Vanguard doesn't understand Mega-Backdoor

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Spewin
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Vanguard doesn't understand Mega-Backdoor

Post by Spewin » Tue Mar 07, 2017 6:58 am

My wife's employer has a 401k plan that is great for the mega backdoor. We are trying to roll over into Vanguard, because her employer does not offer in-plan conversions. There are about $3000 in earnings, because it's taken a while for us to start the roll-over process. I don't really care if they get converted now or diverted into a traditional IRA. I prefer getting the whole thing done over getting a perfectly optimal solution.

Her employer will only issue checks in one of two ways:
1) as a single check for both the contributions and earnings, or
2) once check directly to Vanguard for the earnings and a second to my wife for the contributions which we would send to Vanguard as an indirect rollover.

The problem is that Vanguard doesn't seem to understand what I'm trying to do. In fact, they will often argue that what I'm talking about doesn't exist. Thus, they are having a very hard time telling me how, exactly, they need to receive the funds.

Any idea who I need to ask for at Vanguard to get a straight answer? Is it possible that just getting one check and putting it into my wife's IRA is the whole conversion? If so, where would I indicate the conversion on my taxes? Would the employer perform the conversion before sending the check and then issue a 1099-R? (I'll check with employer on this one also.)

cherijoh
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Re: Vanguard doesn't understand Mega-Backdoor

Post by cherijoh » Tue Mar 07, 2017 7:22 am

Spewin wrote:My wife's employer has a 401k plan that is great for the mega backdoor. We are trying to roll over into Vanguard, because her employer does not offer in-plan conversions. There are about $3000 in earnings, because it's taken a while for us to start the roll-over process. I don't really care if they get converted now or diverted into a traditional IRA. I prefer getting the whole thing done over getting a perfectly optimal solution.

Her employer will only issue checks in one of two ways:
1) as a single check for both the contributions and earnings, or
2) once check directly to Vanguard for the earnings and a second to my wife for the contributions which we would send to Vanguard as an indirect rollover.

The problem is that Vanguard doesn't seem to understand what I'm trying to do. In fact, they will often argue that what I'm talking about doesn't exist. Thus, they are having a very hard time telling me how, exactly, they need to receive the funds.

Any idea who I need to ask for at Vanguard to get a straight answer? Is it possible that just getting one check and putting it into my wife's IRA is the whole conversion? If so, where would I indicate the conversion on my taxes? Would the employer perform the conversion before sending the check and then issue a 1099-R? (I'll check with employer on this one also.)


I'm having trouble understanding what you are trying to do too.

If your wife's company issues 1 check then you could do a trustee-to-trustee transfer to a TIRA and a subsequent Roth conversion. The after-tax contributions would be considered basis and would not be taxed. The earnings would be pre-tax and would be taxable. The employer would issue a 1099-R and you would calculate the taxes/track the basis on Form 8606. This would work as long as she didn't have any other IRAs - otherwise she would run afoul of the pro-rata rules.

For the second option, the earnings go to Vanguard to a TIRA which you could convert to a Roth now or later. Your wife would get a check that she could direct to VG and do a tax-free Roth conversion since 100% of the money would be after-tax contributions. This would count as the 1 permitted rollover/year since the money went though you wife's hands. This is the better option if your wife has funds in other TIRAs.

What do you think you need to do that VG won't let you do? :confused

Grt2bOutdoors
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Re: Vanguard doesn't understand Mega-Backdoor

Post by Grt2bOutdoors » Tue Mar 07, 2017 7:31 am

Write a letter to Vanguard, indicate you want to rollover an in-service distribution from your employer into Fund XYZ in the amount of $x dollars. Now, you may rollover the entire check amount, contributions and earnings. When filing your taxes, you will enter the total amount of distribution from Form 1099-R, the taxable amount will be the earnings of $3,000.

Do not use the term Mega Back Door Roth, because Vanguard would be correct; there is no such thing in the IRS code called Mega Back Door Roth.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Spewin
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Re: Vanguard doesn't understand Mega-Backdoor

Post by Spewin » Tue Mar 07, 2017 8:10 am

Grt2bOutdoors wrote:Do not use the term Mega Back Door Roth, because Vanguard would be correct; there is no such thing in the IRS code called Mega Back Door Roth.


The problem is that they also don't know what the difference between after-tax Roth and after-tax non-Roth contributions/amounts. In fact, we had a representative call us back on her own tell me that she "has been doing this a long time" and had never heard of the ability to contribute beyond the $18,000 limit. She was sure that these dollars couldn't be coming from a 401k.

cherijoh wrote:What do you think you need to do that VG won't let you do?


Vanguard is not preventing me from doing anything, except in so far as that they won't verify that they can receive the funds as they will arrive. Part of that is because, when I describe the situation, they always correct me that I am transferring in Roth funds and then not understand the actual situation. So, I'm not sure if I'm correctly implementing every step in the process.

Volkdancer
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Re: Vanguard doesn't understand Mega-Backdoor

Post by Volkdancer » Tue Mar 07, 2017 8:32 am

One of the problems may be that your description of the problem as you see it seems convoluted because of the language used. I also find the term 'Mega..." irrelevant for the amounts about which you are talking. Fortunately the two earlier responses to your question are very sensible.

Karl V

cherijoh
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Re: Vanguard doesn't understand Mega-Backdoor

Post by cherijoh » Tue Mar 07, 2017 8:51 am

Spewin wrote:
Grt2bOutdoors wrote:Do not use the term Mega Back Door Roth, because Vanguard would be correct; there is no such thing in the IRS code called Mega Back Door Roth.


