Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
TheBogleWay
Posts: 180
Joined: Mon Dec 05, 2016 9:04 pm

Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by TheBogleWay » Fri Dec 15, 2017 12:33 am

Hey All,

2 part thread. Part 1, is there anybody out there who would make a case NOT to use a mega-backdoor roth? This is assuming that you've maxed your normal 401k and normal Roth IRA.

Part 2:

Can somebody explain it to me as if I were a 10 year old? I did read multiple articles before making this thread. Here's my very basic understanding of it and some questions:

  • 1 - It's done through your employer, sort of like your 401k but instead it's after-tax money
    2- Once it's contributed, you can transfer it to a traditional IRA. If #1 is right, my employer uses some other non-Vanguard brokerage firm.. could I set it up, contribute my after tax money to it, and then transfer it to my normal/personal Vanguard account under a TIRA? - from what I think I'm reading, your employer has to allow "non hardship withdrawals" which basically means you can transfer it to your TIRA... but does that mean I can move it from THEIR brokerage firm to my personal which is at Vanguard?
    3 - What is the tax paperwork/additional effort like? I usually file myself to save money. I just finally learned how to comfortably do the backdoor Roth without a headache, simply fund (with after tax money), transfer to Roth, and then file an 8606. How difficult is the paperwork on this mega backdoor,
    could I do it easily with TurboTax?
    4 - Since you fund it with after tax money, I'm assuming it's the gains that aren't taxed when you withdraw? - Edit, ignore this, my question 11 below answers that.. I think.
    5 - You can only do this once you've totally maxed your personal limit on your 401k through employer, right?
    6 - Can most all major employers support this mega-backdoor thing? I'm guessing I just call HR and ask if they know about it? - according to articles I'm reading now, I just require an employer that allows after-tax 401k contributions and it sounds fairly common. I'd bet mine does we're not too small.
    7 - Can I do a normal backdoor roth in addition to this mega-backdoor roth?
    8 - At risk of asking too vague/dumb of a question, how big is the impact of doing this/how good is it for your financial life?
    9 - This is a big one. It's December, I'll be making about $25k this month, if this really makes a big impact I'm tempted to squeeze it into December assuming it follows a calendar tax year but also worried about making my tax season too complicated and stressing me out. I may be overthinking it but should I squeeze in my December income to one of these? Or maybe like my personal IRA accounts it can be done up until April-ish?
    10 - Sounds like if you max out your 18k pre-tax contribution and your employer matched (for example) $6k, you'd have about $29k left that you could contribute after tax.
    11 - Another big question, one article I'm reading basically says that if you left the after-tax contribution in your 401k, it gets taxed as normal income which is higher and worse than the long term gains tax I could have if I invested it normally. However, the value of this is the ability to move it (using the non-hardship withdrawal) to your traditional IRA and gains in your traditional IRA aren't taxed, right? That's the value?
    12 - If my question above #11 is correct, then it's basically not worth it unless your employer lets you transfer out of it with that non-hardship withdrawal right?

Quick background cliff notes of me:
I'm a single normal employee in the US.
income above Roth IRA limits
I max my backdoor roth and 401k. Outside of that I just fund my normal taxable accounts with a lazy 3 fund portfolio.
Probably 20 years+ until retirement age for me.




Thanks in advance to you guys, I love this forum and recommend people here all the time. Incredibly smart and helpful group of people you are. I'll pass it on.

crumbone
Posts: 88
Joined: Thu Oct 12, 2017 11:50 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by crumbone » Fri Dec 15, 2017 1:53 am

There are some requirements for a Mega-Backdoor Roth that unfortunately most employers do not meet:
  • Employee accepts after-tax (not Roth!) 401k contributions (this greatly complicates plan administration and with the exception of some very large corporations, most employers don't offer it.)
  • Employer allows in-plan transfers (other names: in-service distributions, in-service Roth conversions, etc.) Again, only a minority of employers do this-- most plans require you to either separate from the employer, reach retirement age, or actually retire before a transfer is allowed.


If both of these criteria are met, you can contribute up to ($35k - employer contribution) in after-tax 401k contributions. The mechanics are simple-- you simply initiate an in-plan transfer of the after-tax money to your Roth IRA. Your employer's plan administrator is (at least in theory) responsible for the record-keeping.

Any earnings on the after-tax contributions that occur while the money was still in the 401k will need to be reported as income for tax purposes. The tax reporting is described well here: https://thefinancebuff.com/mega-backdoo ... botax.html

The first step is to talk to your plan administrator and/or HR and see if the necessary preconditions apply to you. They don't for most.

Topic Author
TheBogleWay
Posts: 180
Joined: Mon Dec 05, 2016 9:04 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by TheBogleWay » Fri Dec 15, 2017 2:09 am

^ shoot, the articles I read made it sound like it was fairly common.


However I'd still like to know on the off-chance my company allows it.

