Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

Hi Friends,

I follow this Youtubers (https://www.youtube.com/channel/UCtup2o ... ELQLfsOrvg) channel often as he has some very good videos about retirement accounts etc. Here are two videos where he explains about the Mega Backdoor Roth IRA strategy

https://www.youtube.com/watch?v=f64xPe_mLz8
TLDR : Basic info about Mega Backdoor Roth including the approach of moving After Tax contributions to Roth IRA and any intermediate earnings in After Tax Account to Traditional IRA

https://www.youtube.com/watch?v=HsZCqtRhBFQ
TLDR : He brings up the point that moving the earnings to Traditional IRA account pollutes the account with tax deferred income which makes the regular Backdoor Roth IRA process complicated (pro-rata rule). So he suggests either in-plan Roth 401K rollover which is automatic which ensures there are no earnings, or rolling over the whole after tax amount (contribution + earnings) to Roth IRA (paying tax on earnings)

My question is this : Isn't there a third way which will also be equally effective.
1. Move the After Tax Contribution amount to the Roth IRA.
2. Leave the earnings in the After Tax bucket of the 401K and let it compound there.
3. Repeat step 1 and 2 as often as the 401K plan allows you to perform After Tax rollover to Roth IRA
4. The After Tax portion Earnings basically grows like your Traditional tax deductible IRA and you pay the taxes on this After Tax portion Earnings upon withdrawal.

This way you can regularly move the after tax contribution amounts to your Roth IRA and not have to worry about the after tax earnings portion and complicate your taxes.

Any thoughts on this?
User avatar
Duckie
Posts: 8302
Joined: Thu Mar 08, 2007 2:55 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by Duckie »

investmax wrote: Sat Jun 19, 2021 3:14 pm My question is this : Isn't there a third way which will also be equally effective.
1. Move the After Tax Contribution amount to the Roth IRA.
2. Leave the earnings in the After Tax bucket of the 401K and let it compound there.
3. Repeat step 1 and 2 as often as the 401K plan allows you to perform After Tax rollover to Roth IRA
4. The After Tax portion Earnings basically grows like your Traditional tax deductible IRA and you pay the taxes on this After Tax portion Earnings upon withdrawal.

This way you can regularly move the after tax contribution amounts to your Roth IRA and not have to worry about the after tax earnings portion and complicate your taxes.
The problem with #2 is pro-rata. Usually when removing the after-tax portion, any pre-tax earnings in that sub-account are required to go along. You don't have a choice on whether to remove them, just where to send them. When the earnings on the after-tax portion are not large rolling them to a Roth is better. When they are large splitting the rollover and sending the earnings to the TIRA may be better. Often those pre-tax earnings can then be rolled back into the pre-tax sub-account of the 401k plan.
campy2010
Posts: 1064
Joined: Sun Nov 28, 2010 5:01 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by campy2010 »

I do option #5 which I consider the most straightforward. All of the options mentioned above seemed time consuming and convoluted and frankly kept me from taking advantage of the very straightforward option available in my 401k. I say keep it simple (unless there are no other options).

5. Auto in-plan conversions to Roth 401k. Move to Roth IRA when separating from your employer.
placeholder
Posts: 4832
Joined: Tue Aug 06, 2013 12:43 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by placeholder »

The rollover back into the 401k is a way around the requirement that a share of earnings must come with the after tax:
Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?

No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:

pretax amounts to a traditional IRA or another eligible retirement plan, and
after-tax amounts to a Roth IRA.

https://www.irs.gov/retirement-plans/ro ... ment-plans
sailaway
Posts: 3346
Joined: Fri May 12, 2017 1:11 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by sailaway »

campy2010 wrote: Sat Jun 19, 2021 4:33 pm I do option #5 which I consider the most straightforward. All of the options mentioned above seemed time consuming and convoluted and frankly kept me from taking advantage of the very straightforward option available in my 401k. I say keep it simple (unless there are no other options).