The problem is that they also don't know what the difference between after-tax Roth and after-tax non-Roth contributions/amounts. In fact, we had a representative call us back on her own tell me that she "has been doing this a long time" and had never heard of the ability to contribute beyond the $18,000 limit. She was sure that these dollars couldn't be coming from a 401k.

cherijoh wrote:What do you think you need to do that VG won't let you do?


Vanguard is not preventing me from doing anything, except in so far as that they won't verify that they can receive the funds as they will arrive. Part of that is because, when I describe the situation, they always correct me that I am transferring in Roth funds and then not understand the actual situation. So, I'm not sure if I'm correctly implementing every step in the process.


Did you mention "Mega Back door Roth" in your discussion with them? If so I would suspect that is the issue - TMI (too much information). As far as VG is concerned there are two types of accounts - Traditional and Roth. Your wife has a traditional 401k. As Grt2bOutdoors pointed out, a back door Roth/mega back door Roth is a tax-saving PROCEDURE not a type of account. FWIW, there have been several posts about CPAs and other tax professionals not being familiar with the process, so I am not at all surprised that a VG rep isn't familiar with what you are trying to do.

If you do the first option you mentioned (i.e., have the custodian of the 401K send one check to VG), why in the world would you think they wouldn't accept the money? The fact that it contains after-tax money is totally immaterial to the transfer process. How much is taxable is handled by the 1099-R your wife will receive from the 401k custodian and by you when you do your taxes. (It is the taxpayer's responsibility to track the basis after the money is moved out of a 401k, not the new custodian). The transfer process would work exactly like it would have if your wife had separated from her company and the account only contained pre-tax money. (Except that you will owe less taxes when you put it in Roth). I'd be more worried about the custodian getting the 1099R correct.

One other possibility is to find another company that is familiar with after-tax contributions and do the transfer there. Who is your 401k custodian? Do they offer retail accounts?

Grt2bOutdoors
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Re: Vanguard doesn't understand Mega-Backdoor

Post by Grt2bOutdoors » Tue Mar 07, 2017 8:56 am

Spewin wrote:
Grt2bOutdoors wrote:Do not use the term Mega Back Door Roth, because Vanguard would be correct; there is no such thing in the IRS code called Mega Back Door Roth.


The problem is that they also don't know what the difference between after-tax Roth and after-tax non-Roth contributions/amounts. In fact, we had a representative call us back on her own tell me that she "has been doing this a long time" and had never heard of the ability to contribute beyond the $18,000 limit. She was sure that these dollars couldn't be coming from a 401k.

cherijoh wrote:What do you think you need to do that VG won't let you do?


Vanguard is not preventing me from doing anything, except in so far as that they won't verify that they can receive the funds as they will arrive. Part of that is because, when I describe the situation, they always correct me that I am transferring in Roth funds and then not understand the actual situation. So, I'm not sure if I'm correctly implementing every step in the process.


Here is the issue at hand: What did you say exactly when you spoke to Vanguard? It seems to me that you used terminology that is incorrect. Did you use the term "Mega Back Door Roth" at any time during your conversation? Did you mention that your wife made contributions in excess of $18,000 and she is under age 50 year old? The easiest way to fix this is to do as I indicated below - have the administrator of the 401K plan make an in-service distribution of all after-tax contributions and earnings payable to Vanguard Fiduciary Trust Company F/B/O Spewin's spouse's name. Have them mail the check to your home, take the check, make a photocopy for your own records if you wish. Then, type up a letter to Vanguard Fiduciary Trust Company. Dear Sirs, Enclosed is an after-tax in-service distribution rollover that I would like to have deposited into my existing Roth IRA, Vanguard Fund XYZ, account number 1121235xxxxx. Sincerely, insert name of Spewin's Spouse. Have Spewin's spouse physically sign the letter. Insert said letter into a security envelope, affix postage stamp to envelope. Seal it, put some tape on the flap to hold it in place. Drop it into the mail, in 3 or 4 days, said check will be deposited into account.

Now, come tax time - you will fill out Form 8606, indicating you had pre-retirement distribution. A Form 1099-R will be sent to you from the 401K plan administrator - it will indicate the total value of the distribution payment, it will indicate the cost basis or after-tax contribution, and the difference will be the taxable earnings. That's it, you are done. Don't waste your time talking to Vanguard on the phone, because if you mistakenly use the wrong terminology you will get the wrong response. This is not a particularly difficult transaction. Let us know how you make out.
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Phineas J. Whoopee
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Re: Vanguard doesn't understand Mega-Backdoor

Post by Phineas J. Whoopee » Tue Mar 07, 2017 12:02 pm

As a more general point, all of us, and our lurkers, should be especially cautious about expecting anybody else to know Boglehead jargon. I remember one poster telling us how stupid his bank was for not recognizing the term I Bonds. If he had said Savings Bonds, they could have asked whether he wanted series EE or series I.

Not everybody reads this forum.

PJW

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Re: Vanguard doesn't understand Mega-Backdoor

Post by ICMoney » Tue Mar 07, 2017 12:10 pm

One idea is to have the 401k administrator make the check out to: "Vanguard FBO <your wife's name> - after-tax rollover". Include your Vanguard Roth IRA account number on the check as well. Have your 401k administrator send the check directly to Vanguard if they will do that.

