Does Timing Matter for Mega Backdoor Roth Conversion?

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Topic Author
simpatico
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Joined: Thu Jan 19, 2012 11:20 am

Does Timing Matter for Mega Backdoor Roth Conversion?

Post by simpatico »

We’ve just paid off the HEL on the house and have extra $2000 to invest. We both are already doing backdoor Roth IRA conversions at the beginning of each year. Now I’d like to do a Mega backdoor conversion using our 401K accounts. Does it matter when to start? Are those conversions completely independent? Or there is something I need to consider?
Please give me some wisdom…
Alan S.
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by Alan S. »

You would want to make the after tax contributions and roll them to a Roth IRA immediately thereafter so earnings do not build up on the after tax sub account. If you split the rollover per Notice 2014-54 and send the earnings to a TIRA, then some of your back door Roth conversions would become taxable. Likewise, if you avoided rolling pre tax amounts to your TIRA, then you would be taxed on that amount when you rolled the after tax sub account to your Roth.

Of course, one way around this is to split the rollover, and then roll the TIRA pre tax amount back into the employer plan, but if there is only a couple hundred dollars in earnings, this extra step is probably not worth the hassle.

You should verify with your plan how often you can contribute after tax contributions and how often you can roll them out of the plan. Restrictions are possible and you might now always be able to do the Roth rollovers out before some earnings build up in the sub account.

In summary, timing does count if you want to avoid taxes on the earnings. Otherwise, it does not count.
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retiredjg
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by retiredjg »

If I recall correctly, we've only had one poster who could contribute money from outside his paycheck and one poster who could choose what to invest in (independent of the other accounts). That means that most people will have to contribute over time and most people will not be able to just hold the money in money market to avoid earnings. Long story not-so-short...most people have little to no control over the timing.

If you convert as often as you can (within reason) and just send the earnings to Roth IRA and pay the tax on the earnings, that should be the easiest approach and it will not interfere with your back door Roth IRA contributions.
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by placeholder »

Currently I have my 401k elections set to 50% each bond index and stable value so even though I have contributed over 5k after tax to it the earnings are less than $50 thus far and I'll just wait until next year to do the rollover.
Topic Author
simpatico
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by simpatico »

I called my 401K plan, and they said that I can transfer money out of the after tax account monthly. So I am thinking that I'll put $500 from each paycheck into money market. And transfer out on the day of the second paycheck. That should be the safest way (from the tax standpoint), right?
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by placeholder »

Will the contributions be 100% after tax?
Topic Author
simpatico
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by simpatico »

I contribute to 401K up to the maximum before tax. And then those after tax contributions will be in the separate account... And I guess, yes, 100% after tax. Is that what you were asking?
placeholder
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by placeholder »

So all of your contributions at this point are after tax and all going to a money market fund?
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retiredjg
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by retiredjg »

simpatico, most plans do not allow you to put after-tax contributions in money market while the pre-tax contributions are going into something else. Yours might. but it would be unusual.

If you have already completed contributing your $17,500 for this year and are now only putting in after tax money I suppose you can invest it any way you want.
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by placeholder »

retiredjg wrote:If you have already completed contributing your $17,500 for this year and are now only putting in after tax money I suppose you can invest it any way you want.
That's what I was trying to figure out so if the elections are 100% to money market while the after tax contributions are being made then what the OP wants is probably happening.
Topic Author
simpatico
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by simpatico »

Sorry, out of town and didn't have access earlier...
I haven't asked if I can put after tax contributions in money market as opposed to options that are selected for the pre-tax investments. So need to investigate... Will report later...
SGM
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Re: Does Timing Matter for Mega Backdoor Roth Conversion?

Post by SGM »

I convert early in the year so that I have up until October 15 of the following year to recharacterize. Actually do it a month in advance so that you don't have problems with the changes. You can also convert into separate accounts and recharacterize if one or two or all of the accounts lose value. James Lange calls it an atomic conversion, I believe. Alan Roth stated that he did this on a regular basis. I did it last year but did not recharacterize as all the funds did well. Good luck.
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