Hi Bogleheads! I've read and taken the advice of this site for the last year or so. I wish I'd found you earlier and would have slept much better in past years. I'm a saver and have maxed out 401k since age 22 when I joined MegaCorp. I have managed to accumulate savings and a portfolio that I'm proud of, but the 3-fund approach has really helped me clean up the management of it. Thank you all!
From reading here, I have better learned about the value of the after-tax contributions I've made to my MegaCorp 401k over the years, especially as it relates to early retirement. I've read countless threads and googles on the Mega-Backdoor Roth, and that's what I'm thinking about, but I need hand-holding and additional advice if you can spare it.
Background: female, single, age 52. Burned out and have been planning my retirement for sometime this year. The only advantages I see for staying until 55 are 1) retiree medical and 2) access to 401k earlier if I leave after 55. I can manage around those, I believe.
All funds below are invested in combined 3-fund portfolio, placed as tax advantaged as possible with where I started. I'm waiting for some CDs to mature to get it into Vanguard to complete the portfolio.
My goal is 55% US/Intl equities; 35% bond funds; 5% CD; 5% cash.
* Total Savings: $3.2 million
* 401k: $1.4 million, with $500k of that being after-tax and after-tax earnings
* Cash Balance Pension: $500k (can take as cash [roll into tIRA] or annuity)
* Vanguard/Fidelity: $900k
* Cash & CDs: $400k
* one lonely Roth that I backdoored this year: $6,600
* debt: $200k mortgage on $300k home; 2 cars no debt; no CC debt
I talked to the 401k administrator today, asking about exactly what I have in after-tax 401k, and whether I can do an in-service rollover of only this amount with no proration of the pre-tax. This was the reply:
"Plan guidelines indicate pre 59 1/2 in-service withdrawals are processed according to the following source hierarchy:
* CSP After-Tax
* After-Tax
* After-Tax Rollover
* Retirement Plan-EE After-Tax
* Rollover Contributions
* PAYSOP-ER
* xxx Employee ESOP
* xxx Employer ESOP
* CSP Company
* Company Contribution
You are eligible to request an in-service withdrawal as a rollover to an IRA or another qualified plan that accepts after-tax money. As of August 7, 2014 balances, the first $490,638.38 you roll over would be taken from the after-tax source. Of this amount, our records indicate $272,354.80 is from after-tax contributions and $218,283.58 is earnings on the after-tax contributions.
Prior to requesting your rollover, you should check with your new institution to make sure they will accept after-tax money and to see if they will track the after-tax basis (your contributions) and earnings for you to prevent you being taxed on your after-tax contributions when you distribute from the new account. You may also want to check with your tax advisor regarding these issues."
Long-lead in to this question: the way I read it, I can rollover my entire $490k after-tax with no pro-ration of pre-tax. Would I roll the $272k into my Roth, and roll the $218k into a tIRA? I've read the steps to do so, and understand the lack of clear IRS guidelines, but want to make sure I am understanding this correctly. And secondly, is there an advantage to me doing this now, as opposed to later sometime? Vanguard has cheaper and better funds, IMO, so if there is no disadvantage I'd like to move it into Vanguard.
I also plan to roll the qualified pension cash balance into a Vanguard tIRA, though other suggestions are welcome.
Thanks for your guidance! I really appreciate you all.
Early Retiree In-Service Rollover to Roth guidance & opinion
Re: Early Retiree In-Service Rollover to Roth guidance & opi
Your after tax sub account has a high earnings to basis ratio, meaning that you are a prime candidate for one of the "isolation of basis" strategies. This topic has been discussed at length here due to the uncertain guidance the IRS has issued since 2009. Some methods to isolate basis are safer than others, but not necessarily the most convenient.
Methods from safest to more risky listed in order:
1) Roll entire 490k into a rollover TIRA, and if your plan will accept an IRA rollover, then roll the pre tax balance back into the plan, leaving the 272k in the TIRA. Did not see an indication of same, but if you have any other pre tax non Roth IRA balance, roll that into the plan as well leaving only basis in the TIRA. Then simply convert it to your Roth IRA tax free. You can use your current Roth account if you wish.
