Separate Roth IRA accounts for the backdoor and the mega backdoor?

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UncleLeo
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Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by UncleLeo » Wed Oct 18, 2017 4:34 pm

I have executed the roth IRA backdoor few months ago, and I'm about to do the first conversion of the Mega backdoor. This is the first year I've executed on any of those. both are with Vangaurd.

Is it a good practice to keep 2 separate roth IRA accounts, one for the regular backdoor and one for the mega?
If so, can I use the same accounts for the following years? Or should I open new accounts each year? (I'd rather avoid that)

Thanks :beer

barnaclebob
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by barnaclebob » Wed Oct 18, 2017 5:01 pm

No reason for two separate accounts, once the money is in the roth its all the same.

retiredjg
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by retiredjg » Wed Oct 18, 2017 5:15 pm

I think some people might suggest using separate accounts because they might want to re-characterize the back door if the market goes down. If that is of interest to you, having them in separate accounts just makes it a little easier. But it can be accomplished even if you don't keep them separate.

Not something you asked, but it is important that you keep meticulous running records (personal notes, 10-99s, other forms) of how every penny gets into your Roth IRA. Keep these records until your middle 60's. You will need this information if you ever need to remove any money before you are 59.5 years old.

Roth withdrawal order and rules are complex. Having the information makes it do-able.

Small Law Survivor
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by Small Law Survivor » Wed Oct 18, 2017 6:02 pm

What is the difference between a "backdoor" and a "mega backdoor," please?

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Duckie
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by Duckie » Wed Oct 18, 2017 6:26 pm

Small Law Survivor wrote:What is the difference between a "backdoor" and a "mega backdoor," please?
The backdoor method involves making non-deductible contributions to a Traditional IRA and quickly converting them to a Roth IRA. The mega backdoor method involves making after-tax contributions (the same as non-deductible) to a work plan like a 401k and either rolling/converting them to a Roth IRA or doing an in-plan conversion to a Roth 401k.

The mega backdoor method can shelter a lot more than the backdoor method because IRAs have a $5500/$6500 contribution limit and work plans can have up to a $54,000/$60,000 contribution limit. The $54K limit is shared among the $18K employEE contributions (either pre-tax or Roth), any employER matching or profit sharing, and any after-tax amounts.

Longdog
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by Longdog » Wed Oct 18, 2017 6:30 pm

retiredjg wrote:
Wed Oct 18, 2017 5:15 pm
I think some people might suggest using separate accounts because they might want to re-characterize the back door if the market goes down.
I can see how that could possibly be beneficial for a Roth conversion from a pre-tax IRA since you'd have taxes due on that conversion, but I'm curious why that could benefit someone for a back door Roth contribution? What would the sequence of events be that would make that beneficial?
Steve

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Thrifty Femme
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by Thrifty Femme » Wed Oct 18, 2017 9:39 pm

Small Law Survivor wrote:
Wed Oct 18, 2017 6:02 pm
What is the difference between a "backdoor" and a "mega backdoor," please?
In addition to what Duckie said, the mega backdoor roth requires a 401k plan that allows non-roth after-tax contributions and in-service withdrawals, preferably without restrictions.

retiredjg
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by retiredjg » Thu Oct 19, 2017 5:37 am

Longdog wrote:
Wed Oct 18, 2017 6:30 pm
retiredjg wrote:
Wed Oct 18, 2017 5:15 pm
I think some people might suggest using separate accounts because they might want to re-characterize the back door if the market goes down.
I can see how that could possibly be beneficial for a Roth conversion from a pre-tax IRA since you'd have taxes due on that conversion, but I'm curious why that could benefit someone for a back door Roth contribution? What would the sequence of events be that would make that beneficial?
You're right Longdog. Yet, I'm pretty sure that some posters think there is a benefit - seems like Celia mentions this from time to time. Maybe it has nothing to do with the market going down, but is related to something else.

grp2c
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by grp2c » Thu Oct 19, 2017 11:41 am

I live in CA and I plan to use separate roth ira accounts for the backdoor vs the mega backdoor due to differences in creditor protection in CA. Funds in an IRA that are traceable to qualified plans have better creditor protection than regular IRA assets.

https://udirectira.com/592-2rollover/

Spirit Rider
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by Spirit Rider » Thu Oct 19, 2017 6:30 pm

I would add a reason for the Mega Backdoor Roth. You calculate your after-tax contributions to the penny and then the employer makes a one off contribution, refunds forfeitures, makes payments to correct plan errors, etc.... The employer should catch these, but many will not because they are mandatory contributions.

You now have an excess contribution due to exceeding the annual limit. If you already rolled over the excess contribution, it must be clawed back from the Roth IRA.

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UncleLeo
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by UncleLeo » Sun Oct 22, 2017 1:42 pm

Thanks for the answers! I think I will have 2 separate IRA accounts as it seems that there are some (minor) advantages.
I'm getting ready to do my first Rollover from the 401K after-tax to the IRA account, but I'm having trouble seeing my current 401K after-tax balance on the Vanguard website. I can only see my after-tax (and pre-tax) contributions, but that doesn't include gains or losses.
Is there a way I can see my current after-tax and pre-tax balance using their website?

Alan S.
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Re: Separate Roth IRA accounts for the backdoor and the mega backdoor?

Post by Alan S. » Sun Oct 22, 2017 4:58 pm

grp2c wrote:
Thu Oct 19, 2017 11:41 am
I live in CA and I plan to use separate roth ira accounts for the backdoor vs the mega backdoor due to differences in creditor protection in CA. Funds in an IRA that are traceable to qualified plans have better creditor protection than regular IRA assets.

https://udirectira.com/592-2rollover/
The McMullen case is a positive development, but any sense of security should be tempered when large amounts are involved. Here is what one CA law firm stated with respect to the McMullen Appeals court case:
The McMullen decision is not a California Supreme Court decision. Other courts in California are free to follow the reasoning of the Mooney court, until the California Supreme Court or the California legislature lays this issue to rest. Accordingly, California investors should recognize that IRAs remain a somewhat risky destination for 401k funds and IRAs funded with non rollover contributions are unquestionably subject to the “extent necessary” test. Whenever possible, 401k funds should be rolled back into another 401k plan to avoid the risk posed by California’s defective statutory system. ♣ ______________________________________

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