5. Auto in-plan conversions to Roth 401k. Move to Roth IRA when separating from your employer.
This really is the most efficient, if available.
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

Duckie wrote: Sat Jun 19, 2021 4:05 pm
investmax wrote: Sat Jun 19, 2021 3:14 pm My question is this : Isn't there a third way which will also be equally effective.
1. Move the After Tax Contribution amount to the Roth IRA.
2. Leave the earnings in the After Tax bucket of the 401K and let it compound there.
3. Repeat step 1 and 2 as often as the 401K plan allows you to perform After Tax rollover to Roth IRA
4. The After Tax portion Earnings basically grows like your Traditional tax deductible IRA and you pay the taxes on this After Tax portion Earnings upon withdrawal.

This way you can regularly move the after tax contribution amounts to your Roth IRA and not have to worry about the after tax earnings portion and complicate your taxes.
The problem with #2 is pro-rata. Usually when removing the after-tax portion, any pre-tax earnings in that sub-account are required to go along. You don't have a choice on whether to remove them, just where to send them.
So assuming there was a contribution of $1000 into my after tax account, and after 3 months there is $100 earnings. So when I transfer to the Roth IRA there is no way of just transferring the $1000 of the contribution amount to Roth IRA and leaving the $100 of earnings in the after tax bucket of 401K. This $100 portion can remain in the after tax bucket of 401K accumulating earnings tax free till withdrawals. But this will not be possible as it is not possible to separate these monies due to pro rata rule? Is this correct?
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

sailaway wrote: Sat Jun 19, 2021 5:38 pm
campy2010 wrote: Sat Jun 19, 2021 4:33 pm I do option #5 which I consider the most straightforward. All of the options mentioned above seemed time consuming and convoluted and frankly kept me from taking advantage of the very straightforward option available in my 401k. I say keep it simple (unless there are no other options).

5. Auto in-plan conversions to Roth 401k. Move to Roth IRA when separating from your employer.
This really is the most efficient, if available.
Thanks campy2010, sailaway. The only problem with Roth 401k is the contributions cannot be with drawn. In case of Roth IRA the contributions can be withdrawn after 5 years in case we need it.
Strifey
Posts: 65
Joined: Thu Apr 01, 2021 4:15 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by Strifey »

I personally do option number 2 as I need my tIRA clear for normal backdoor Roth IRA.

Option 3 seems overcomplicated and as someone mentioned potentially not possible.

If you are doing regular conversions from after-tax to Roth IRA then you should have minimal tax gains/loss. It really doesn't complicate your taxes... you get a form and fill out 2 numbers, even easier with tax software and auto-importing from your broker. It's literally the same form/process whether you have after-tax earnings or not... the difference is like the 2 seconds it takes you to put some numbers in another box (or auto-filled from importing). Unless you're only converting like once or twice a year the earnings portion should be so small it really shouldn't matter.

The reason I don't do the auto Roth 401K conversion even though my plan allows it is because I can't specify different allocations for 401k vs Roth 401K in my plan. I hold only Total US Market in my Roth IRA and 100% of my Bonds/International in my 401K, so it screws up my portfolio balance pumping money into a Roth 401K that is holding bonds/international when I really want it holding my highest growth US total market.

For me it's a quick 5 min phone call to Fidelity once a month. I personally don't mind but I can see why people may want to go for the auto Roth-401K conversion and can either set different allocations for their 401 vs Roth 401K or don't balance their 3-fund allocation between their different types of accounts.
Last edited by Strifey on Sun Jun 20, 2021 1:25 pm, edited 2 times in total.
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

Thanks. This is what I will be probably doing as well. Calling Vanguard once a month and moving the after tax over. I have set up the after tax amount to be invested in the Money Market Vanguard fund so there shouldnt be much gains in that period anyways
User avatar
neurosphere
Posts: 4256
Joined: Sun Jan 17, 2010 1:55 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by neurosphere »

We either do in-plan conversions or rollover to an IRA with the same custodian that holds the 401k. This is in case we have to undo excess contributions due to highly compensated employee rules. Some have reported administrative/tax headaches if the excess after-tax contribution is now in a Roth IRA at another institution.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
User avatar
sapphire96
Posts: 152
Joined: Fri Jun 16, 2017 8:08 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by sapphire96 »

investmax wrote: Sat Jun 19, 2021 3:14 pm Hi Friends,

I follow this Youtubers (https://www.youtube.com/channel/UCtup2o ... ELQLfsOrvg) channel often as he has some very good videos about retirement accounts etc. Here are two videos where he explains about the Mega Backdoor Roth IRA strategy