2) Full distribution to you and 60 day rollovers. This one requires that you have other funds to replace the mandatory 20% withholding until you get your tax refund. 20% of the pre tax amount of 218k is 43.6k, so you would have to come up with 43.6k to complete your rollovers. Order of rollovers is critical. First roll the 218k to your rollover TIRA and when that is complete then roll the 272k to your Roth IRA including the 43.6 of replacement funds to make the rollovers complete. Both rollovers must be done within 60 days of receipt of the check. Again, the distribution is paid to YOU, it is not a direct rollover. This method is in accord with Code Sec 402(c)(2) which states that when you receive pre tax and post tax amounts and do a rollover, the pre tax funds are considered the first funds rolled over. Pro rating is avoided.
3) Direct rollover from the 401k of the pre tax amount of 218 to a rollover TIRA with check for the 272 in after tax contributions sent to you. You then roll that to a Roth IRA yourself within 60 days.
4) Tandem direct rollovers. This is the most risky and also the most convenient. Many plans will do this and it entails doing two direct rollovers. The 218k goes to your rollover TIRA and the 272k goes to your Roth IRA. These are direct rollovers with the checks made out to your IRA custodian for your benefit (FBO). If you opt for this, wait until about late November after which it is too late for the IRS to alter the 1099R reporting instructions for plan administrators because their tax programming will already be underway.
Note that NONE of these methods has been challenged by the IRS to my knowledge. So even choice 4 has been done for the last few years without a problem. Choice 3 is safer than 4 because it will require 2 1099R forms while some plans might try to combine choice 4 on one 1099R that could be confusing.
Question: What is the difference between CSP after tax and just after tax?
Note: If you want to push retirement to 55, you can take penalty free distributions if you retire IN THE calendar year you will reach 55 even before you actually turn 55. That could reduce your remaining time by several months.
Methods from safest to more risky listed in order:
1) Roll entire 490k into a rollover TIRA, and if your plan will accept an IRA rollover, then roll the pre tax balance back into the plan, leaving the 272k in the TIRA. Did not see an indication of same, but if you have any other pre tax non Roth IRA balance, roll that into the plan as well leaving only basis in the TIRA. Then simply convert it to your Roth IRA tax free. You can use your current Roth account if you wish.
2) Full distribution to you and 60 day rollovers. This one requires that you have other funds to replace the mandatory 20% withholding until you get your tax refund. 20% of the pre tax amount of 218k is 43.6k, so you would have to come up with 43.6k to complete your rollovers. Order of rollovers is critical. First roll the 218k to your rollover TIRA and when that is complete then roll the 272k to your Roth IRA including the 43.6 of replacement funds to make the rollovers complete. Both rollovers must be done within 60 days of receipt of the check. Again, the distribution is paid to YOU, it is not a direct rollover. This method is in accord with Code Sec 402(c)(2) which states that when you receive pre tax and post tax amounts and do a rollover, the pre tax funds are considered the first funds rolled over. Pro rating is avoided.
3) Direct rollover from the 401k of the pre tax amount of 218 to a rollover TIRA with check for the 272 in after tax contributions sent to you. You then roll that to a Roth IRA yourself within 60 days.
4) Tandem direct rollovers. This is the most risky and also the most convenient. Many plans will do this and it entails doing two direct rollovers. The 218k goes to your rollover TIRA and the 272k goes to your Roth IRA. These are direct rollovers with the checks made out to your IRA custodian for your benefit (FBO). If you opt for this, wait until about late November after which it is too late for the IRS to alter the 1099R reporting instructions for plan administrators because their tax programming will already be underway.
Note that NONE of these methods has been challenged by the IRS to my knowledge. So even choice 4 has been done for the last few years without a problem. Choice 3 is safer than 4 because it will require 2 1099R forms while some plans might try to combine choice 4 on one 1099R that could be confusing.
Question: What is the difference between CSP after tax and just after tax?
Note: If you want to push retirement to 55, you can take penalty free distributions if you retire IN THE calendar year you will reach 55 even before you actually turn 55. That could reduce your remaining time by several months.
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Re: Early Retiree In-Service Rollover to Roth guidance & opi
Will the $218k earning from after tax contribution be considered as tax-free and be rolled into Roth directly without tax consequence?