This has worked for me in sending my after-tax 401k rollovers to my Vanguard Roth IRA, without issues/having to make a phone call to Vanguard.

Best,
ICM

ved
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Re: Vanguard doesn't understand Mega-Backdoor

Post by ved » Tue Mar 07, 2017 12:11 pm

Why don't you open a Roth IRA (for your wife) with the custodian that administers her 401k? And then have this "mega back-door" rolled over to that Roth IRA?

This is simpler, because the 401k administrator would know that there are pre-tax and after-tax contributions, and money has to be moved from one side of their house (401k administration) to another side of the house (Roth IRA). They will not send you a check (and thus having the money out of the market for possibly several weeks). Instead, the transaction can be completed in a couple days, and you can get back into the market.

Then, when everything is settled, you can move the Roth IRA from the 401k custodian to Vanguard or wherever, if you so choose.

kd2008
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Re: Vanguard doesn't understand Mega-Backdoor

Post by kd2008 » Tue Mar 07, 2017 12:25 pm

I believe your problem was calling Vanguard. Why did you do that? What was the need?

Just go over to https://investor.vanguard.com/401k-rollover/

https://investor.vanguard.com/401k-roll ... -roll-over has all the steps you need.

A guide to your 401(k) rollover

Follow these steps to roll over your retirement savings.
Step 1
Set up your Vanguard IRA®

Call a Vanguard rollover specialist at 800-523-9442 or start the process online. (Online you can do this in 30 sec, do not call)

You'll need to:

Pick a type of IRA for your rollover (Choose Roth IRA)
Choose investments for your rollover IRA (Just choose money market fund for now)

Step 2
Call the financial company holding your 401(k) (your 401k provider may allow you to do this step online too)

You'll need to:

Find out the company's rollover requirements.
Ask them to make the check payable to:
Vanguard Fiduciary Trust Company
FBO [your name]
Have the check mailed to:
Vanguard
P.O. Box 1110
Valley Forge, PA 19482-1110

Note: If the check is made payable to you instead of Vanguard, mail it to Vanguard within 60 days to avoid paying potential taxes and penalties on your savings. Please don't endorse the check.
Step 3
Watch for your confirmation

Once we receive the check, we'll immediately invest the money in the funds you've selected and send you a confirmation.

You may also receive a reminder to name beneficiaries for your IRA.


It is super easy. Why are you explaining Vanguard what you are doing like mega backdoor etc?

2pedals
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Re: Vanguard doesn't understand Mega-Backdoor

Post by 2pedals » Tue Mar 07, 2017 12:43 pm

I always request two in service distribution checks,
1) for the 401K after tax portion that will be payable to your Roth account FBO of you.
2) for the 401k gains on the after tax portion that will be payable to your IRA account FBO of you.
Both checks avoid taxes on the distribution for the tax year.

nimo956
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Re: Vanguard doesn't understand Mega-Backdoor

Post by nimo956 » Tue Mar 07, 2017 1:09 pm

I do this twice a year and Vanguard understands exactly what I want and there's never been a problem. My 401k is with Vanguard, however, so I'm talking to someone in their retirement plans department. They can see the amount of after-tax contributions and even tell me what the gain/loss is. All I say is that I want to roll the after-tax money in my 401k to my Roth IRA. I'm not sure if that language is perfectly precise. They mail me the paper forms and I have to fill them out and mail them back in (they say they can't do it electronically or over the phone).
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BrandonBogle
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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Tue Mar 07, 2017 1:33 pm

For my after-tax 401k in-service distributions, I follow this simple process:

1. I look online to record the balance of my after-tax subaccount and how much of that was. The screen has a breakdown of "cost" and "current value".
2. I ask my 401k custodian for a check to <XYZ Firm> Roth IRA FBO BrandonBogle
3. I deposit the check at my Roth IRA custodian as a direct rollover (the check was made payable to them, not me)
4. I verify that my 1099-R from the 401k custodian matches the following:
- total distribution = current value I took down
- taxable distribution = current value minus cost

Nowhere in this process did I talk to the Roth IRA custodian beyond whatever steps were necessary to get their deposit form (for me online, but it could have been by phone).

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Earl Lemongrab
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Re: Vanguard doesn't understand Mega-Backdoor

Post by Earl Lemongrab » Tue Mar 07, 2017 3:56 pm

There shouldn't be any particular problem. Stop trying to get permission from the receiver. First decide whether you want a split rollover, that is the earnings to TIRA and the basis to Roth.

If not, take the combined check and roll it over to the Roth and be prepared to pay some tax.

If you do, then do two rollovers. The first will be a direct rollover from a qualified plan to a TIRA. The second will be an indirect rollover from a qualified plan to a Roth IRA.

Vanguard should have no problems with those. Don't confuse the issue by telling them the taxability. They don't need to know, and don't want to know. The tax situation has nothing to do with them. Only your 401(k) custodian, you, and the IRS are involved in that.
Last edited by Earl Lemongrab on Tue Mar 07, 2017 5:50 pm, edited 1 time in total.
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Re: Vanguard doesn't understand Mega-Backdoor

Post by pkcrafter » Tue Mar 07, 2017 5:16 pm

Phineas J. Whoopee wrote:As a more general point, all of us, and our lurkers, should be especially cautious about expecting anybody else to know Boglehead jargon. I remember one poster telling us how stupid his bank was for not recognizing the term I Bonds. If he had said Savings Bonds, they could have asked whether he wanted series EE or series I.