2cents2
Posts: 389
Joined: Sun Mar 02, 2014 11:31 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by 2cents2 » Fri Dec 15, 2017 8:21 am

crumbone wrote:
Fri Dec 15, 2017 1:53 am
There are some requirements for a Mega-Backdoor Roth that unfortunately most employers do not meet:
  • Employee accepts after-tax (not Roth!) 401k contributions (this greatly complicates plan administration and with the exception of some very large corporations, most employers don't offer it.)
  • Employer allows in-plan transfers (other names: in-service distributions, in-service Roth conversions, etc.) Again, only a minority of employers do this-- most plans require you to either separate from the employer, reach retirement age, or actually retire before a transfer is allowed.


If both of these criteria are met, you can contribute up to ($35k - employer contribution) in after-tax 401k contributions. The mechanics are simple-- you simply initiate an in-plan transfer of the after-tax money to your Roth IRA. Your employer's plan administrator is (at least in theory) responsible for the record-keeping.

Any earnings on the after-tax contributions that occur while the money was still in the 401k will need to be reported as income for tax purposes. The tax reporting is described well here: https://thefinancebuff.com/mega-backdoo ... botax.html

The first step is to talk to your plan administrator and/or HR and see if the necessary preconditions apply to you. They don't for most.
Small quibble--I believe the max from all sources (2017 limit) is 54k for under 50 and 60k for over 50 (assuming that 6k is contributed to catch up). The limit will be going up by 1k in 2018. Here is a link that has a handy chart: https://www.fool.com/retirement/2017/12 ... -2018.aspx

2cents2
Posts: 389
Joined: Sun Mar 02, 2014 11:31 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by 2cents2 » Fri Dec 15, 2017 8:49 am

TheBogleWay wrote:
Fri Dec 15, 2017 2:09 am

However I'd still like to know on the off-chance my company allows it.
DH just started working for a company that allows after tax contributions (and met the criteria outlined in crumbone's post). I also wondered about the steps needed to accomplish this.

Firstly, the contribution section has several categories (DH is over 50): 1. pretax, 2. Roth, 3. after-tax, 4. employee pre-tax catch-up and 5. employee Roth catch-up.
So, DH contributed to #3. after-tax.

(This is the step we are on now, because we are waiting until DH has a minimum 10k to transfer so he can invest in a lower ER index fund)

Next, you need a Roth IRA Account to which you transfer the after-tax contributions.
Then, you transfer your after-tax contributions to your Roth. DH's plan administrator requires a phone call to accomplish this step. We were told that gains could be put into the Roth account also (the gains would then be taxed). Or, the basis could be transferred into the Roth and the gains could be transferred into a traditional IRA--in which case you would need to have a traditional IRA, too.

Last step (optional) DH's 401K accepts roll ins so if the gains were split off into the traditional IRA, the traditional IRA money could be rolled back into to the 401k.

retiredjg
Posts: 38451
Joined: Thu Jan 10, 2008 12:56 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by retiredjg » Fri Dec 15, 2017 8:55 am

I'll also quibble some with crumbone's answer, but much of it is correct.
  • -your employer must allow after-tax contributions (not the same as Roth contributions) to the 401k

    -your employer must allow in-service (while working) non-hardship distributions from that after-tax account...OR...your employer must allow in-plan Roth rollovers (roll the after-tax account to Roth 401k)
If your plan does not offer both of these things, you cannot do it.

retiredjg
Posts: 38451
Joined: Thu Jan 10, 2008 12:56 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by retiredjg » Fri Dec 15, 2017 9:04 am

Some comments about several misunderstandings. I won't go into great detail though.


TheBogleWay wrote:
Fri Dec 15, 2017 12:33 am
Hey All,

2 part thread. Part 1, is there anybody out there who would make a case NOT to use a mega-backdoor roth? This is assuming that you've maxed your normal 401k and normal Roth IRA. I can't think of a reason not to do it.

Part 2:

Can somebody explain it to me as if I were a 10 year old? I did read multiple articles before making this thread. Here's my very basic understanding of it and some questions:

  • 1 - It's done through your employer, sort of like your 401k but instead it's after-tax money
    2- Once it's contributed, you can transfer it to a traditional IRA. In most cases, you could roll the money out to Roth IRA, not traditional IRA. If #1 is right, my employer uses some other non-Vanguard brokerage firm.. could I set it up, contribute my after tax money to it, and then transfer it to my normal/personal Vanguard account under a TIRA? - from what I think I'm reading, your employer has to allow "non hardship withdrawals" which basically means you can transfer it to your TIRA... but does that mean I can move it from THEIR brokerage firm to my personal which is at Vanguard? If allowed, you can roll your money anywhere you want.
    3 - What is the tax paperwork/additional effort like? I usually file myself to save money. I just finally learned how to comfortably do the backdoor Roth without a headache, simply fund (with after tax money), transfer to Roth, and then file an 8606. How difficult is the paperwork on this mega backdoor, could I do it easily with TurboTax? It is simple - handled with a 1099
    4 - Since you fund it with after tax money, I'm assuming it's the gains that aren't taxed when you withdraw? - Edit, ignore this, my question 11 below answers that.. I think.
    5 - You can only do this once you've totally maxed your personal limit on your 401k through employer, right? No, you do not have to put anything into your elective deferrals (the $18k)
    6 - Can most all major employers support this mega-backdoor thing? I'm guessing I just call HR and ask if they know about it? They will have no idea what mega back door is. Ask about after tax (but not Roth) contributions first. If the answer is yes, ask about non-hardship withdrawals.- according to articles I'm reading now, I just require an employer that allows after-tax 401k contributions and it sounds fairly common. I'd bet mine does we're not too small.
    7 - Can I do a normal backdoor roth in addition to this mega-backdoor roth? Yes
    8 - At risk of asking too vague/dumb of a question, how big is the impact of doing this/how good is it for your financial life?
    9 - This is a big one. It's December, I'll be making about $25k this month, if this really makes a big impact I'm tempted to squeeze it into December assuming it follows a calendar tax year but also worried about making my tax season too complicated and stressing me out. I may be overthinking it but should I squeeze in my December income to one of these? Or maybe like my personal IRA accounts it can be done up until April-ish? Even if your plan allows this, it is unlikely to happen by 12/31.
    10 - Sounds like if you max out your 18k pre-tax contribution and your employer matched (for example) $6k, you'd have about $29k left that you could contribute after tax.
    11 - Another big question, one article I'm reading basically says that if you left the after-tax contribution in your 401k, it gets taxed as normal income which is higher and worse than the long term gains tax I could have if I invested it normally. However, the value of this is the ability to move it (using the non-hardship withdrawal) to your traditional IRA and gains in your traditional IRA aren't taxed, right? That's the value? This is all messed up. If your plan allows you to do the mega back door, we can talk more about this later.
    12 - If my question above #11 is correct, then it's basically not worth it unless your employer lets you transfer out of it with that non-hardship withdrawal right?

2cents2
Posts: 389
Joined: Sun Mar 02, 2014 11:31 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by 2cents2 » Fri Dec 15, 2017 9:16 am

TheBogleWay wrote:
Fri Dec 15, 2017 12:33 am
2 part thread. Part 1, is there anybody out there who would make a case NOT to use a mega-backdoor roth? This is assuming that you've maxed your normal 401k and normal Roth IRA.
The only thing that I could come up with is-- I don't want to spend money put into the Roth (even though I am over 59.5 and have had my Roth for over 5 years) because I would rather the gains grow tax free. :oops: (I'm sure I will get over this obstacle in time).

Pigeye Brewster
Posts: 395
Joined: Thu Oct 05, 2017 7:33 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by Pigeye Brewster » Fri Dec 15, 2017 10:57 am

One issue I haven't seen mentioned in this thread involves highly compensated employees. After-tax contributions are subject to ACP testing, even if the 401k plan is a safe-harbor plan. So if your employer's plan allows for the mega-backdoor and you're an HCE, you might be limited depending on the after-tax amounts contributed by non-HCE participants.

crumbone
Posts: 88
Joined: Thu Oct 12, 2017 11:50 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by crumbone » Sat Dec 16, 2017 1:01 am

2cents2 wrote:
Fri Dec 15, 2017 8:21 am
crumbone wrote:
Fri Dec 15, 2017 1:53 am
There are some requirements for a Mega-Backdoor Roth that unfortunately most employers do not meet:
  • Employee accepts after-tax (not Roth!) 401k contributions (this greatly complicates plan administration and with the exception of some very large corporations, most employers don't offer it.)
  • Employer allows in-plan transfers (other names: in-service distributions, in-service Roth conversions, etc.) Again, only a minority of employers do this-- most plans require you to either separate from the employer, reach retirement age, or actually retire before a transfer is allowed.


If both of these criteria are met, you can contribute up to ($35k - employer contribution) in after-tax 401k contributions. The mechanics are simple-- you simply initiate an in-plan transfer of the after-tax money to your Roth IRA. Your employer's plan administrator is (at least in theory) responsible for the record-keeping.

Any earnings on the after-tax contributions that occur while the money was still in the 401k will need to be reported as income for tax purposes. The tax reporting is described well here: https://thefinancebuff.com/mega-backdoo ... botax.html

The first step is to talk to your plan administrator and/or HR and see if the necessary preconditions apply to you. They don't for most.
Small quibble--I believe the max from all sources (2017 limit) is 54k for under 50 and 60k for over 50 (assuming that 6k is contributed to catch up). The limit will be going up by 1k in 2018. Here is a link that has a handy chart: https://www.fool.com/retirement/2017/12 ... -2018.aspx
Your quibble is very much accepted. I should have clarified that my number of $35K minus employer contribution was for 2017, age<50, and presumed a maximal employee 401'k contribution ($18k for 2017.)