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Re: Early Retiree In-Service Rollover to Roth guidance & opi
Not at all hence Alan's discussion of how to separate those.flyingaway wrote:Will the $218k earning from after tax contribution be considered as tax-free and be rolled into Roth directly without tax consequence?
Re: Early Retiree In-Service Rollover to Roth guidance & opi
Thank you for your helpful advice, Alan!
- Don Christy
- Posts: 391
- Joined: Sun Oct 11, 2009 10:33 pm
Re: Early Retiree In-Service Rollover to Roth guidance & opi
This site is really great!
I did a quick review of the wiki entries around Roth IRA, Roth conversions, Backdoor Roth, etc., and didn't see anything this detailed related to means to isolate basis.
This would seem to be a great candidate for a wiki entry.
Thanks for taking the time to write such a detailed, precise, and concise guide Alan!
I did a quick review of the wiki entries around Roth IRA, Roth conversions, Backdoor Roth, etc., and didn't see anything this detailed related to means to isolate basis.
This would seem to be a great candidate for a wiki entry.
Thanks for taking the time to write such a detailed, precise, and concise guide Alan!
Alan S. wrote:Your after tax sub account has a high earnings to basis ratio, meaning that you are a prime candidate for one of the "isolation of basis" strategies. This topic has been discussed at length here due to the uncertain guidance the IRS has issued since 2009. Some methods to isolate basis are safer than others, but not necessarily the most convenient.
Methods from safest to more risky listed in order:
1) Roll entire 490k into a rollover TIRA, and if your plan will accept an IRA rollover, then roll the pre tax balance back into the plan, leaving the 272k in the TIRA. Did not see an indication of same, but if you have any other pre tax non Roth IRA balance, roll that into the plan as well leaving only basis in the TIRA. Then simply convert it to your Roth IRA tax free. You can use your current Roth account if you wish.
2) Full distribution to you and 60 day rollovers. This one requires that you have other funds to replace the mandatory 20% withholding until you get your tax refund. 20% of the pre tax amount of 218k is 43.6k, so you would have to come up with 43.6k to complete your rollovers. Order of rollovers is critical. First roll the 218k to your rollover TIRA and when that is complete then roll the 272k to your Roth IRA including the 43.6 of replacement funds to make the rollovers complete. Both rollovers must be done within 60 days of receipt of the check. Again, the distribution is paid to YOU, it is not a direct rollover. This method is in accord with Code Sec 402(c)(2) which states that when you receive pre tax and post tax amounts and do a rollover, the pre tax funds are considered the first funds rolled over. Pro rating is avoided.
3) Direct rollover from the 401k of the pre tax amount of 218 to a rollover TIRA with check for the 272 in after tax contributions sent to you. You then roll that to a Roth IRA yourself within 60 days.
4) Tandem direct rollovers. This is the most risky and also the most convenient. Many plans will do this and it entails doing two direct rollovers. The 218k goes to your rollover TIRA and the 272k goes to your Roth IRA. These are direct rollovers with the checks made out to your IRA custodian for your benefit (FBO). If you opt for this, wait until about late November after which it is too late for the IRS to alter the 1099R reporting instructions for plan administrators because their tax programming will already be underway.
Note that NONE of these methods has been challenged by the IRS to my knowledge. So even choice 4 has been done for the last few years without a problem. Choice 3 is safer than 4 because it will require 2 1099R forms while some plans might try to combine choice 4 on one 1099R that could be confusing.
Question: What is the difference between CSP after tax and just after tax?
Note: If you want to push retirement to 55, you can take penalty free distributions if you retire IN THE calendar year you will reach 55 even before you actually turn 55. That could reduce your remaining time by several months.
“Speak only if it improves upon the silence." Mahatma Gandhi
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- Joined: Sun Dec 16, 2007 11:25 am
Re: Early Retiree In-Service Rollover to Roth guidance & opi
It is indeed great........... but don't forget Google.Don Christy wrote: This site is really great!
I did a quick review of the wiki entries around Roth IRA, Roth conversions, Backdoor Roth, etc., and didn't see anything this detailed related to means to isolate basis.
If you Google "isolating 401k basis" it leads you to the excellent Fairmark tax guide on this.
JW
http://fairmark.com/retirement/roth-acc ... onversion/
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