Not everybody reads this forum. Whaaaat? :shock:



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CantPassAgain
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Re: Vanguard doesn't understand Mega-Backdoor

Post by CantPassAgain » Tue Mar 07, 2017 9:06 pm

OP, call Vanguard back and tell them you want to do a Mega Super-Duper Backdoor Roth. They will probably understand then.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by Grt2bOutdoors » Tue Mar 07, 2017 10:06 pm

CantPassAgain wrote:OP, call Vanguard back and tell them you want to do a Mega Super-Duper Backdoor Roth. They will probably understand then.


What is that, the secret Vanguard "hand-shake"? :P
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BrandonBogle
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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Tue Mar 07, 2017 10:39 pm

Grt2bOutdoors wrote:
CantPassAgain wrote:OP, call Vanguard back and tell them you want to do a Mega Super-Duper Backdoor Roth. They will probably understand then.


What is that, the secret Vanguard "hand-shake"? :P


You are aware that there is a secret Bogleheads' handshake? I think VictoriaF was the contributor (though I may be remembering wrong), and we presented it to Jack at the Bogleheads 2014 conference. He had a good chuckle at it.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by jasper » Wed Mar 08, 2017 12:33 am

I have a vanguard 401k and do the mega backdoor to my vanguard Roth routinely

So they surely understand this

I have found that talking to the retirement account experts (rather than the first person who gets on the phone) at vanguard will put me in touch with more knowledgable experts when I have a hiccup. Maybe try that route. Ask for someone in their retirement accounts department..

Edit - the 401k retirement account department

pyld76
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Re: Vanguard doesn't understand Mega-Backdoor

Post by pyld76 » Wed Mar 08, 2017 1:09 am

Spewin wrote:My wife's employer has a 401k plan that is great for the mega backdoor. We are trying to roll over into Vanguard, because her employer does not offer in-plan conversions. There are about $3000 in earnings, because it's taken a while for us to start the roll-over process. I don't really care if they get converted now or diverted into a traditional IRA. I prefer getting the whole thing done over getting a perfectly optimal solution.

Her employer will only issue checks in one of two ways:
1) as a single check for both the contributions and earnings, or
2) once check directly to Vanguard for the earnings and a second to my wife for the contributions which we would send to Vanguard as an indirect rollover.

The problem is that Vanguard doesn't seem to understand what I'm trying to do. In fact, they will often argue that what I'm talking about doesn't exist. Thus, they are having a very hard time telling me how, exactly, they need to receive the funds.

Any idea who I need to ask for at Vanguard to get a straight answer? Is it possible that just getting one check and putting it into my wife's IRA is the whole conversion? If so, where would I indicate the conversion on my taxes? Would the employer perform the conversion before sending the check and then issue a 1099-R? (I'll check with employer on this one also.)


If the 401k custodian is willing to make a single check to "Vanguard, FBO your wife" have them do so and mail you the check. If you don't mind paying the tax now due on the earnings, the process is:

1. Ask 401k custodian to cut a check to Vanguard Fiduciary Trust Company. FBO yourwife.
2. Prey they get the 1099 right which will reflect a total rollover amount of whatever, and a taxable amount of 3k.
3. Have them mail you the check. It's still a direct rollover by virtue of the fact that the check isn't made out to your wife.
4. Send the check and a letter of intent like this to vanguard. I use the overnight address ATTN: Roth IRA rollover dept.

Enclosed you will find a check made out to Vanguard, FBO: Someone (me). This check represents an in-service withdrawal of after-tax monies from my workplace 401(k) qualified retirement plan administered by 401kadmingoeshere (this is a traditional 401k/thrift plan with an after-tax subaccount, not a Roth 401(k)). My plan permits in-service distribution and rollovers of after-tax monies to another qualified retirement account.

My intent is to roll this money (rollover) into my existing Roth IRA at Vanguard. You will note the check is not made out to me (rather, to you, FBO: Me) and I have not endorsed it. This is due to my express intent of performing a “direct” rollover as contemplated under IRS law and regulation.

Please invest the enclosed funds into my Roth IRA (accountnumberhere ) as follows:

(amounts and funds here)

If there is any question at all about my intent for this rollover or you require any clarification, please contact me at the address above or by telephone (Phone goes here)or by email (Email goes here).


Ive been using this method for 4 or 5 years and it works every time.

6. You will put the 1099 on your tax return and owe the taxes on the 3k or earnings.
7. If the 401k people want to send the money direct to vanguard, write them the letter of intent and tell them where and when it's coming from and what to do with it.

I'm not sure why her 401k administrator would have that combination of options. I'd say screw it, roll the entire thing into her Roth, and move on.

Assuming you can get the 401k administrator not to flake, this will work like a champ. I a, somewhat fortune to have fidelity on the source end of this transactions and they have their proverbial stuff together.

joeblow
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Re: Vanguard doesn't understand Mega-Backdoor

Post by joeblow » Wed Mar 08, 2017 1:21 am

I did not read all the posts because frankly...TLDRDC, but I have completed a mega-backdoor roth contribution with vanguard without problem. You have to do it "manually" (aka over the phone and via snail mail) but it worked seamlessly. You do have to get the right person on the phone, but that is simply a transfer or two. The entry level guy that takes your call will not know what you are talking about.

Bacchus01
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Re: Vanguard doesn't understand Mega-Backdoor

Post by Bacchus01 » Wed Mar 08, 2017 7:38 am

Odd that Vanguard would be confused. Could be your language.

