First time Mega Backdoor

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
katzmandu
Posts: 139
Joined: Tue Nov 26, 2013 8:39 am

First time Mega Backdoor

Post by katzmandu » Wed Oct 25, 2017 11:36 am

Glad my employer offers this as an option at MegaCorp

Curious as to the how this is executed. I'm fairly certain I have 2 of the steps completed, but just trying to see what else I have to do or if Im all set:

1) Change my spillover elections to go past the 18k limit - Done
2) Change the After Tax option to 100% conversion to ROTH - Done

Presently (per pay period), I have only the pre-tax % filled in. After tax is set to 0%. How does this play out once you hit the 18k max? Since you already elected to go past 18k in the spillover option, does it simply take the % you specified under pre-tax and use the same % on an after-tax basis, or do you need to set pre-tax to 0% and then make the % change for after-tax for the next pay period until years end?

First time doing this so appreciate the sage wisdom of one who'd walked this path before me.

Grt2bOutdoors
Posts: 19322
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: First time Mega Backdoor

Post by Grt2bOutdoors » Wed Oct 25, 2017 12:03 pm

Generally, that is how a spillover election works. Max out pre-tax, then spillover election permits the same level of withdrawal percentage but on an after-tax basis. Make sure your employer permits in-service distributions of after tax contributions. Not all plans permit it, they permit the spillover but not the after-tax in-service distribution of your contributions into a direct rollover to your ROTH IRA, thereby making those after tax contributions similar to a non-deductible Traditional IRA.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

katzmandu
Posts: 139
Joined: Tue Nov 26, 2013 8:39 am

Re: First time Mega Backdoor

Post by katzmandu » Wed Oct 25, 2017 12:28 pm

Grt2bOutdoors wrote:
Wed Oct 25, 2017 12:03 pm
Generally, that is how a spillover election works. Max out pre-tax, then spillover election permits the same level of withdrawal percentage but on an after-tax basis. Make sure your employer permits in-service distributions of after tax contributions. Not all plans permit it, they permit the spillover but not the after-tax in-service distribution of your contributions into a direct rollover to your ROTH IRA, thereby making those after tax contributions similar to a non-deductible Traditional IRA.
If you want to laugh, I confirmed all the options you mentioned with the chairman of our pension investment committee. I'd say that's as solid a lock on info for ones company as one might get :)

Spirit Rider
Posts: 8905
Joined: Fri Mar 02, 2007 2:39 pm

Re: First time Mega Backdoor

Post by Spirit Rider » Wed Oct 25, 2017 12:37 pm

katzmandu wrote:
Wed Oct 25, 2017 11:36 am
1) Change my spillover elections to go past the 18k limit - Done
2) Change the After Tax option to 100% conversion to ROTH - Done
  1. You may want to make this election so you can specify your contribution percentage to the minimum necessary to reach the employee deferral limit.

    Just be aware that if your plan does not "true up" the employer match and does not match after-tax contributions, you may need to adjust this to ensure you make the minimum deferral to receive the match for all pay periods.

    For this reason and to knowingly specify your after-tax contributions, I would separately use the after-tax percentage to make the after-tax contributions.
  2. This option may be specifying an In-plan Roth Rollover (IRR). This likely automatically rolls over the after-tax contribution to your Roth 401k account. There are advantages to this in that it minimizes/eliminates any taxable earnings.

    However, if as Grt2bOutdoors suggested, if you plan supports in-service rollovers, then you can do the true Mega Backdoor Roth and rollover the after-tax contributions to a Roth IRA. Any pre-tax earnings can either be converted to that same Roth IRA as a taxable rollover or to a traditional IRA in a tax-free rollover.
Last edited by Spirit Rider on Wed Oct 25, 2017 12:38 pm, edited 2 times in total.

barnaclebob
Posts: 3040
Joined: Thu Aug 09, 2012 10:54 am

Re: First time Mega Backdoor

Post by barnaclebob » Wed Oct 25, 2017 12:38 pm

katzmandu wrote:
Wed Oct 25, 2017 12:28 pm
Grt2bOutdoors wrote:
Wed Oct 25, 2017 12:03 pm
Generally, that is how a spillover election works. Max out pre-tax, then spillover election permits the same level of withdrawal percentage but on an after-tax basis. Make sure your employer permits in-service distributions of after tax contributions. Not all plans permit it, they permit the spillover but not the after-tax in-service distribution of your contributions into a direct rollover to your ROTH IRA, thereby making those after tax contributions similar to a non-deductible Traditional IRA.
If you want to laugh, I confirmed all the options you mentioned with the chairman of our pension investment committee. I'd say that's as solid a lock on info for ones company as one might get :)
Don't take anyones' word at any company about specific options or procedures within a 401k plan unless they back it up with a reference to the plan documents. There are too many people that have no idea how the plans work but like to talk like they are an authority.