The 2018 (age<50) equivalents would be $18.5k max employee contribution and $54k for (employee pretax/Roth + employer + after-tax), meaning an after-tax limit of $35.5k minus employer for an employee maxing pretax/Roth contributions.

angler-39
Posts: 33
Joined: Tue Jun 16, 2015 10:49 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by angler-39 » Sat Dec 16, 2017 6:35 am

I would NOT 'make a case' for not contributing to a mega-backdoor roth if one is available. However, there are some reasons an individual may choose not to take advantage of it:
1) - most (all) of current savings is in qualified accounts; little to no non-retirement savings;
2) - requires access to these funds before age 59.5;
3) - desires to NOT pass on Roth assets and prefers taxable assets;
4) - although it goes without saying (but I'll say it anyway), the individual must have the funds to effect a mega-backdoor roth.

In the final analysis, there really is no downside to doing the mega-backdoor: due to ordering rules contributions can be withdrawn penalty-free (provided the five-year requirement is satisfied); you may utilize 72t withdrawals (although that doesn't seem a good idea!). Lastly, a roth IRA beneficiary can withdraw more than the RMDs so I don't see why someone would NOT want to pass on roth assets vs taxable.
Good luck! Hopefully your plan allows it!
George M.

trueson1
Posts: 108
Joined: Mon Mar 13, 2017 11:40 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by trueson1 » Sat Dec 16, 2017 9:58 am

Can't think of one if you company allows it, as others have indicated above. I only wish I had found out about it earlier. Have backdoored 30K in the past 2 years and it is easy to do.

Smilodon
Posts: 37
Joined: Thu Jan 22, 2015 6:42 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by Smilodon » Sat Dec 16, 2017 11:17 am

crumbone wrote:
Sat Dec 16, 2017 1:01 am
The 2018 (age<50) equivalents would be $18.5k max employee contribution and $54k for (employee pretax/Roth + employer + after-tax), meaning an after-tax limit of $35.5k minus employer for an employee maxing pretax/Roth contributions.
My mega corp's 401k seems to allow all after-tax (I am not confusing this with Roth) employee contributions. Not that I would do this (I fill up the employee pretax first), but in theory I could elect all of my contributions to be after-tax. So in this case the 2018 (age<50) mega Roth limit becomes $55k - employer match.

One thing that concerns me is the ACP test. I would hate to complete the rollover to my Roth IRA, and then find out mega corp failed the ACP test, requiring some of my after-tax contributions be refunded. What a mess that would be. Does anyone know what time of year a company must report and remedy any ACP test failures? I was thinking to hold off on the rollover (despite knowing that taxable earnings are accruing) until I am confident the ACP test passes, or at least the deadline has passed.

bada bing
Posts: 106
Joined: Fri Sep 09, 2016 10:45 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by bada bing » Sat Dec 16, 2017 12:47 pm

My employer's 401K plan is at Fidelity and allows the components to accomplish the
mega-backdoor Roth. I would guess that most plans that allow the mega-backdoor are
with one of the major custodians like Fidelity and Vanguard. I have found that my assigned
customer service rep is the best source of information and help for things like doing the
mega-backdoor. She is way more knowledgeable than anyone in my company HR department
with respect to the details of the retirement plans. I would suggest that the CSR at your
401K plan could be the best source for questions about your plans particulars. I got a lot
of dumb silences and incorrect answers in response to my questions to HR people about
the 401K plan details. The CSR at the custodian has a vested interest in getting more of
your money invested, your HR people do not.

The only drawback I can think of for the mega-backdoor Roth is the 5 year clock on access
to the contributions. I believe the 5 year clock is on each contribution individually. If you
know you won't need access to the money for 5 years, then there is no downside and a lot of
advantages.

retiredjg
Posts: 38451
Joined: Thu Jan 10, 2008 12:56 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by retiredjg » Sat Dec 16, 2017 1:18 pm

bada bing wrote:
Sat Dec 16, 2017 12:47 pm
The only drawback I can think of for the mega-backdoor Roth is the 5 year clock on access
to the contributions. I believe the 5 year clock is on each contribution individually. If you
know you won't need access to the money for 5 years, then there is no downside and a lot of
advantages.
The 5 tax year clock only applies to the part of the rollover/conversion that was taxable at the time of the rollover to Roth IRA. And yes, each rollover contribution has it's own clock.

For this reason, you need to keep meticulous records on how every penny gets into your Roth IRA so you'll know how much is taxable, what has finished with the clock and what has not. If you have to take out some money that has not finished its clock, there is a 10% penalty on that part of what you withdraw. It could be a small amount and worth paying if you really need the money.