I called them a couple years back and said exactly what I want to do, take an in-service withdrawal of after-tax contributions and roll them into my Roth IRA. They knew exactly what I meant and gave me the exact instructions. The 401k custodian followed my direction to a T and then every quarter hence I initiate the same transaction. No problem.

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Earl Lemongrab
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Re: Vanguard doesn't understand Mega-Backdoor

Post by Earl Lemongrab » Wed Mar 08, 2017 10:37 am

pyld76 wrote:Enclosed you will find a check made out to Vanguard, FBO: Someone (me). This check represents an in-service withdrawal of after-tax monies from my workplace 401(k) qualified retirement plan administered by 401kadmingoeshere (this is a traditional 401k/thrift plan with an after-tax subaccount, not a Roth 401(k)). My plan permits in-service distribution and rollovers of after-tax monies to another qualified retirement account.

Why would put all that in? They don't need to know anything about after-tax subaccounts. I'd use the Vanguard forms for rollovers form qualified plans found in this "kit":

https://personal.vanguard.com/us/litfulfillment/ELFMainResults?cat=OAFM&subCat1=ORET&subCat2=ROVR

Using the predefined from is likely to work better than winging it with a note.
Last edited by Earl Lemongrab on Wed Mar 08, 2017 10:43 am, edited 1 time in total.
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BrandonBogle
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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Wed Mar 08, 2017 10:41 am

Please don't take this as a mean note, but something to catch the eye. This sounds like a case of "diarrhea of the mouth". Giving WAY too much information rather than simple, clear instructions. I second using standard forms. How you need to treat things and the process used is all for you to control. No need to go into that detail with the people servicing your request. Tell them you need entity A to do action B, don't bother with the details around C, D, E, or F!

pyld76
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Re: Vanguard doesn't understand Mega-Backdoor

Post by pyld76 » Wed Mar 08, 2017 11:15 am

Earl Lemongrab wrote:
pyld76 wrote:Enclosed you will find a check made out to Vanguard, FBO: Someone (me). This check represents an in-service withdrawal of after-tax monies from my workplace 401(k) qualified retirement plan administered by 401kadmingoeshere (this is a traditional 401k/thrift plan with an after-tax subaccount, not a Roth 401(k)). My plan permits in-service distribution and rollovers of after-tax monies to another qualified retirement account.

Why would put all that in? They don't need to know anything about after-tax subaccounts. I'd use the Vanguard forms for rollovers form qualified plans found in this "kit":

https://personal.vanguard.com/us/litfulfillment/ELFMainResults?cat=OAFM&subCat1=ORET&subCat2=ROVR

Using the predefined from is likely to work better than winging it with a note.


While your opinion about "winging it with a note" is well taken, I've been doing this since before there was a form to adequately capture the intent of rolling an after-tax 401k (rather than a roth 401k) distribution into a Roth IRA. I've also been doing these rollovers since before the IRS came out with Notice 2014-54 (which, although specifically targeted towards multiple destinations for pre and post-tax monies is ostensibly what solidifies the whole "mega backdoor" thing as good). I want to leave no doubt in whomever's mind at Vanguard exactly what I'm having them do and where the funds are coming from. If you want to use the kit, by all means do so: I've had years of success with the method above.

BrandonBogle wrote:Please don't take this as a mean note, but something to catch the eye. This sounds like a case of "diarrhea of the mouth". Giving WAY too much information rather than simple, clear instructions. I second using standard forms. How you need to treat things and the process used is all for you to control. No need to go into that detail with the people servicing your request. Tell them you need entity A to do action B, don't bother with the details around C, D, E, or F!


*shrug* I prefer everyone involved in issuing tax forms (to wit, the 1099-R from the 401k custodian) and the eventual 5498 (from Vanguard) to be exactly aware of what my intent is. This was particularly important when there were few people (even at Vanguard) who understood the transaction. For what it's worth, if you look at the form, the only additional detail that the letter I've described gives them beyond the form is that it's an in-service withdrawal of an after-tax 401k account (as opposed to the entire account, a post-59.5 rollover, pre-86, etc). You may not feel this to be a relevant detail, but I personally encountered enough resistance and questioning (from the 401k trustee Fidelity and from Vanguard itself) prior to 2014-54 that I felt it prudent. Do what works for you.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Wed Mar 08, 2017 11:26 am

pyld76 wrote:*shrug* I prefer everyone involved in issuing tax forms (to wit, the 1099-R from the 401k custodian) and the eventual 5498 (from Vanguard) to be exactly aware of what my intent is. This was particularly important when there were few people (even at Vanguard) who understood the transaction. For what it's worth, if you look at the form, the only additional detail that the letter I've described gives them beyond the form is that it's an in-service withdrawal of an after-tax 401k account (as opposed to the entire account, a post-59.5 rollover, pre-86, etc). You may not feel this to be a relevant detail, but I personally encountered enough resistance and questioning (from the 401k trustee Fidelity and from Vanguard itself) prior to 2014-54 that I felt it prudent. Do what works for you.


The 1099-R I completely agree with. If you send a note to your 401k custodian to make that happen properly, more power to you. I've been fortunately that their online screens in viewing my account handle everything (properly).

The 5498 I am confused about. What does the note change versus Vanguard's contributory form specifying the account/contribution type and dollar amount? An "after-tax in-service rollover" check looks exactly the same to Vanguard as a "pre-tax rollover" and a "Roth rollover".

I guess my point for the Op was NOT about giving the details to the 401k custodian (form, letter, however), but to the recipient IRA custodian. They get check A and need to deposit it to account B as a rollover. What else do they need to know?

