Also, many employers now offer after-tax 401ks, and/or Roth 401ks.  These are not the same thing.  While both are after-tax contributions, the gains in the after-tax 401k are taxed at ordinary income rates (as opposed to a traditional 401k, which also taxes the principle contributions at ordinary rates when withdrawn in retirement).  However, Roth 401ks are completely tax-free just like Roth IRAs.

The after-tax 401k shouldn't exist, IMO, because I can only imagine rather specific and abnormal circumstances where it would make sense.  Just putting that into a regular brokerage account is pretty much the same treatment, with the exception you have to wait until 59.5 to withdraw the 401k.  The only disadvantage in the brokerage is you are taxed on ordinary income (dividends, bond interest, etc), plus capital gains when you transact.

Now the actual limit for 401k contributions is $70k - $23,500 pre-tax...plus another $7500 catch-up if you're 50+.  This also includes your employer match, which ALWAYS goes to pre-tax (and does not count against your individual pre-tax limit).  Won't really affect anyone here, really, but that limit is PER EMPLOYER.  However, you remain capped at $23,500 pre-tax regardless how many employers you have.

So let's just say you contribute $20k, and your employer matches $10k.  If your employer plan allows, you can then contribute another $40k after-tax either to 401k or Roth.  However, many employers (like mine) - or maybe it's federal law - only allow you to designate that $23,500 as pre-tax 401k or after-tax Roth.

Enter the "in-service" [meaning you continue to be employed there, not a seperation event) rollover.   Some employers allow you continue making after-tax 401k contributions.  You then convert like mentioned previously - rollover into a Roth 401k.  It doesn't cost anything because the original contribution was after-tax.  But now my gains are also tax free.

BIG BIG CAVEAT:  This is relatively "simple" if you don't have existing pre-tax IRA accounts.  If you do, it gets very messy.  Ideally you'd want to convert that first so you have no pre-tax IRAs, but that can be expensive (and stupid if you're in a high tax bracket).

Anyway, I think for most people it's fairly simple:

1) Contribute enough to your 401k to at least get the full employer match (free money)

2) My very rough rule of thumb is if you're in the lower 2 tax brackets, it probably makes sense to contribute to Roth 401k than traditional, eventhough it's more costly.  For most people, when they start to really save significant money, they are usually in higher tax brackets and you're unlikely to be worse off making pre-tax contributions (even with predictions of higher tax brackets).  If you're in the upper 2-3 brackets, you're almost certainly better off with pre-tax (otherwise, congratulate yourself for savings well and investing even better).

As you get older, in higher brackets and also with catch-up contributions, pre-tax is going to make sense AND it's going to grow pretty quickly over 15-20 years.

Younger in the low brackets will really benefit from the compounding, and it will all be tax-free in a Roth.  You likely will not be in the lower 2 brackets in retirement, if for no other reason than SS is already going to put you on the cusp of the 3rd bracket.  Plus your employer match is going to traditional 401k.

In an ideal scenario, you minimize taxes in retirement using a combination of brokerage (cap gains), Roth (no tax) and traditional 401k (ordinary rates) to draw from.  A LOT of retirees are shocked to learn distributions from their 401k will trigger taxes on their SS.  Cap gains distributions from brokerage accounts will also do that.  Roth distributions will not.  That said, if you're near retirement and can lock-in a favorable mortgage rate, it might make sense to refinance and invest the proceeds (you should net out ahead).  Property taxes and mortgage interest can be deductions from your taxable SS and 401k income.  That may be too risky for some, especially if you can't beat the mortgage rate with CDs or other risk-free investments.

gut wrote:

Have you looked at being able to roll your traditional IRA into your workplace 401k?  Usually it's only 401k to 401k, but worth exploring.  Would save you the hassle of trying to convert away and pay taxes on the IRA.

When I was a contract employee, I had a self-employed 401k.  I believe I was able to roll my SEP into it to get rid of my pre-tax IRAs.

Bringing this here.

No, but maybe I'll explore that. My employee 401k is through Empower. Both IRAs are Schwab managed accounts. 

Automatik wrote:

Bringing this here.

No, but maybe I'll explore that. My employee 401k is through Empower. Both IRAs are Schwab managed accounts. 

Empower allows it, but it depends on the specifics of your employer's plan.  You should also consider if you're satisfied with your 401k investment choices, as 401k's tend to be much more limited (in a self-directed IRA you can invest in almost anything).  If the choices aren't good and/or sufficient for your diversification goals it could actually end-up costing you more in the long-run than just eating the tax on the conversion.