https://www.youtube.com/watch?v=f64xPe_mLz8
TLDR : Basic info about Mega Backdoor Roth including the approach of moving After Tax contributions to Roth IRA and any intermediate earnings in After Tax Account to Traditional IRA

https://www.youtube.com/watch?v=HsZCqtRhBFQ
TLDR : He brings up the point that moving the earnings to Traditional IRA account pollutes the account with tax deferred income which makes the regular Backdoor Roth IRA process complicated (pro-rata rule). So he suggests either in-plan Roth 401K rollover which is automatic which ensures there are no earnings, or rolling over the whole after tax amount (contribution + earnings) to Roth IRA (paying tax on earnings)

My question is this : Isn't there a third way which will also be equally effective.
1. Move the After Tax Contribution amount to the Roth IRA.
2. Leave the earnings in the After Tax bucket of the 401K and let it compound there.
3. Repeat step 1 and 2 as often as the 401K plan allows you to perform After Tax rollover to Roth IRA
4. The After Tax portion Earnings basically grows like your Traditional tax deductible IRA and you pay the taxes on this After Tax portion Earnings upon withdrawal.

This way you can regularly move the after tax contribution amounts to your Roth IRA and not have to worry about the after tax earnings portion and complicate your taxes.

Any thoughts on this?
Will Peterson’s content is fantastic! I subscribe to him as well.
Keep interest as your friend, not your foe. | Use money as a tool for bettering your life, not squandering it. | Stay the course, don’t deviate from it.
retiredjg
Posts: 44828
Joined: Thu Jan 10, 2008 12:56 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by retiredjg »

investmax wrote: Sun Jun 20, 2021 11:40 am So assuming there was a contribution of $1000 into my after tax account, and after 3 months there is $100 earnings. So when I transfer to the Roth IRA there is no way of just transferring the $1000 of the contribution amount to Roth IRA and leaving the $100 of earnings in the after tax bucket of 401K. This $100 portion can remain in the after tax bucket of 401K accumulating earnings tax free till withdrawals. But this will not be possible as it is not possible to separate these monies due to pro rata rule? Is this correct?
You cannot leave the earnings in the after-tax account. The earnings must leave with the contributions.
  • The earnings can go to Roth IRA (you pay tax) or

    The earnings can go to tIRA and get in the way of the ordinary backdoor so you quit doing it, or

    The earnings can go to tIRA and about December 1st, you roll them back into the 401k so that your tIRA will be empty at the end of the year.
JediMisty
Posts: 746
Joined: Tue Aug 07, 2018 7:06 am
Location: Central NJ

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by JediMisty »

Strifey wrote: Sun Jun 20, 2021 1:16 pm I personally do option number 2 as I need my tIRA clear for normal backdoor Roth IRA.

Option 3 seems overcomplicated and as someone mentioned potentially not possible.

If you are doing regular conversions from after-tax to Roth IRA then you should have minimal tax gains/loss. It really doesn't complicate your taxes... you get a form and fill out 2 numbers, even easier with tax software and auto-importing from your broker. It's literally the same form/process whether you have after-tax earnings or not... the difference is like the 2 seconds it takes you to put some numbers in another box (or auto-filled from importing). Unless you're only converting like once or twice a year the earnings portion should be so small it really shouldn't matter.

The reason I don't do the auto Roth 401K conversion even though my plan allows it is because I can't specify different allocations for 401k vs Roth 401K in my plan. I hold only Total US Market in my Roth IRA and 100% of my Bonds/International in my 401K, so it screws up my portfolio balance pumping money into a Roth 401K that is holding bonds/international when I really want it holding my highest growth US total market.

For me it's a quick 5 min phone call to Fidelity once a month. I personally don't mind but I can see why people may want to go for the auto Roth-401K conversion and can either set different allocations for their 401 vs Roth 401K or don't balance their 3-fund allocation between their different types of accounts.
After conversion from after tax to Roth 401k inside my plan, I then switch the converted funds to the s&p 500 fund available in my 401k. No earnings, because the after tax is auto converted at my plan.
Strifey
Posts: 65
Joined: Thu Apr 01, 2021 4:15 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by Strifey »

JediMisty wrote: Sun Jun 20, 2021 2:19 pm After conversion from after tax to Roth 401k inside my plan, I then switch the converted funds to the s&p 500 fund available in my 401k. No earnings, because the after tax is auto converted at my plan.
Yea if people have that option I could see why they would do auto Roth 401K conversion.