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Re: Vanguard doesn't understand Mega-Backdoor

Post by Earl Lemongrab » Wed Mar 08, 2017 11:32 am

BrandonBogle wrote:I guess my point for the Op was NOT about giving the details to the 401k custodian (form, letter, however), but to the recipient IRA custodian. They get check A and need to deposit it to account B as a rollover. What else do they need to know?

Exactly. IRA custodians don't track the taxability of the accounts. That's up to you. You will get a 1099-R from the 401(k) custodian and use that at tax time. Vanguard isn't involved.
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Re: Vanguard doesn't understand Mega-Backdoor

Post by ajs317 » Wed Mar 08, 2017 11:39 am

I do this regularly as well from a Putnam 401(k) to a Vanguard Roth. They send the check directly to Vanguard made out to VFTC fbo [my name]. I think what makes it smooth for me is that when I request the in-service distribution from Putnam, they ask me for the account number at Vanguard that I want the check sent for and they presumably communicate that to Vanguard. As others have mentioned, the way that Vanguard does its account numbers, you can specify a specific fund that you want the check to go towards by changing the account number to reflect Vanguard's fund code.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Wed Mar 08, 2017 11:40 am

Earl Lemongrab wrote:
BrandonBogle wrote:I guess my point for the Op was NOT about giving the details to the 401k custodian (form, letter, however), but to the recipient IRA custodian. They get check A and need to deposit it to account B as a rollover. What else do they need to know?

Exactly. IRA custodians don't track the taxability of the accounts. That's up to you. You will get a 1099-R from the 401(k) custodian and use that at tax time. Vanguard isn't involved.


I think there is some confusion between your post and mine. I see you linked to the IRA Transfer Kit. I do not use that as I do NOT have the recipient manage the process (especially Vanguard given other topics about their mistakes). I use this form for After-Tax In-Service Rollover/Conversions: http://personal.vanguard.com/pdf/s052.pdf

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Re: Vanguard doesn't understand Mega-Backdoor

Post by Earl Lemongrab » Wed Mar 08, 2017 1:33 pm

BrandonBogle wrote:I think there is some confusion between your post and mine. I see you linked to the IRA Transfer Kit. I do not use that as I do NOT have the recipient manage the process (especially Vanguard given other topics about their mistakes). I use this form for After-Tax In-Service Rollover/Conversions: http://personal.vanguard.com/pdf/s052.pdf

I didn't spend a lot of time looking at it, but there was a section for handling a check issued by a qualified plan.
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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Wed Mar 08, 2017 1:40 pm

Earl Lemongrab wrote:
BrandonBogle wrote:I think there is some confusion between your post and mine. I see you linked to the IRA Transfer Kit. I do not use that as I do NOT have the recipient manage the process (especially Vanguard given other topics about their mistakes). I use this form for After-Tax In-Service Rollover/Conversions: http://personal.vanguard.com/pdf/s052.pdf

I didn't spend a lot of time looking at it, but there was a section for handling a check issued by a qualified plan.


There is (in the IRA Kit you referred to). However, I go by the adage "if you want it done right, do it yourself." So I do not use one of those transfer kits where I provide all the details to Vanguard for them to do the request on my behalf (at which point pyld76's advice of sending in a note could very well be useful). Instead, I do the following:

0. Determine if I will use an existing Roth IRA or open a new one for it (fill out paperwork to open the account as necessary)
1. Request a Direct Rollover off the After-Tax sub account from my 401k custodian (includes basis + earnings)
2. Get the check made out to the Roth IRA custodian from 401k custodian
3. Turn in the check to the Roth IRA custodian with their deposit paperwork, checking the box that this is a qualified plan rollover/conversion

This way, I ensure there is no misunderstanding of my intent at each step. This sounds very similar to plyd76's note, but I am not telling each party the whole story -- just the individual component they need.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by Earl Lemongrab » Wed Mar 08, 2017 2:08 pm

My impression was that the form would be used with an existing check. However, I'm sure the one you referenced is preferable.
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Re: Vanguard doesn't understand Mega-Backdoor

Post by barnaclebob » Wed Mar 08, 2017 2:20 pm

Learn to speak "vanguard". The less you tell them the better. Just ask "I want to rollover after tax money and its gains in my 401k to a roth IRA. How do I do that". It doesnt matter why you want to do it or anything else or that it was over the 18k pretax limit..

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Re: Vanguard doesn't understand Mega-Backdoor

Post by Earl Lemongrab » Wed Mar 08, 2017 3:02 pm

barnaclebob wrote:Learn to speak "vanguard". The less you tell them the better. Just ask "I want to rollover . . . money . . . in my 401k to a roth IRA. How do I do that". It doesnt matter why you want to do it or anything else or that it was over the 18k pretax limit..

I would make it even simpler as in the edit above. The taxable nature of the money is not relevant.
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Re: Vanguard doesn't understand Mega-Backdoor

Post by noraz123 » Thu Mar 09, 2017 9:24 am

cherijoh wrote: I am not at all surprised that a VG rep isn't familiar with what you are trying to do.



I realize that OP is asking about Vanguard, but for what it is worth, my wife's 401k plan with Fidelity added after tax contributions with quarterly in-service withdrawals last year. Every three months we call to start the process for doing the in-service withdrawal, and each representative that I spoke with new exactly what I was trying to do, even knew the term, "Mega backdoor Roth IRA" contribution.