A way to avoid this clock is to roll the earnings into a tiRA and roll the after-tax contributions into the Roth IRA. Some people do not want to do this because it interferes with the ordinary "back door" to Roth IRA.

mopman78
Posts: 64
Joined: Fri Jan 06, 2017 2:46 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by mopman78 » Sun Dec 17, 2017 9:18 am

One small additional note - even if your company’s plan allows all of the above, they may limit the amount of post-tax contributions at a lower level than the federal limit. I started my mega backdoor roth this year and found out my company limits contributions to 10% of income

User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by Earl Lemongrab » Mon Dec 18, 2017 2:38 am

There's no requirement that someone do regular deferrals first or at all to make after-tax contribution. One could put 54k - employer contributions in after-tax and roll out if so desired. A potential reason for that would be if the plan did not offer Roth 401(k) and the participant wanted all contributions to go to Roth.

crumbone
Posts: 88
Joined: Thu Oct 12, 2017 11:50 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by crumbone » Tue Dec 19, 2017 11:47 pm

Earl Lemongrab wrote:
Mon Dec 18, 2017 2:38 am
There's no requirement that someone do regular deferrals first or at all to make after-tax contribution. One could put 54k - employer contributions in after-tax and roll out if so desired. A potential reason for that would be if the plan did not offer Roth 401(k) and the participant wanted all contributions to go to Roth.
True enough, though I'd have to imagine most of the employees who can afford to max after-tax 401k contributions are in a high enough tax bracket to benefit from deferral.

2cents2
Posts: 389
Joined: Sun Mar 02, 2014 11:31 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by 2cents2 » Wed Dec 20, 2017 9:28 am

Smilodon wrote:
Sat Dec 16, 2017 11:17 am
One thing that concerns me is the ACP test. I would hate to complete the rollover to my Roth IRA, and then find out mega corp failed the ACP test, requiring some of my after-tax contributions be refunded. What a mess that would be. Does anyone know what time of year a company must report and remedy any ACP test failures? I was thinking to hold off on the rollover (despite knowing that taxable earnings are accruing) until I am confident the ACP test passes, or at least the deadline has passed.
I was curious about this, too. I googled the topic and it looks like March 15th of the following year for no penalties, but.... it looks like it could go longer than that if company doesn't have their "stuff" together. Here is what I found on google: http://www.consultrms.com/res/uploads/m ... esting.pdf I don't know what happens to resolve the deficiency if you have done a rollover...

I wonder if ERISA Stone might weigh in on this topic?

ERISA Stone
Posts: 1625
Joined: Tue Jun 24, 2014 8:54 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by ERISA Stone » Wed Dec 20, 2017 1:08 pm

2cents2 wrote:
Wed Dec 20, 2017 9:28 am
Smilodon wrote:
Sat Dec 16, 2017 11:17 am
One thing that concerns me is the ACP test. I would hate to complete the rollover to my Roth IRA, and then find out mega corp failed the ACP test, requiring some of my after-tax contributions be refunded. What a mess that would be. Does anyone know what time of year a company must report and remedy any ACP test failures? I was thinking to hold off on the rollover (despite knowing that taxable earnings are accruing) until I am confident the ACP test passes, or at least the deadline has passed.
I was curious about this, too. I googled the topic and it looks like March 15th of the following year for no penalties, but.... it looks like it could go longer than that if company doesn't have their "stuff" together. Here is what I found on google: http://www.consultrms.com/res/uploads/m ... esting.pdf I don't know what happens to resolve the deficiency if you have done a rollover...

I wonder if ERISA Stone might weigh in on this topic?
I don't have experience with this specific situation but my assumption is if you roll over money that was not eligible to be in the plan, your company needs to contact your IRA custodian to let them know there are ineligible funds in the IRA and they should be distributed to the individual. This is how it is handled in similar situations.

Pigeye Brewster
Posts: 395
Joined: Thu Oct 05, 2017 7:33 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by Pigeye Brewster » Wed Dec 20, 2017 2:37 pm

ERISA Stone wrote:
Wed Dec 20, 2017 1:08 pm
2cents2 wrote:
Wed Dec 20, 2017 9:28 am
Smilodon wrote:
Sat Dec 16, 2017 11:17 am
One thing that concerns me is the ACP test. I would hate to complete the rollover to my Roth IRA, and then find out mega corp failed the ACP test, requiring some of my after-tax contributions be refunded. What a mess that would be. Does anyone know what time of year a company must report and remedy any ACP test failures? I was thinking to hold off on the rollover (despite knowing that taxable earnings are accruing) until I am confident the ACP test passes, or at least the deadline has passed.
I was curious about this, too. I googled the topic and it looks like March 15th of the following year for no penalties, but.... it looks like it could go longer than that if company doesn't have their "stuff" together. Here is what I found on google: http://www.consultrms.com/res/uploads/m ... esting.pdf I don't know what happens to resolve the deficiency if you have done a rollover...

I wonder if ERISA Stone might weigh in on this topic?
I don't have experience with this specific situation but my assumption is if you roll over money that was not eligible to be in the plan, your company needs to contact your IRA custodian to let them know there are ineligible funds in the IRA and they should be distributed to the individual. This is how it is handled in similar situations.
I had the same concerns and came to a similar conclusion. So I opted to go with an in-plan Roth rollover rather than rolling to Roth IRA. Just seemed a little easier to unwind if needed.