Unfortunately when I go to rebalance I can't select individual parts of my 401K and the message says:
"When you rebalance, you can change how your entire account is invested. Below, you can see your current allocation, and make changes. For each investment, indicate the allocation you want in the Desired % column. Your choices must add up to 100%."

When I select my contribution election it's also the same thing, I have one source group to select allocations for all of the below types:
"Source: Source Group 1
Includes: PRE-TAX DEFERRAL, ROTH DEFERRAL, EMPLOYER MATCH, PROFIT SHARING, QNEC, PRIOR PLAN MATCH, SAFE HARBOR MATCH, PRIOR ER VESTED, PRE-TAX BONUS, ROTH BONUS, ROTH IN-PLAN CONVERSION, ROTH IPC - EMPLOYEE, ROTH IPC - EMPLOYER, AFTER-TAX, AFTER-TAX BONUS
Change your investment elections for this source:"

So in my case I need to do the Roth IRA conversion to put 100% of my Roth to FSKAX.
catchinup
Posts: 231
Joined: Sun Dec 31, 2017 6:35 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by catchinup »

retiredjg wrote: Sun Jun 20, 2021 1:47 pm
You cannot leave the earnings in the after-tax account. The earnings must leave with the contributions.
My solo 401k is with Fidelity (non-prototype plan). When I make my after tax contributions, they get deposited into my core position which is a money market fund. I then distribute them to my Roth IRA. This zeros out the account the day of the distribution, but at some point thereafter, a few cents of interest appear in the sub-account. Do I need to distribute this before I make another voluntary after tax contribution? Or can I make a new contribution and just keep track of basis vs interest?
catchinup
Posts: 231
Joined: Sun Dec 31, 2017 6:35 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by catchinup »

investmax wrote: Sun Jun 20, 2021 1:23 pm Thanks. This is what I will be probably doing as well. Calling Vanguard once a month and moving the after tax over. I have set up the after tax amount to be invested in the Money Market Vanguard fund so there shouldnt be much gains in that period anyways
Do you have a Vanguard solo 401K plan or are you doing this with a 3rd party plan housed with Vanguard? I'm asking because I thought Vanguard solo 401K plans did not allow after tax employee contributions.
retiredjg
Posts: 44828
Joined: Thu Jan 10, 2008 12:56 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by retiredjg »

catchinup wrote: Sun Jun 20, 2021 6:53 pm
retiredjg wrote: Sun Jun 20, 2021 1:47 pm
You cannot leave the earnings in the after-tax account. The earnings must leave with the contributions.
My solo 401k is with Fidelity (non-prototype plan). When I make my after tax contributions, they get deposited into my core position which is a money market fund. I then distribute them to my Roth IRA. This zeros out the account the day of the distribution, but at some point thereafter, a few cents of interest appear in the sub-account. Do I need to distribute this before I make another voluntary after tax contribution? Or can I make a new contribution and just keep track of basis vs interest?
Sorry. I don't know the answer to that one.

I would be surprised if there is a need to worry about a few pennies.

However....to my knowledge, Fidelity does not offer a solo that allows after-tax accounts so you must be using someone else's plan and holding it at Fidelity. Perhaps you are using one of those plans that you can buy from a plan provider and you do not actually have a plan administrator.

This is the type of thing that makes me cautious about people with no experience trying to administer these plans. I wish you luck with it. :happy
retiredjg
Posts: 44828
Joined: Thu Jan 10, 2008 12:56 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by retiredjg »

catchinup wrote: Sun Jun 20, 2021 6:56 pm
investmax wrote: Sun Jun 20, 2021 1:23 pm Thanks. This is what I will be probably doing as well. Calling Vanguard once a month and moving the after tax over. I have set up the after tax amount to be invested in the Money Market Vanguard fund so there shouldnt be much gains in that period anyways
Do you have a Vanguard solo 401K plan or are you doing this with a 3rd party plan housed with Vanguard? I'm asking because I thought Vanguard solo 401K plans did not allow after tax employee contributions.
I don't think this poster said anything about this being a solo plan.
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