While I wasn't about to move my existing accounts from Vanguard to fidelity, I do advise friends now to choose fidelity over Vanguard because of the superior knowledgeable customer service. Moreover, we set up a Roth IRA account at fidelity for these rollovers.

Love Vanguard's pricing and funds. Prefer Fidelity's website and customer service.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by dbr » Thu Mar 09, 2017 9:31 am

If you Google "mega backdoor Roth" there seem to be lots of articles from a wide variety of sources. This is not some sort of Boglehead jargon. In any case a person can be specific about what is intended without using jargon to refer to it.

I agree that it seems pretty pathetic that a first level CSR would not be trained to recognize what is being asked even if the actual transaction has to be referred to a specialist.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by Earl Lemongrab » Thu Mar 09, 2017 10:30 am

dbr wrote:If you Google "mega backdoor Roth" there seem to be lots of articles from a wide variety of sources. This is not some sort of Boglehead jargon.

I think the actual term was coined by the White Coat Investor:

http://whitecoatinvestor.com/the-mega-backdoor-roth-ira/

All of the exact phrases on the forum seem to date from around that time. Of course, the concept has been around here much longer. I suspect most of the other references on the web come from his site or this. But it is indeed out there.
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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Thu Mar 09, 2017 11:34 am

noraz123 wrote:
cherijoh wrote: I am not at all surprised that a VG rep isn't familiar with what you are trying to do.



I realize that OP is asking about Vanguard, but for what it is worth, my wife's 401k plan with Fidelity added after tax contributions with quarterly in-service withdrawals last year. Every three months we call to start the process for doing the in-service withdrawal, and each representative that I spoke with new exactly what I was trying to do, even knew the term, "Mega backdoor Roth IRA" contribution.

While I wasn't about to move my existing accounts from Vanguard to fidelity, I do advise friends now to choose fidelity over Vanguard because of the superior knowledgeable customer service. Moreover, we set up a Roth IRA account at fidelity for these rollovers.

Love Vanguard's pricing and funds. Prefer Fidelity's website and customer service.


Actually, I think you (or maybe I) misunderstood. Vanguard is NOT the 401k provider. They are where the IRA is. If Op complained that the 401k provider didn't know how to handle after-tax in-service distributions, that would be a different conversation. When talking to the support desk for the IRA custodian, they could very well not know about these details b/c they have no need to know it in order to support and handle the IRA.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by AdamP » Thu Mar 09, 2017 11:53 am

I did nearly 30 "mega backdoor Roth" rollovers from my 401k's after-tax contributions to my Roth IRA at Vanguard - totaling nearly $50,000. They're just rollovers - nothing complicated, and I only had a few minor hiccups on Vanguard's end. I requested a withdrawal from my 401k every two weeks, got a check, and mailed that check to Vanguard. Done. It did help immensely to send my check with a note stating the following (as two or three of the checks were processed incorrectly):
To Whom It May Concern,
The attached check should be coded as a Rollover Contribution from an employer-sponsored 401k. It is from after-tax non-Roth contributions, and should be deposited into my Roth IRA account xxxxxxxx.
    Account: xxxxxxxx
    Transaction type: Rollover (incoming)
    Transaction description: Rollover Contribution
If you are thinking of coding it differently, please read the note on my account about these checks and bring this to the attention of a manager. If necessary, call me.


Also, I would highly highly recommend that you invest any after-tax contributions while in your 401k in a money market or bond fund so you don't have to deal with the gains.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by cherijoh » Thu Mar 09, 2017 5:32 pm

BrandonBogle wrote:
noraz123 wrote:
cherijoh wrote: I am not at all surprised that a VG rep isn't familiar with what you are trying to do.



I realize that OP is asking about Vanguard, but for what it is worth, my wife's 401k plan with Fidelity added after tax contributions with quarterly in-service withdrawals last year. Every three months we call to start the process for doing the in-service withdrawal, and each representative that I spoke with new exactly what I was trying to do, even knew the term, "Mega backdoor Roth IRA" contribution.

While I wasn't about to move my existing accounts from Vanguard to fidelity, I do advise friends now to choose fidelity over Vanguard because of the superior knowledgeable customer service. Moreover, we set up a Roth IRA account at fidelity for these rollovers.

Love Vanguard's pricing and funds. Prefer Fidelity's website and customer service.


Actually, I think you (or maybe I) misunderstood. Vanguard is NOT the 401k provider. They are where the IRA is. If Op complained that the 401k provider didn't know how to handle after-tax in-service distributions, that would be a different conversation. When talking to the support desk for the IRA custodian, they could very well not know about these details b/c they have no need to know it in order to support and handle the IRA.


I never thought VG was the 401k provider and I'm not sure what I wrote gave you that impression. Unless this comment is directed at noraz.

Your last statement is exactly what I meant - all VG needs to know is if the money came from a Traditional or a Roth account. So OP's expectation that the CSR should understand after tax contributions and the mega back door Roth process is unrealistic IMO.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Thu Mar 09, 2017 7:32 pm

cherijoh wrote:I never thought VG was the 401k provider and I'm not sure what I wrote gave you that impression. Unless this comment is directed at noraz.


It was

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Re: Vanguard doesn't understand Mega-Backdoor

Post by noraz123 » Fri Mar 10, 2017 4:46 pm

BrandonBogle wrote:
cherijoh wrote:I never thought VG was the 401k provider and I'm not sure what I wrote gave you that impression. Unless this comment is directed at noraz.


