Data Entry: After-tax 401k contributions

One of the savings options in RightCapital is to reflect after-tax 401(k) contributions that are ultimately converted to a Roth IRA.  This strategy is sometimes referred to as the "Mega Backdoor Roth Conversion" strategy.  If your client's 401(k) plan allows for after-tax contributions and you wish to illustrate this strategy, you can do it within RightCapital.

To illustrate this, on the Profile / Savings screen, click on Add Savings and select the 'After-tax 401(k)' option:

In the after-tax 401(k) card, in addition to standard information like the percentage or amount of savings and the start and end points, you can also specify information about the Roth conversions.  Note that the client's 401(k) plan will determine what options and timing for conversion are available.

The 'Convert to Roth' field allows you to specify whether assets are converted within the 401(k) to a Roth 401(k), or distributed out of the 401(k) to a Roth IRA.

The 'Conversion year' field allows you to specify the timing of the conversions.  If clients are able to take in-service withdrawals from their 401(k), and you wish to illustrate the after-tax contributions being converted each year immediately after the contribution is made, specify "Annually via in-service withdrawal".  Otherwise, you can specify the calendar year in which you plan to distribute the 401(k) and convert the after-tax contributions to the Roth account.

Please note:

  • You cannot enter after-tax 401(k) savings without an ultimate Roth conversion.
  • Only the after-tax contributions will be converted to the Roth account, any growth remains in the 401(k) as per tax law.
  • When converting the after-tax 401(k) amount to a Roth IRA, the remaining value will be left in the 401(k) account.  To illustrate rolling the remaining assets over to an IRA, you can add a Distribution card on the Profile / Income screen.
  • If the 401(k) value is not converted before the client needs to access the 401(k) assets to fund cash flows, the after-tax aspect of the 401(k) will not be factored into the tax calculation; the full withdrawal from the 401(k) will be considered taxable.