Hello all,

I am a 25yo trying to start saving right for my future. I already have a rainy day fund, so I am trying to save for retirement and a house. Right now I am focused on my 401k. With my 401k, we are able to make Pre-Tax, Roth, or After-Tax contributions. I however, did not know this for the last year, and have been putting 5% into Pre-Tax all last year. My employer matches Pre-Tax and Roth $1 for $1 up to the IRS matching limit (~$11.25k this year, half my limit).

I want to save for a home and my retirement at the same time. A colleague told me you can do this by contributing to Roth to get the whole match, (11k), but then also contribute anything past the match, (so another $11k?) into my After-Tax 401k and convert that back into my Roth 401k as well. Then, the next step is to roll this After-Tax converted money over to a Roth IRA.

With this strategy they claim that I can withdraw the converted money whenever I end up needing a downpayment which will me penalty and tax-free from the roth IRA (at least the contributions). He said the rest of the money (regular 401k and all earnings) will still be locked up until retirement however.

I am a bit confused on the steps however. I get that I should contribute to my Pre-Tax or Roth 401k to get my match, but anything past I should put in my After-Tax contributions. But how come I should roll my After-Tax earnings back into my Roth 401k before I roll it into a Roth IRA? Couldn't I just roll the After-Tax into a Roth IRA somehow?

Also, sorry if this doesn't work or make sense, bit of a tax noob. Thanks!

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Stock-Freedom t1_jadpgxi wrote on February 28, 2023 at 6:20 PM

#2,116,295

Your friend is likely trying to explain a bit much that makes it complicated.

Instead of all these hoops, you should likely contribute pre-tax to a 401k and to a Roth IRA.

Follow the flowchart.

My generic advice:

https://i.imgur.com/lSoUQr2.png

Here is the flowchart from the r/personalfinance subreddit’s Prime Directive. If you follow that, you will be ahead of almost all of your peers.

Stop by the sidebar to see the Common Topics, which include basic money handling and investing.

You don’t need to talk to anyone or buy some random book to do this. You have all the tools right here.

AutoModerator t1_jadph1j wrote on February 28, 2023 at 6:20 PM

#2,116,298

Replying to Stock-Freedom (#2,116,295)

I love the flowchart! Here's the wiki page with more context and information.

I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.

AutoModerator t1_jadph3g wrote on February 28, 2023 at 6:20 PM

#2,116,299

Replying to Stock-Freedom (#2,116,295)

Here's a link to the PF Wiki for helpful guides and information.

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CSedu OP t1_jadpxqj wrote on February 28, 2023 at 6:22 PM

#2,116,481

Replying to Stock-Freedom (#2,116,295)

Thanks dude! So it seems I should just keep contributing for my match to my Pre-Tax 401k, and then contribute my own money past the match into my Roth IRA?

If so, can I ask why I should use a Pre-Tax 401k and not a Roth 401k? I like the idea of not worrying about the taxes later.

Stock-Freedom t1_jadq3na wrote on February 28, 2023 at 6:23 PM

#2,116,524

Replying to CSedu (#2,116,481)

You can ask! The simple reason is you always pay taxes but you likely will pay less in retirement.

Why you should (almost) never contribute to a Roth 401(k) https://reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/

Note: Depending on your MAGI you may be the almost never.

CSedu OP t1_jadr3z4 wrote on February 28, 2023 at 6:30 PM

#2,116,852

Replying to Stock-Freedom (#2,116,524)

Sweet, thanks my dude. I will contribute to the Pre-Tax 401k for the match, and then my Roth IRA past that :)