At my megacorp once you fill up pretax withdrawals it automatically starts taking you same% and puts them in post tax along with withholding more from my paycheck. We get the employer match on pretax and post tax deductions but I think would lose it if I stopped contributing after filling the pretax.

katzmandu
Posts: 139
Joined: Tue Nov 26, 2013 8:39 am

Re: First time Mega Backdoor

Post by katzmandu » Wed Oct 25, 2017 12:48 pm

Spirit Rider wrote:
Wed Oct 25, 2017 12:37 pm
katzmandu wrote:
Wed Oct 25, 2017 11:36 am
1) Change my spillover elections to go past the 18k limit - Done
2) Change the After Tax option to 100% conversion to ROTH - Done
  1. You may want to make this election so you can specify your contribution percentage to the minimum necessary to reach the employee deferral limit.

    Just be aware that if your plan does not "true up" the employer match and does not match after-tax contributions, you may need to adjust this to ensure you make the minimum deferral to receive the match for all pay periods.

    For this reason and to knowingly specify your after-tax contributions, I would separately use the after-tax percentage to make the after-tax contributions.
  2. This option may be specifying an In-plan Roth Rollover (IRR). This likely automatically rolls over the after-tax contribution to your Roth 401k account. There are advantages to this in that it minimizes/eliminates any taxable earnings.

    However, if as Grt2bOutdoors suggested, if you plan supports in-service rollovers, then you can do the true Mega Backdoor Roth and rollover the after-tax contributions to a Roth IRA. Any pre-tax earnings can either be converted to that same Roth IRA as a taxable rollover or to a traditional IRA in a tax-free rollover.
1) My % is high enough I'll hit it after mid Nov or end of Nov paycheck. I believed they are tracked in the plan as 'after tax ROTH' so you don't specifically have to roll them over to your ROTH IRA, unless you want to, I suppose.

2) I get a set amount per pay period regardless if I put anything or not, so no wall will be hit and there is no true-up needed or applicable.

katzmandu
Posts: 139
Joined: Tue Nov 26, 2013 8:39 am

Re: First time Mega Backdoor

Post by katzmandu » Wed Oct 25, 2017 12:49 pm

barnaclebob wrote:
Wed Oct 25, 2017 12:38 pm
katzmandu wrote:
Wed Oct 25, 2017 12:28 pm
Grt2bOutdoors wrote:
Wed Oct 25, 2017 12:03 pm
Generally, that is how a spillover election works. Max out pre-tax, then spillover election permits the same level of withdrawal percentage but on an after-tax basis. Make sure your employer permits in-service distributions of after tax contributions. Not all plans permit it, they permit the spillover but not the after-tax in-service distribution of your contributions into a direct rollover to your ROTH IRA, thereby making those after tax contributions similar to a non-deductible Traditional IRA.
If you want to laugh, I confirmed all the options you mentioned with the chairman of our pension investment committee. I'd say that's as solid a lock on info for ones company as one might get :)
Don't take anyones' word at any company about specific options or procedures within a 401k plan unless they back it up with a reference to the plan documents. There are too many people that have no idea how the plans work but like to talk like they are an authority.

At my megacorp once you fill up pretax withdrawals it automatically starts taking you same% and puts them in post tax along with withholding more from my paycheck. We get the employer match on pretax and post tax deductions but I think would lose it if I stopped contributing after filling the pretax.
I'm not averse to having a discussion with Fidelity directly to confirm what I was told. What's 15 minutes to get it 100% right from the horses mouth? ":)

Spirit Rider
Posts: 8905
Joined: Fri Mar 02, 2007 2:39 pm

Re: First time Mega Backdoor

Post by Spirit Rider » Wed Oct 25, 2017 1:08 pm

katzmandu wrote:
Wed Oct 25, 2017 12:48 pm
1) My % is high enough I'll hit it after mid Nov or end of Nov paycheck. I believed they are tracked in the plan as 'after tax ROTH' so you don't specifically have to roll them over to your ROTH IRA, unless you want to, I suppose.
2) I get a set amount per pay period regardless if I put anything or not, so no wall will be hit and there is no true-up needed or applicable.
What you are describing sounds like an IRR, which as I described previously, rolls the employee after-tax contributions into your Roth 401k. There are advantages to rolling this over to a Roth IRA if your company allows in-service rollovers,

If you do not get an employer match, but rather a non-elective employer contribution, it does not matter when you stop your employee deferrals.

