portfolio shifting towards more fixed income when approaching retirement age. Historic performance supports this approach without exception.
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I hope this isn’t a dumb question, but here goes …
I bought an I-bond back when they were making 8%. Nothing that’s going on now affects that, correct? I’m locked in at 8%, and that’s still a good rate?
I bonds have 2 rates. A fixed rate from when you bought it and a variable rate that changes, I believe, every 6 months. So you would have to check your fixed rate when you bought it then add the variable rate currently to know where your rate is today.
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I-bonds have a fixed interest rate that doesn’t change, and a fluctuating rate that does (every 6 months). I don’t think they have offered a fixed 8% rate in decades (if ever). The highest I remember it being in the last 25 years or so was 5% fixed, in the early 2000s. More recently, the fixed rate on them has been 0. The 8% rate was the 6 month fluctuating rate.
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jinx. 
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Not a dumb question at all but I bond rates are not locked in. The yield is a function of a fixed rate that never changes plus a variable rate that sets twice a year based on an inflation matrix.
Back when inflation was running high these bonds were setting at 8+%. With inflation now significantly lower the yields they are paying are unfortunately lower.
They are a great inflation hedge but that variability does come with a cost.
Hopefully not a dumb answer.
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Here are the I bond rates - it was in 2022 they topped at 9.62%. They’ve come down substantially since. After 9.62%, the 6 month increments were 6.89%, 4.3%, 5.27%, 4.28% and the current 3.11%.
The rates were good for 6 months - and if you sold b4 five years (as I did), you paid a 3 month penalty.
There was a $10K max per person per year I believe - hence I could only buy $20K. The current rate appears to be 3.11% but check treasurydirect.gov for anything official.
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Thanks, everyone!
I was considering cashing it out at some point and taking the penalty, which I don’t think is that bad.
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The highest fixed rate ever on the I bond was 3.6% if purchased in the year 2000. (I have some of those I bonds, wish I had more)
The highest variable rate was 9.62%. That means in that 6 month period I was earning 13.22% on those I bonds.
If the current composite rate is 3.11, with a fixed rate of 1.2 and a variable rate of 1.9. That means my bonds bought in 2000 are currently earning 5.5%
I don’t think it’s possible to have a current rate at 8%, but I could be wrong.
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I am not offering financial advice (prohibited given I am licensed) but would suggest you consider the implication tariffs might have on inflation (and your variable rate component) before you make your decision to sell.
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Are you sure it’s locked in? I bought one for each of my kids many moons ago. Also at that rate, IIRC. But I seem to recall, when I checked (and before thy cashed in their savings bonds) that the rate had dropped.
The limits of what you could buy were higher then as well. I miss those higher limits.
Duly noted! Thanks.
@jym626 … well, I thought it was, but I may have been wrong. I will investigate this afternoon. Dh is the keeper of all the log-in info for that.
On a side note, I just did a cost-saving thing! I reduced the size of our trash can, saving about $85/year. We have this giant trash can from when the kids were here, and there’s no reason to keep paying for a large one. As empty nesters, we don’t produce that much trash.
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