retiredjg wrote: Sun Jun 20, 2021 7:41 pm
catchinup wrote: Sun Jun 20, 2021 6:56 pm
investmax wrote: Sun Jun 20, 2021 1:23 pm Thanks. This is what I will be probably doing as well. Calling Vanguard once a month and moving the after tax over. I have set up the after tax amount to be invested in the Money Market Vanguard fund so there shouldnt be much gains in that period anyways
Do you have a Vanguard solo 401K plan or are you doing this with a 3rd party plan housed with Vanguard? I'm asking because I thought Vanguard solo 401K plans did not allow after tax employee contributions.
I don't think this poster said anything about this being a solo plan.
Yes, retiredjg, you are correct. This is an employer 401K plan through Vanguard, and I have a Roth IRA account in Vanguard as well.
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

OK Friends, I have some bad news.

I called up Vanguard to initiate the After Tax rollover to Roth IRA in Vanguard itself, for the mega backdoor transfer. The agent was very helpful and knew what he had to do. But he clarified that this rollover would technically be a withdrawal, and for every after tax withdrawal, I would be charged $25. This means if I make a transfer every month to avoid getting any gains on the after tax contributions within my 401K, I will end up paying Vanguard $300 a year! :oops: So I did not initiate the rollover today. :annoyed

Now assume I change my strategy and try to do the rollover/withdrawal every quarter. This means I will be transferring approximately $2000 per quarter and paying $25 each time for the privilege. Even though I keep this money in the Vanguard Money Market fund, I assume there may be approximately $20 worth of gains in the after tax amount in the 3 months period.

So when I do this rollover I will be transferring $2000 + $20 to the Roth IRA. I realize I will need to take care of the taxes for this gains portion (as it is pre-tax) before it hits the Roth IRA. But the Roth IRA will have $2020 added to it. So over the period of 1 year I may have a total of $80 to $100 which is the after-tax growth.

Now would this then complicate my process for the regular Backdoor Roth IRA ($6000 per year). How can I ensure I will be able to add $6000 to the Roth IRA via the backdoor process without getting caught up in the complex pro-rata rules. :confused

Thanks in advance for your advise guys.
Strifey
Posts: 65
Joined: Thu Apr 01, 2021 4:15 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by Strifey »

After-tax 401K conversion should be completely separate from your backdoor Roth IRA which is a conversion of your $6K annual contribution (i.e. 2021) from your traditional IRA to Roth IRA, so it shouldn't complicate the backdoor process at all. The buckets you are converting to your Roth IRA are completely separate instances.

Also once you do your first conversion I would check that you actually get charged the $25.

My plan says something similar that there may be a $25 fee incurred for withdrawal transactions, but I've never actually been charged doing the conversion from Fidelity. One of the reps said that the fee should only be $25 per year (although the language in my benefits plan doesn't seem to say that), but I've checked my monthly statements and have never actually been charged any $25 amount. I have heard that they waive the fee if it's a conversion from your Fidelity 401K -> Roth IRA... maybe Vanguard is similar but I can't confirm. Something worth checking though.
nolesrule
Posts: 2016
Joined: Thu Feb 26, 2015 10:59 am

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by nolesrule »

investmax wrote: Mon Jun 21, 2021 3:19 pm
Now would this then complicate my process for the regular Backdoor Roth IRA ($6000 per year). How can I ensure I will be able to add $6000 to the Roth IRA via the backdoor process without getting caught up in the complex pro-rata rules. :confused

Thanks in advance for your advise guys.
As long as the after-tax money and earnings go into the Roth straight from the 401k and do not hit a traditional IRA in between then it's not reported on the Form 8606, which is the form used for both parts of the backdoor Roth process.
placeholder
Posts: 4832
Joined: Tue Aug 06, 2013 12:43 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by placeholder »

I realize I will need to take care of the taxes for this gains portion (as it is pre-tax) before it hits the Roth IRA.
You take care of the taxes when you report the rollover on your tax return for the year.
retiredjg
Posts: 44828
Joined: Thu Jan 10, 2008 12:56 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by retiredjg »

investmax wrote: Mon Jun 21, 2021 3:19 pm OK Friends, I have some bad news.