User avatar
cockersx3
Posts: 173
Joined: Sun Apr 17, 2016 3:55 pm

Re: First time Mega Backdoor

Post by cockersx3 » Wed Oct 25, 2017 1:35 pm

katzmandu wrote:
Wed Oct 25, 2017 11:36 am
Glad my employer offers this as an option at MegaCorp

Curious as to the how this is executed. I'm fairly certain I have 2 of the steps completed, but just trying to see what else I have to do or if Im all set:

1) Change my spillover elections to go past the 18k limit - Done
2) Change the After Tax option to 100% conversion to ROTH - Done

Presently (per pay period), I have only the pre-tax % filled in. After tax is set to 0%. How does this play out once you hit the 18k max? Since you already elected to go past 18k in the spillover option, does it simply take the % you specified under pre-tax and use the same % on an after-tax basis, or do you need to set pre-tax to 0% and then make the % change for after-tax for the next pay period until years end?

First time doing this so appreciate the sage wisdom of one who'd walked this path before me.
Not sure what you mean by step 2. For me, the spillover election just takes whatever my contribution % was for pre-tax and instead takes it out post-tax. It all still goes into my 401K account. My employer matching contributions still go into my 401k account as pre-tax (ie not taxable income to me).

One other prep step is to make sure you don't have any IRA's in your name, and (if you do) roll them over to your 401k account if allowed by your plan. If you don't, the "pro rata" rule will likely make most of the eventual Roth rollover taxable. Corrected - this only applies to "regular" backdoor Roth's, not the "mega backdoor" roth!

Here's a good blog post that explains the process well - I used this to do mine the first time:

http://www.madfientist.com/after-tax-contributions/

Hope this helps!
Last edited by cockersx3 on Thu Oct 26, 2017 7:08 am, edited 1 time in total.

Spirit Rider
Posts: 8905
Joined: Fri Mar 02, 2007 2:39 pm

Re: First time Mega Backdoor

Post by Spirit Rider » Wed Oct 25, 2017 2:34 pm

As I said earlier, step 2 is highly likely referring to an In-plan Roth Rollover (IRR). An IRR simply rolls the after-tax contributions to your Roth 401k account

CppCoder
Posts: 841
Joined: Sat Jan 23, 2016 9:16 pm

Re: First time Mega Backdoor

Post by CppCoder » Wed Oct 25, 2017 3:06 pm

cockersx3 wrote:
Wed Oct 25, 2017 1:35 pm
One other prep step is to make sure you don't have any IRA's in your name, and (if you do) roll them over to your 401k account if allowed by your plan. If you don't, the "pro rata" rule will likely make most of the eventual Roth rollover taxable.
Existing traditional IRA accounts have nothing to do with a mega backdoor Roth IRA. They are important for doing a "regular" backdoor Roth IRA.

User avatar
cockersx3
Posts: 173
Joined: Sun Apr 17, 2016 3:55 pm

Re: First time Mega Backdoor

Post by cockersx3 » Thu Oct 26, 2017 7:10 am

CppCoder wrote:
Wed Oct 25, 2017 3:06 pm
cockersx3 wrote:
Wed Oct 25, 2017 1:35 pm
One other prep step is to make sure you don't have any IRA's in your name, and (if you do) roll them over to your 401k account if allowed by your plan. If you don't, the "pro rata" rule will likely make most of the eventual Roth rollover taxable.
Existing traditional IRA accounts have nothing to do with a mega backdoor Roth IRA. They are important for doing a "regular" backdoor Roth IRA.
Yup - sorry about that! Just corrected my post.

To the OP - don't stress out too much about it, the process for a Mega-Backdoor Roth is very easy provided you can do after-tax contributions and in-service rollovers. Your 401(k) custodian should be able to walk you though it once you call them.

katzmandu
Posts: 139
Joined: Tue Nov 26, 2013 8:39 am

Re: First time Mega Backdoor

Post by katzmandu » Thu Oct 26, 2017 7:44 am

cockersx3 wrote:
Thu Oct 26, 2017 7:10 am
CppCoder wrote:
Wed Oct 25, 2017 3:06 pm
cockersx3 wrote:
Wed Oct 25, 2017 1:35 pm
One other prep step is to make sure you don't have any IRA's in your name, and (if you do) roll them over to your 401k account if allowed by your plan. If you don't, the "pro rata" rule will likely make most of the eventual Roth rollover taxable.
Existing traditional IRA accounts have nothing to do with a mega backdoor Roth IRA. They are important for doing a "regular" backdoor Roth IRA.
Yup - sorry about that! Just corrected my post.