Wannamontana
Posts: 2
Joined: Tue Feb 27, 2018 7:11 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by Wannamontana » Tue Feb 27, 2018 7:30 pm

Pigeye Brewster wrote:
Wed Dec 20, 2017 2:37 pm
ERISA Stone wrote:
Wed Dec 20, 2017 1:08 pm
2cents2 wrote:
Wed Dec 20, 2017 9:28 am
Smilodon wrote:
Sat Dec 16, 2017 11:17 am
One thing that concerns me is the ACP test. I would hate to complete the rollover to my Roth IRA, and then find out mega corp failed the ACP test, requiring some of my after-tax contributions be refunded. What a mess that would be. Does anyone know what time of year a company must report and remedy any ACP test failures? I was thinking to hold off on the rollover (despite knowing that taxable earnings are accruing) until I am confident the ACP test passes, or at least the deadline has passed.
I was curious about this, too. I googled the topic and it looks like March 15th of the following year for no penalties, but.... it looks like it could go longer than that if company doesn't have their "stuff" together. Here is what I found on google: http://www.consultrms.com/res/uploads/m ... esting.pdf I don't know what happens to resolve the deficiency if you have done a rollover...

I wonder if ERISA Stone might weigh in on this topic?
I don't have experience with this specific situation but my assumption is if you roll over money that was not eligible to be in the plan, your company needs to contact your IRA custodian to let them know there are ineligible funds in the IRA and they should be distributed to the individual. This is how it is handled in similar situations.
I had the same concerns and came to a similar conclusion. So I opted to go with an in-plan Roth rollover rather than rolling to Roth IRA. Just seemed a little easier to unwind if needed.
My question about ACP is more basic. Does the fact that my 401(k) use a safe harbor plan eliminate the concern of ACP testing the inclusion of these after tax contributions? Thank you

User avatar
LadyGeek
Site Admin
Posts: 57760
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by LadyGeek » Tue Feb 27, 2018 7:58 pm

FYI - Wannamontana is asking a similar question here: Mega Backdoor Roth IRA - wait for 401(k) ADP/ACP testing deadlines?
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Pigeye Brewster
Posts: 395
Joined: Thu Oct 05, 2017 7:33 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by Pigeye Brewster » Tue Feb 27, 2018 8:15 pm

Wannamontana wrote:
Tue Feb 27, 2018 7:30 pm
Pigeye Brewster wrote:
Wed Dec 20, 2017 2:37 pm
ERISA Stone wrote:
Wed Dec 20, 2017 1:08 pm
2cents2 wrote:
Wed Dec 20, 2017 9:28 am
Smilodon wrote:
Sat Dec 16, 2017 11:17 am
One thing that concerns me is the ACP test. I would hate to complete the rollover to my Roth IRA, and then find out mega corp failed the ACP test, requiring some of my after-tax contributions be refunded. What a mess that would be. Does anyone know what time of year a company must report and remedy any ACP test failures? I was thinking to hold off on the rollover (despite knowing that taxable earnings are accruing) until I am confident the ACP test passes, or at least the deadline has passed.
I was curious about this, too. I googled the topic and it looks like March 15th of the following year for no penalties, but.... it looks like it could go longer than that if company doesn't have their "stuff" together. Here is what I found on google: http://www.consultrms.com/res/uploads/m ... esting.pdf I don't know what happens to resolve the deficiency if you have done a rollover...

I wonder if ERISA Stone might weigh in on this topic?
I don't have experience with this specific situation but my assumption is if you roll over money that was not eligible to be in the plan, your company needs to contact your IRA custodian to let them know there are ineligible funds in the IRA and they should be distributed to the individual. This is how it is handled in similar situations.
I had the same concerns and came to a similar conclusion. So I opted to go with an in-plan Roth rollover rather than rolling to Roth IRA. Just seemed a little easier to unwind if needed.
My question about ACP is more basic. Does the fact that my 401(k) use a safe harbor plan eliminate the concern of ACP testing the inclusion of these after tax contributions? Thank you
No. After-tax contributions are still subject to ACP testing even in safe harbor plans.

Alan S.
Posts: 8686
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by Alan S. » Tue Feb 27, 2018 9:59 pm

Note that failing to pass discrimination testing does not always result in an excess contribution distribution.

There are other possibilities as explained here: https://www.irs.gov/retirement-plans/pl ... kes-timely

Therefore, if you are concerned with ACP testing, you might ask the plan if there have been testing failures in the last 5 years, and if so what method did the plan use to resolve the issue.

In addition, plans might opt to limit your after tax contributions, not only to avoid breaching the 415(c) limit, but also to limit exposure to testing failures.

Many people here have been doing the mega back door Roth in recent years, and very few have reported an excess contribution situation - fewer than you might expect.

ucla-engineer
Posts: 32
Joined: Wed Apr 26, 2017 12:01 am
Location: CA

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by ucla-engineer » Sun Jul 21, 2019 11:31 pm

Earl Lemongrab wrote:
Mon Dec 18, 2017 2:38 am
There's no requirement that someone do regular deferrals first or at all to make after-tax contribution. One could put 54k - employer contributions in after-tax and roll out if so desired. A potential reason for that would be if the plan did not offer Roth 401(k) and the participant wanted all contributions to go to Roth.
If an individual has a plan to maximize the amount of dollars in an after tax retirement plan, is there any reason that one should contribute to a Roth 401(k) rather than contributing all in after-tax and then rolling that into a Roth (Vanguard)?
The only reasons I can see is if the employee match is somehow tied to making either Roth 401(k) or regular 401(k) contributions, or if the funds/fees available within the company plan are better than those available outside.