I called up Vanguard to initiate the After Tax rollover to Roth IRA in Vanguard itself, for the mega backdoor transfer. The agent was very helpful and knew what he had to do. But he clarified that this rollover would technically be a withdrawal, and for every after tax withdrawal, I would be charged $25. This means if I make a transfer every month to avoid getting any gains on the after tax contributions within my 401K, I will end up paying Vanguard $300 a year! :oops: So I did not initiate the rollover today. :annoyed

Now assume I change my strategy and try to do the rollover/withdrawal every quarter. This means I will be transferring approximately $2000 per quarter and paying $25 each time for the privilege. Even though I keep this money in the Vanguard Money Market fund, I assume there may be approximately $20 worth of gains in the after tax amount in the 3 months period.

So when I do this rollover I will be transferring $2000 + $20 to the Roth IRA. I realize I will need to take care of the taxes for this gains portion (as it is pre-tax) before it hits the Roth IRA. But the Roth IRA will have $2020 added to it. So over the period of 1 year I may have a total of $80 to $100 which is the after-tax growth.

Now would this then complicate my process for the regular Backdoor Roth IRA ($6000 per year). How can I ensure I will be able to add $6000 to the Roth IRA via the backdoor process without getting caught up in the complex pro-rata rules. :confused

Thanks in advance for your advise guys.
First, did you verify with Vanguard that you can put your after-tax account into money market while the rest of the play stays invested? This is allowed at very few plans. It would surprise me if Vanguard is one of them.

I think you may be worried a little too much about growth of the after-tax account. If you invest your money like the rest of the plan and transfer once a year, it will cost $25 in transfer fees. The earnings can go to Roth IRA (where you pay taxes) or to tIRA and be rolled back into the 401k before the end of the year (if your plan allows that).

Tax on the earnings is not due at the time of the rollover/conversion. Increase your salary withholding to cover it.
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

retiredjg wrote: Tue Jun 22, 2021 8:28 am
First, did you verify with Vanguard that you can put your after-tax account into money market while the rest of the play stays invested? This is allowed at very few plans. It would surprise me if Vanguard is one of them.
Yes. When I allocate my 401K contributions, I can allocate separate percentages for pre-tax and after-tax contributions. For example I can allocate 10% of my salary to the pre-tax contribution and 5% to the after-tax contribution.

So each of these contributions have different "sources". I can allocate each of these sources to different Vanguard funds in my plan.

For example I am allocating 100% of my pre-tax contribution to the Vanguard S&P 500 fund and 100 % of the after-tax contribution to the Vanguard Money market fund.

So yes in my plan we can split our contributions to different funds based on the "Source"
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

Strifey wrote: Mon Jun 21, 2021 3:27 pm
Also once you do your first conversion I would check that you actually get charged the $25.

My plan says something similar that there may be a $25 fee incurred for withdrawal transactions, but I've never actually been charged doing the conversion from Fidelity. One of the reps said that the fee should only be $25 per year (although the language in my benefits plan doesn't seem to say that), but I've checked my monthly statements and have never actually been charged any $25 amount. I have heard that they waive the fee if it's a conversion from your Fidelity 401K -> Roth IRA... maybe Vanguard is similar but I can't confirm. Something worth checking though.
Thanks Strifey. I did check this by transferring / rolling over the after tax portion in my Vanguard 401K to the Vanguard Roth IRA. 2 days later the money gets Rolled over to IRA. The next day, my 401K account is dinged with $25 fee as advertised :( :oops:

I guess going forward I will let the after tax portion sit in the Vanguard Money Market fund for a quarter and then rollover every quarter to the Roth IRA. This way I will accrue minimum gains on the after tax portion.
placeholder
Posts: 4832
Joined: Tue Aug 06, 2013 12:43 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by placeholder »

