From $0 in 2011, my Roth IRA reached $100,000 in 2015. I will explain in detail with screenshots everything that I did in these 4 years.
The below table summarizes the entire process from 2011 – till date 2015:
We will get into specific details but broadly speaking here is what I have done:
- Maxed out my Roth IRA contributions in 2011
- Maxed out my Traditional IRA contributions and rollover over to Roth every year (2012 – 2015)
- I maxed out my After-tax (Thrift) contributions to the 401k plan
- Periodically rolled over the After-tax 401k money to Roth IRA (paying taxes on earnings)
Let me break up the above table and explain each section in a little more detail, along with my commentary.
I maxed out my IRA contributions
Two things to notice here:
- I maxed out my IRA contributions every single year (IRS imposed limit of $5,000 in 2011 and $5,500 then on)
- I was able to make a direct Roth contribution in 2011, but I had to use the Back Door Entry to the Roth IRA 2012 onwards because my income levels have been high
Roth conversion of Traditional IRA
I performed a Roth conversion of my traditional IRA assets soon after I made the non-deductible traditional IRA contribution.
In case you are wondering why did I wait till 2013 to convert the 2012 traditional IRA contributions?
I contributed $5,000 in 2012 and $5,500 in 2013 to my traditional IRA account BUT performed a ROTH Conversion only once (for $10,500 in 2013). This happened because I made 2012 and 2013 contributions within a period of a few weeks – 2012 contributions were made in December 2012 and 2013 contributions were made in January 2013.
After-tax 401k plan contributions
I have had two 401k accounts in this time frame, we will call them 401k Plan-1 and 401k Plan-2. I maxed out my After-tax contributions.
This image provides a breakup of my After-tax 401k contributions between the 2 plans. Essentially I was contributing to 401k Plan-1 from 2012 – 2014 and I contributed to 401k Plan-2 for the year 2015.
I contributed $5,833 in 2012 (to 401 Plan-1), $17,763 in 2013 (to 401 Plan-1), $14,158 in 2014 (to 401 Plan-1), and $30,552 in 2015 (to 401 Plan-2).
Roth conversion of After-tax 401k
As I mentioned above, I periodically kept on converting my After-tax 401k investments to my Roth IRA. Here are the exact details of both the 401k plans in question.
In 2015, I did a Roth Conversion twice – once from my 401k plan-1 for $23,148 and the second time from 401k plan-2 for $31,104
Whenever I converted After-tax 401k amount to a Roth IRA, I did not have to pay taxes on the ‘contribution amount that is rolled over’ because that is already after-tax.
But I did owe taxes on earnings that the contribution amount has made in the 401k account. For example – In 2015, I contributed $30,552 after-tax to my 401k and it became $31,104 by the time I rolled over to a Roth IRA. I owe taxes on the difference ($552) – I will pay these taxes when I file my income tax returns.
Similarly, I have paid some taxes almost every time I rolled over After-tax 401k money. In fact, I try not to rollover After-tax 401k money to Roth IRA if I am making losses, I wait for it to be at least at the contribution amount or slightly more before moving it to Roth IRA.
Why? Because I might be able to avoid the hassle of a rollover – by the time this amount breaks even, I might have more After-tax assets to move, and I can move all of them together.
Remember – IRS taxes earnings in After-tax 401k rollover but does not provide for a capital loss deduction.
Frequency of After-tax 401k Rollover
Two factors determine how often you rollover your After-tax 401k assets:
- Your 401k plan restrictions
- Your willingness to take on administrative hassle for saving taxes
Since earnings on after-tax 401k assets are taxed, it is advisable to roll it over to a Roth IRA as often as possible, but doing it 24 times a year is a bit too much (once every pay check contribution).
My 401k Plan-1 had a limit of 4 times a year and I try to stick to that frequency and have been very happy with the results.
Plan for 2016
Current traditional IRA balance is also zero. So I will be able to use the backdoor entry to the Roth IRA again easily.
Current after-tax amount in both my 401k plans is zero. I no longer can contribute to the 401k Plan-1 but intend to contribute maximum allowed (Pre-tax and Post-tax) to the 401k Plan-2.
You can read here about the aggressive plans I have for 2016.