I would think that having the option to have more of one's assets in a 3rd party Vanguard account would be preferred. Am I missing something?

User avatar
changingtimes
Posts: 219
Joined: Mon Jul 24, 2017 9:28 am

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by changingtimes » Mon Jul 22, 2019 7:30 am

ucla-engineer wrote:
Sun Jul 21, 2019 11:31 pm
Earl Lemongrab wrote:
Mon Dec 18, 2017 2:38 am
There's no requirement that someone do regular deferrals first or at all to make after-tax contribution. One could put 54k - employer contributions in after-tax and roll out if so desired. A potential reason for that would be if the plan did not offer Roth 401(k) and the participant wanted all contributions to go to Roth.
If an individual has a plan to maximize the amount of dollars in an after tax retirement plan, is there any reason that one should contribute to a Roth 401(k) rather than contributing all in after-tax and then rolling that into a Roth (Vanguard)?
The only reasons I can see is if the employee match is somehow tied to making either Roth 401(k) or regular 401(k) contributions, or if the funds/fees available within the company plan are better than those available outside.

I would think that having the option to have more of one's assets in a 3rd party Vanguard account would be preferred. Am I missing something?
I don't know about all plans, but in mine, you can only contribute 15% after tax dollars each paycheck--*unless* you elect to have your pre-tax contributions continued as after-tax once they max out, in which case you can contribute up to 50% pre-tax and then it rolls over to after-tax.

ucla-engineer
Posts: 32
Joined: Wed Apr 26, 2017 12:01 am
Location: CA

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by ucla-engineer » Mon Jul 22, 2019 11:34 pm

ucla-engineer wrote:
Sun Jul 21, 2019 11:31 pm
Earl Lemongrab wrote:
Mon Dec 18, 2017 2:38 am
There's no requirement that someone do regular deferrals first or at all to make after-tax contribution. One could put 54k - employer contributions in after-tax and roll out if so desired. A potential reason for that would be if the plan did not offer Roth 401(k) and the participant wanted all contributions to go to Roth.
If an individual has a plan to maximize the amount of dollars in an after tax retirement plan, is there any reason that one should contribute to a Roth 401(k) rather than contributing all in after-tax and then rolling that into a Roth (Vanguard)?
The only reasons I can see is if the employee match is somehow tied to making either Roth 401(k) or regular 401(k) contributions, or if the funds/fees available within the company plan are better than those available outside.

I would think that having the option to have more of one's assets in a 3rd party Vanguard account would be preferred. Am I missing something?
Put another way: "Is it better to every year have 56k minus company match added to your 3rd party Roth IRA or your companies' Roth 401(k)?"

realitytest
Posts: 3
Joined: Sun Oct 07, 2018 4:56 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by realitytest » Sat Nov 16, 2019 7:06 pm

Guess I don't qualify for "explanations for ten year olds."

I have an unusual problem, perhaps an unusual son (age 30). Before I begin, let me say I fully support his conscience and salute all signs that my long-standing efforts with him and his brother may be paying off (e.g., as children/teens, woudn't allow them to download music or sofstware without paying fees).

However, that said, I want to make sure he's acting on the basis of accurate information in precisely this business.

I perked up when I saw the title of this thread because I thought it might help me provide him with relevant information about a topic he recently called to my attention - he has an a ETHICAL objection to using a mega-backdoor Roth (for which he and his firm qualify). No such luck (the topic turned out to be different), so I'll do my best to pose the same question differently. I hope someone may be willing/able to address his concern - he has a conscientious objection to using this tax strategy. Admitting he's no investment/tax expert,
he's decided against it because he says it sounds socially "sketchy" - seeing his supposedly progressive colleagues using it as rationalizing hypocrites.

My still less informed investment/tax opinions - despite trying to digest discussions here and elsewhere! - makes it sound complicated but acceptable, not only legally but morally. (Is that an acceptable frame of reference here?). That even though it can only be employed by those with upper-tier incomes - around his level and greater - it's not unfair. ("How come there's an income ceiling for the Roth, then?" he asks me.) An older friend and adviser (far richer than son) encourages him in the decision not to avail himself of the MBR following his own example.

I already know from the tone of this Board that anything illegal would never be countenanced.
But, well - IS there an argument to be made for it's being "morally ambiguous" in some way? I hope I 'm not offending the worthy members or prejudicing them against my son (don't forget he's not the one asking!). Does anyone see where he may be coming from, and how might you explain the government's offering the Mega-backdoor Roth? (I don't want him to act against his conscience, but only to be sure he's not misunderstanding this tax option - if he IS .)