To the OP - don't stress out too much about it, the process for a Mega-Backdoor Roth is very easy provided you can do after-tax contributions and in-service rollovers. Your 401(k) custodian should be able to walk you though it once you call them.
I was told that once you set the Quarterly ROTH conversion option to 'Transfer 100% of after-tax balance', these after tax monies in my 401k would be converted and tracked separately so you wouldn't need to transfer to a ROTH IRA (unless you really wanted to, I suppose). Considering that many of my in plan fund choices tend to center around the institutional plus funds, probably a good choice to leave it in there if I can.

This option would presumably be an issue if one had vast sums of previously saved after tax monies that had never been converted, incurring a large tax bill, but for a first timer for a month or 2, I assume the gains will likely result in negligible amounts of tax.

CppCoder
Posts: 841
Joined: Sat Jan 23, 2016 9:16 pm

Re: First time Mega Backdoor

Post by CppCoder » Thu Oct 26, 2017 12:15 pm

katzmandu wrote:
Thu Oct 26, 2017 7:44 am
I was told that once you set the Quarterly ROTH conversion option to 'Transfer 100% of after-tax balance', these after tax monies in my 401k would be converted and tracked separately so you wouldn't need to transfer to a ROTH IRA (unless you really wanted to, I suppose). Considering that many of my in plan fund choices tend to center around the institutional plus funds, probably a good choice to leave it in there if I can.

This option would presumably be an issue if one had vast sums of previously saved after tax monies that had never been converted, incurring a large tax bill, but for a first timer for a month or 2, I assume the gains will likely result in negligible amounts of tax.
Yes. Many like to roll out of the 401k for different (better?) investment options. I do an in plan Roth conversion and keep the money in my 401k versus rolling to a Roth IRA because my 401k has better (cheaper) options for similar index funds. Sounds like yours might, as well. Keep in mind that you may eventually want to roll your Roth 401k to a Roth IRA to avoid RMDs. This can be handled later after you've retired.

katzmandu
Posts: 139
Joined: Tue Nov 26, 2013 8:39 am

Re: First time Mega Backdoor

Post by katzmandu » Thu Oct 26, 2017 12:27 pm

CppCoder wrote:
Thu Oct 26, 2017 12:15 pm
katzmandu wrote:
Thu Oct 26, 2017 7:44 am
I was told that once you set the Quarterly ROTH conversion option to 'Transfer 100% of after-tax balance', these after tax monies in my 401k would be converted and tracked separately so you wouldn't need to transfer to a ROTH IRA (unless you really wanted to, I suppose). Considering that many of my in plan fund choices tend to center around the institutional plus funds, probably a good choice to leave it in there if I can.

This option would presumably be an issue if one had vast sums of previously saved after tax monies that had never been converted, incurring a large tax bill, but for a first timer for a month or 2, I assume the gains will likely result in negligible amounts of tax.
Yes. Many like to roll out of the 401k for different (better?) investment options. I do an in plan Roth conversion and keep the money in my 401k versus rolling to a Roth IRA because my 401k has better (cheaper) options for similar index funds. Sounds like yours might, as well. Keep in mind that you may eventually want to roll your Roth 401k to a Roth IRA to avoid RMDs. This can be handled later after you've retired.
Thanks for the heads up...didn't know/realize that the ROTH portion of the 401k is subject to RMDs. May as well let it grow for the time being at cheaper ER and worry about that later later. Its not much, but why give away any more than needed?

Spirit Rider
Posts: 8905
Joined: Fri Mar 02, 2007 2:39 pm

Re: First time Mega Backdoor

Post by Spirit Rider » Thu Oct 26, 2017 3:08 pm

One additional reason for doing an IRR.

Assets contained in a 401k that covers non-owner employees is fully protected by ERISA anti-alienation protections against creditors. IRAs only receive federal bankruptcy protection and their creditor protection is subject to state law. About 20% of states do not provide full creditor protection to Roth IRAs.

Just remember to roll it over to a Roth IRA in the year before you take your first RMD. In a year you take an RMD the first dollars must come an RMD.

djscal
Posts: 33
Joined: Thu Feb 02, 2017 2:42 pm

Re: First time Mega Backdoor

Post by djscal » Thu Oct 26, 2017 4:06 pm

In my 401k plan if I converted my after tax funds to roth I would not be able to withdraw it while an active employee.

Make sure you can take in service withdrawals of roth 401k funds. I can only do an in service withdrawal of after tax funds - which as you know are very different buckets. In my plan if they are converted to the roth bucket in the 401k - they are stuck there.

Read your plan docs / prospectus - don't take any one's verbal word for it.

Post Reply