Can you do nothing but the after tax so it's only over a shorter period?
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

placeholder wrote: Thu Jun 24, 2021 4:29 pm Can you do nothing but the after tax so it's only over a shorter period?
I am not sure I followed your question correctly. I am only trying to roll over to the Roth IRA my after-tax portion of my 401K. But the issue is every roll over transaction I get charged a fee of $25.
placeholder
Posts: 4832
Joined: Tue Aug 06, 2013 12:43 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by placeholder »

investmax wrote: Fri Jun 25, 2021 7:34 pm
placeholder wrote: Thu Jun 24, 2021 4:29 pm Can you do nothing but the after tax so it's only over a shorter period?
I am not sure I followed your question correctly. I am only trying to roll over to the Roth IRA my after-tax portion of my 401K. But the issue is every roll over transaction I get charged a fee of $25.
When I was doing it at megacorp I would do all my regular deferrals first and then switch to after tax (actually the system did that for me) so all that would be in the latter part of the year then I would do one transfer out for the year.
okwriter
Posts: 214
Joined: Mon Apr 12, 2021 2:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by okwriter »

One way to minimize fees is to max out your after-tax contributions quickly and then do 1 rollover a year. Some plans allow as much as 100% of the paycheck or annual bonus to go to the 401k, for example, so it might be possible to max out the 401k in a few months. This is kind of an extreme strategy though, so it depends on how comfortable you are with uneven cashflows.
Topic Author
investmax
Posts: 128
Joined: Thu Mar 11, 2021 8:00 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by investmax »

placeholder wrote: Sat Jun 26, 2021 12:24 am
investmax wrote: Fri Jun 25, 2021 7:34 pm
placeholder wrote: Thu Jun 24, 2021 4:29 pm Can you do nothing but the after tax so it's only over a shorter period?
I am not sure I followed your question correctly. I am only trying to roll over to the Roth IRA my after-tax portion of my 401K. But the issue is every roll over transaction I get charged a fee of $25.
When I was doing it at megacorp I would do all my regular deferrals first and then switch to after tax (actually the system did that for me) so all that would be in the latter part of the year then I would do one transfer out for the year.
Would you be getting your Employer Match for the After Tax portion as well. For example If you do 19K pre-tax 401K deferrals till September and then 3 months of After Tax 401K contributions for Oct - Dec, would you get the employer match for Oct - Dec.

I need to check this in my plan, will call up Vanguard on Monday.
DLAKE
Posts: 16
Joined: Mon May 10, 2021 1:48 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by DLAKE »

Would you be getting your Employer Match for the After Tax portion as well. For example If you do 19K pre-tax 401K deferrals till September and then 3 months of After Tax 401K contributions for Oct - Dec, would you get the employer match for Oct - Dec.
My megacorp has employer match on pre tax and Roth contributions, but they do not provide match on non-Roth after tax contributions.
placeholder
Posts: 4832
Joined: Tue Aug 06, 2013 12:43 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by placeholder »

investmax wrote: Sat Jun 26, 2021 11:36 am
placeholder wrote: Sat Jun 26, 2021 12:24 am
When I was doing it at megacorp I would do all my regular deferrals first and then switch to after tax (actually the system did that for me) so all that would be in the latter part of the year then I would do one transfer out for the year.
Would you be getting your Employer Match for the After Tax portion as well. For example If you do 19K pre-tax 401K deferrals till September and then 3 months of After Tax 401K contributions for Oct - Dec, would you get the employer match for Oct - Dec.
Yes I did which was important because the plan did not do true up therefore you needed to contribute each pay period to get full match so that is an important thing to check.
User avatar
anon_investor
Posts: 7482
Joined: Mon Jun 03, 2019 1:43 pm

Re: Is the strategy explained in these videos about Mega Backdoor Roth Coversion the most efficient?

Post by anon_investor »

placeholder wrote: Sat Jun 26, 2021 5:43 pm
investmax wrote: Sat Jun 26, 2021 11:36 am
placeholder wrote: Sat Jun 26, 2021 12:24 am
When I was doing it at megacorp I would do all my regular deferrals first and then switch to after tax (actually the system did that for me) so all that would be in the latter part of the year then I would do one transfer out for the year.
Would you be getting your Employer Match for the After Tax portion as well. For example If you do 19K pre-tax 401K deferrals till September and then 3 months of After Tax 401K contributions for Oct - Dec, would you get the employer match for Oct - Dec.
Yes I did which was important because the plan did not do true up therefore you needed to contribute each pay period to get full match so that is an important thing to check.
My 401k plan is similar, after tax contributions are matched, but no true up, so I have to make a contribution every pay check to get the maximum match.
Post Reply