Smilodon
Posts: 37
Joined: Thu Jan 22, 2015 6:42 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by Smilodon » Sun Nov 17, 2019 10:52 am

The tax code is a labyrinth of rules, provisions, deductions, credits, phase-outs, etc. as a result of decade-upon-decade of various legislation. It is loaded with inconsistencies and apparent policy contradictions. Each year as taxpayers, we find ourselves at a certain time and place that determines what taxation rules and options apply to us. It seems that careful consideration of these rules and options to make wise financial decisions is appropriate and is in no way unethical so long as we stay within the law.

Regarding the MBR in particular, I personally take full advantage of it each year. I wonder to myself "how is this even allowed?", but have no ethical problem with it since I am optimizing my tax situation appropriate to time (the tax code currently allows it) and place (my 401k allows it, somehow passes ACP/ADP testing, and I can afford it).
realitytest wrote:
Sat Nov 16, 2019 7:06 pm
"How come there's an income ceiling for the Roth, then?" he asks me.
How come, indeed? As initially stated, the tax code is loaded with inconsistencies and apparent policy contradictions, e.g. IRA limits are much smaller than 401k limits. Another example is the normal backdoor Roth involving converting non-deductible traditional IRA contributions to Roth without restriction due to income.

You mention your son is age 30 and MBR is available to him. At such a young age, it would be especially worthwhile to take advantage of it now to the largest extent possible. Not doing so would be wasting what might be a fleeting opportunity.

retiredjg
Posts: 38451
Joined: Thu Jan 10, 2008 12:56 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by retiredjg » Sun Nov 17, 2019 11:23 am

Nice answer Smilodon.
("How come there's an income ceiling for the Roth, then?" he asks me.)
Probably some holdover that had a good purpose from way back when. Makes no sense that I can see in today's world.

EddyB
Posts: 1081
Joined: Fri May 24, 2013 3:43 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by EddyB » Sun Nov 17, 2019 11:45 am

realitytest wrote:
Sat Nov 16, 2019 7:06 pm
Guess I don't qualify for "explanations for ten year olds."

I have an unusual problem, perhaps an unusual son (age 30). Before I begin, let me say I fully support his conscience and salute all signs that my long-standing efforts with him and his brother may be paying off (e.g., as children/teens, woudn't allow them to download music or sofstware without paying fees).

However, that said, I want to make sure he's acting on the basis of accurate information in precisely this business.

I perked up when I saw the title of this thread because I thought it might help me provide him with relevant information about a topic he recently called to my attention - he has an a ETHICAL objection to using a mega-backdoor Roth (for which he and his firm qualify). No such luck (the topic turned out to be different), so I'll do my best to pose the same question differently. I hope someone may be willing/able to address his concern - he has a conscientious objection to using this tax strategy. Admitting he's no investment/tax expert,
he's decided against it because he says it sounds socially "sketchy" - seeing his supposedly progressive colleagues using it as rationalizing hypocrites.

My still less informed investment/tax opinions - despite trying to digest discussions here and elsewhere! - makes it sound complicated but acceptable, not only legally but morally. (Is that an acceptable frame of reference here?). That even though it can only be employed by those with upper-tier incomes - around his level and greater - it's not unfair. ("How come there's an income ceiling for the Roth, then?" he asks me.) An older friend and adviser (far richer than son) encourages him in the decision not to avail himself of the MBR following his own example.

I already know from the tone of this Board that anything illegal would never be countenanced.
But, well - IS there an argument to be made for it's being "morally ambiguous" in some way? I hope I 'm not offending the worthy members or prejudicing them against my son (don't forget he's not the one asking!). Does anyone see where he may be coming from, and how might you explain the government's offering the Mega-backdoor Roth? (I don't want him to act against his conscience, but only to be sure he's not misunderstanding this tax option - if he IS .)
If he really wants to see some blessing for the “backdoor” Roth and a common second step in a mega-backdoor Roth, it was explicitly reflected in footnote 268 of the Congressional conference report prior to adoption of the Tax Cuts and Jobs Act. https://www.govinfo.gov/content/pkg/CRP ... rpt466.pdf

The IRS has given allocation guidance on distributions including after-tax amounts, so it seems fair to say a mega-backdoor distribution (the first or only step) is ok under its interpretation of the law. https://www.irs.gov/pub/irs-drop/n-14-54.pdf

SRenaeP
Posts: 956
Joined: Tue Jan 19, 2010 9:05 pm

Re: Questions about mega-backdoor Roth, and is there any reason NOT to do a mega-backdoor Roth?

Post by SRenaeP » Mon Nov 18, 2019 9:02 am

I don't see anything morally or ethically wrong with doing the MBR. However, I can see where some may feel it's unfair and choose not to avail themselves of it. In such instances, I wouldn't try to sway that person's opinion. We all have our own moral compass.

An unfortunate (or not, depending on your perspective) fact of life is that those who have more money can/will get more advantages than others. I recently saw a similar sentiment contemplated in another PF forum - does it give the wrong message to one's children to buy/use 'fast track' passes at amusement parks that allow you to jump the line. That's something that each person has to answer for themselves.

Post Reply