Yet another mega backdoor rollover question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
mopman78
Posts: 13
Joined: Fri Jan 06, 2017 2:46 pm

Yet another mega backdoor rollover question

Postby mopman78 » Mon Mar 20, 2017 11:08 am

I actually have a few questions on the specifics of the mega backdoor roth conversion. I've read many many posts, here and elsewhere on the topic and still have some nagging concerns that may be due to confusion resulting from sensory overload.

I am currently above the income limits for any IRA contributions. However, my 401k allows me to make after-tax contributions and in-service withdrawals so my plan is to use the mega backdoor conversion strategy. I have been consistently maxing out my pre-tax contributions for a while and will start making after-tax contributions this year. My pre-tax 401k balance is currently ~$65k. My 2017 pre-tax contributions will be $18k plus $7.75k match. My post-tax contributions will be $15k. At the end of the year my 401k should have the following balances: $90,750 pre-tax, $15k post-tax.

So here are my questions.

1-If i convert the post-tax portion to a Roth, do i have to convert the pre-tax portion to a tIRA as well?
2-Are there any rollover limits for that pre-tax version? My confusion comes from the $53k limit. Since my pre-tax balance is well over that, does it only mean i can convert a portion of the pre-tax amount?

I'm excited to take advantage of this option on my plan but I want to make sure I'm thinking about it correctly. Any help would be appreciated.

Oreamnos
Posts: 14
Joined: Tue Jan 07, 2014 1:27 pm

Re: Yet another mega backdoor rollover question

Postby Oreamnos » Mon Mar 20, 2017 11:29 am

My situation is essentially similar to yours. When I learned about the ability to do an in-service distribution of my after-tax contributions to a Roth, I pounced on it. Just took a quick call to Fidelity (our 401k admin). They moved over $200K of multiple years' worth of after-tax contributions in one shot, and then created a separate "rollover" Traditional IRA for basically the earnings associated with those after-tax contributions.

So for your specific questions:

1) No. But you do have to convert the after-tax-associated earnings.
2) No. My initial conversion resulted in a new $100+K tIRA.

mopman78
Posts: 13
Joined: Fri Jan 06, 2017 2:46 pm

Re: Yet another mega backdoor rollover question

Postby mopman78 » Mon Mar 20, 2017 11:32 am

Thanks Oreamnos. Hopefully my plan administrator will be equally helpful

ved
Posts: 582
Joined: Sat Jan 18, 2014 6:56 pm

Re: Yet another mega backdoor rollover question

Postby ved » Mon Mar 20, 2017 11:41 am

mopman78 wrote:So here are my questions.

1-If i convert the post-tax portion to a Roth, do i have to convert the pre-tax portion to a tIRA as well?


The after-tax sub-account within your 401k can be rolled over to Roth IRA or Roth 401k by itself, without impacting or impact from the pre-tax 401k sub-account. However, any earnings in the after-tax sub-account from the time you make your contribution to the time you rollover is taxable (at ordinary income levels). You will have the option to either roll those earnings also into the Roth, and pay taxes on it, or, you can rollover the earnings to a traditional IRA or the pre-tax 401k sub-account.
If the earnings are minimal (which would be if you do this after-tax rollover regularly), I would suggest just roll the earnings also into the Roth, and just pay taxes on that minimal amount
You will get a 1099 R for this rollover (you will get just one 1099R for the year, regardless of the number of times you rollover the after-tax)

mopman78 wrote:2-Are there any rollover limits for that pre-tax version? My confusion comes from the $53k limit. Since my pre-tax balance is well over that, does it only mean i can convert a portion of the pre-tax amount?

The $53k limit (actually it's $54k for 2017) is the max contribution that can be made into your 401k - this includes your contributions (18k), any company match, and any contributions to after-tax.
This $54k limit is not related to what you rollover.

mopman78
Posts: 13
Joined: Fri Jan 06, 2017 2:46 pm

Re: Yet another mega backdoor rollover question

Postby mopman78 » Mon Mar 20, 2017 11:43 am

Awesome. Thanks for the clarification

Alan S.
Posts: 6739
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Yet another mega backdoor rollover question

Postby Alan S. » Mon Mar 20, 2017 12:10 pm

The after tax sub account can generally utilize a split rollover per Notice 2014-54 in which the contributions go to the Roth IRA and any earnings to your TIRA.

Now that some plans want to retain 401k assets and IRRs are becoming more commonplace, I wonder how many plans offer the option of using Notice 2014-54 to split the after tax sub account balance between the Roth and the pre tax account (or between Roth 401k and TIRA). I suspect that these are very rare at this time. This would probably result in an additional complication to plan accounting, that is a category of the pre tax account that can be distributed upon request, when other portions may not be eligible for distribution while still employed and under 59.5.

So, who can verify that their plan would allow this?

pyld76
Posts: 130
Joined: Thu Feb 09, 2012 4:15 pm

Re: Yet another mega backdoor rollover question

Postby pyld76 » Mon Mar 20, 2017 8:40 pm

Alan S. wrote:The after tax sub account can generally utilize a split rollover per Notice 2014-54 in which the contributions go to the Roth IRA and any earnings to your TIRA.

Now that some plans want to retain 401k assets and IRRs are becoming more commonplace, I wonder how many plans offer the option of using Notice 2014-54 to split the after tax sub account balance between the Roth and the pre tax account (or between Roth 401k and TIRA). I suspect that these are very rare at this time. This would probably result in an additional complication to plan accounting, that is a category of the pre tax account that can be distributed upon request, when other portions may not be eligible for distribution while still employed and under 59.5.

So, who can verify that their plan would allow this?


Are you speaking of rolling the earnings from the after-tax account (on which tax is due) back into the pre-tax 401k? Or did I parse your meaning incorrectly?

My plan will split them and cut you a check to your tIRA for the pre-tax amounts and the post-tax amounts to an rIRA. I'll bet Fido (my plan admin) would happily open a rollover tIRA and allow me to immediately roll that back into the 401k (the 401k accepts inbound rollovers from t-IRAs while one is still employed).

Alan S.
Posts: 6739
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Yet another mega backdoor rollover question

Postby Alan S. » Mon Mar 20, 2017 10:32 pm

Yes, I was asking about earnings in the after tax sub account being rolled into the pre tax account.

And if that were not allowed when doing an IRR, if those earnings could be rolled into a TIRA. An increasing number of accounts only allow IRRs, not rollovers to Roth IRAs, but it is not clear what the options may be for the earnings in the sub account. In most cases the earnings are too small to matter, but for those just discovering the distributions options, the initial balance might have a large amount of earnings.

pyld76
Posts: 130
Joined: Thu Feb 09, 2012 4:15 pm

Re: Yet another mega backdoor rollover question

Postby pyld76 » Mon Mar 20, 2017 11:40 pm

So, my Megacorp 401k has an after tax component, but no Roth component.

Based on my reading of my plan's docs, even if they won't take a direct rollover into the pre-tax IRA of post-tax subaccount earnings, I'll bet the mechanics of actually doing it (over to a tIRA, back into the 401k) might be achieved in 2 phone calls over 2 days with Fido (in my case). I agree with you that for folks who have large earnings volume sitting in the post-tax sub account, it's a useful thing to know.

I may try it this year, at the risk of extra paperwork at tax time. I usually just pay the small amount of tax due and move it all into my rIRA.....


Return to “Investing - Help with Personal Investments”