It was

Thanks, I did misread the original post. I assumed that Vanguard was handled both the 401K and the IRA accounts.

However, I will stand by my original comments. Talking with the Fidelity reps each quarter, the first thing I say is that I want to do a mega-backdoor Roth IRA contribution from my 401K. They knew exactly what I was talking about. The transfer was all the easier because Fidelity was both the 401K provider and the manager of the IRA account, but I think if my 401K was held elsewhere, they still would have understood what I was talking about.

I know that people who do such contributions are in the minority, mega-backdoor Roth IRA contributions have been talked about so much in the financial press, I would expect Vanguard customer service reps to know the mechanics of this by now and how to receive the funds.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by Spirit Rider » Fri Mar 10, 2017 5:39 pm

AdamP wrote:Also, I would highly highly recommend that you invest any after-tax contributions while in your 401k in a money market or bond fund so you don't have to deal with the gains.

I have never understood this recommendation. Since when is it a good idea to avoid gains because you might have to pay taxes on those gains. I can see if it is a small number of days as in a backdoor Roth. Otherwise it makes no sense at all.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by BrandonBogle » Fri Mar 10, 2017 5:44 pm

noraz123 wrote:However, I will stand by my original comments. Talking with the Fidelity reps each quarter, the first thing I say is that I want to do a mega-backdoor Roth IRA contribution from my 401K. They knew exactly what I was talking about. The transfer was all the easier because Fidelity was both the 401K provider and the manager of the IRA account, but I think if my 401K was held elsewhere, they still would have understood what I was talking about.

I know that people who do such contributions are in the minority, mega-backdoor Roth IRA contributions have been talked about so much in the financial press, I would expect Vanguard customer service reps to know the mechanics of this by now and how to receive the funds.


I don't know about Fidelity as my Vanguard 401k is from a previous employer switching from Fidelity to Vanguard and back then I had never a need to call for anything. At Vanguard, the 401k reps are a different team than the other reps. I would expect those reps to be familiar with it.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by cherijoh » Sat Mar 11, 2017 9:47 am

Spirit Rider wrote:
AdamP wrote:Also, I would highly highly recommend that you invest any after-tax contributions while in your 401k in a money market or bond fund so you don't have to deal with the gains.

I have never understood this recommendation. Since when is it a good idea to avoid gains because you might have to pay taxes on those gains. I can see if it is a small number of days as in a backdoor Roth. Otherwise it makes no sense at all.


Some people may be making multiple rollovers per year out of the after-tax sub-account. In which case the time period may not be that long.

Also, they may already have a significant allocation to bonds in their 401k. (I imagine that many people who are able to use the mega backdoor Roth option are older and have a more conservative allocation). If they can tailor the AA to the sub-account, it might make sense to make the AA in the after-tax subaccount more conservative, while keeping the overall AA at their target AA. Of course, I'm not sure plans would allow this - my 401k doesn't allow after tax contributions. If they have to use the same AA across all accounts, then your logic is absolutely correct. But it wouldn't be the first time someone let the tax tail wag the investment dog. :oops:

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Re: Vanguard doesn't understand Mega-Backdoor

Post by AdamP » Sat Mar 11, 2017 11:03 am

Spirit Rider wrote:
AdamP wrote:Also, I would highly highly recommend that you invest any after-tax contributions while in your 401k in a money market or bond fund so you don't have to deal with the gains.

I have never understood this recommendation. Since when is it a good idea to avoid gains because you might have to pay taxes on those gains. I can see if it is a small number of days as in a backdoor Roth. Otherwise it makes no sense at all.


It makes no sense to you to avoid paying a tax you don't have to? I think too many contributors on here make assumptions about everyone else's options based on their own limited experience. I clearly explained that I had the option of unlimited withdrawals, so my advice was also tailored to those who might have similar plans.

cherijoh wrote: If they can tailor the AA to the sub-account, it might make sense to make the AA in the after-tax subaccount more conservative, while keeping the overall AA at their target AA.


There is obviously some confusion about what I was doing, so I'll explain for those that might have similar plans (although I did explain this in another thread): First, none of my 401k plans have allowed sub-account differences in how contributions are invested coming in -although, all of them allowed investment exchanges on an aggregate (across all tax types). So my technique to avoid any gains on the after-tax amounts was quite simple: set the 401k to invest all incoming money into a money market fund. A day or week after the contributions hit the account (both pre and post hit the same day), request the withdrawal of the after-tax amounts. And after those amounts have left my account, exchange all of the remaining money market in the employer contributions (which are always pre-tax) for the proper AA. I literally had to sign in for 5 minutes, 4 times per month. I avoided all gains, and I was able to keep my AA across all of my accounts consistent.

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Re: Vanguard doesn't understand Mega-Backdoor

Post by Spirit Rider » Sat Mar 11, 2017 11:57 am

AdamP wrote:It makes no sense to you to avoid paying a tax you don't have to? I think too many contributors on here make assumptions about everyone else's options based on their own limited experience. I clearly explained that I had the option of unlimited withdrawals, so my advice was also tailored to those who might have similar plans.

Not when it means giving up gains to avoid taxes on those gains. It is totally counter productive to arbitrarily forsake gains to avoid taxation for its own sake, unless...

cherijoh wrote: If they can tailor the AA to the sub-account, it might make sense to make the AA in the after-tax sub account more conservative, while keeping the overall AA at their target AA.

... This I agree with, because you are not really avoiding the gains are you. but just how many people who hear the basic advice actually do this.

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