Mega back door roth

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sdsu04
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Joined: Sun Nov 19, 2017 11:53 pm

Mega back door roth

Post by sdsu04 » Tue Dec 26, 2017 9:48 pm

Hello folks,

I have a question on mega back door Roth. My spouse’s workplace allows them to contribute to after tax 401k beyond the 18k limit.

There is one concern: they do not allow the money to be rolled into a Roth (both in plan or out of plan) until she leaves her company or is 59.5 years of age. Given we are not sure when she will leave her workplace, we are unable to decide if we should contribute to after tax 401k. We are concerned that if she stays at her workplace for many more years and then move it to Roth it will result in a taxable event. If we don’t contrunite to the after tax 401k we will likely invest the money in a regular trading account on low cost passive funds but the money will be more readily available.

How should we make this decision?

Thanks!

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aj76er
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Location: Portland, OR

Re: Mega back door roth

Post by aj76er » Tue Dec 26, 2017 11:43 pm

If you plan on working until 59.5 or later, then the mega back door Roth may be better.

When you leave your company, the after tax contributions will get split into a Roth account and no extra taxes will be due.

If you want to retire early or have gaps in your work prior to 59.5, then a taxable account is useful.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Thrifty Femme
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Re: Mega back door roth

Post by Thrifty Femme » Wed Dec 27, 2017 2:15 pm

You can use the spreadsheet in the Mega Backdoor Roth Without In-Service Distribution article from The Finance Buff to help in your analysis.

victw
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Re: Mega back door roth

Post by victw » Wed Dec 27, 2017 7:15 pm

aj76er wrote:
Tue Dec 26, 2017 11:43 pm
If you plan on working until 59.5 or later, then the mega back door Roth may be better.

When you leave your company, the after tax contributions will get split into a Roth account and no extra taxes will be due.

If you want to retire early or have gaps in your work prior to 59.5, then a taxable account is useful.
I'm not sure why 59.5 would matter? If you leave the company before that age you can still split it on the rollover - but the growth into a traditional IRA and the original into a Roth.

Vic

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torius71
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Re: Mega back door roth

Post by torius71 » Wed Dec 27, 2017 10:56 pm

Thrifty Femme wrote:
Wed Dec 27, 2017 2:15 pm
You can use the spreadsheet in the Mega Backdoor Roth Without In-Service Distribution article from The Finance Buff to help in your analysis.
This is a great review. Make sure you read the wiki too (link below), which highlights advantages and disadvantages, including legislative risk. A potential advantage that the wiki doesn't highlight is the possibility of avoiding the 3.8% Medicare tax (if applicable).

https://www.bogleheads.org/wiki/After-tax_401(k)

As highlighted in another ongoing backdoor Roth thread, there are several ways to screw this up. Be very careful and make sure you fully understand all the implications before proceeding.
"A new truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."-MP

sdsu04
Posts: 15
Joined: Sun Nov 19, 2017 11:53 pm

Re: Mega back door roth

Post by sdsu04 » Sun Jan 21, 2018 11:56 am

Thanks everyone for your replies. This is very helpful. Apologies for late reply as I was out travelling.

Update on my end: I called ML (they manage my wife's 401K) and spoke to 3 different people over phone who all gave me conflicting reply. After further digging it turns out they do allow out of plan Roth conversion at any time upto 4 times a year. So my original question does not hold. In this process I did get a few good links and material that helped understand this better. Thanks!

2pedals
Posts: 628
Joined: Wed Dec 31, 2014 12:31 pm

Re: Mega back door roth

Post by 2pedals » Sun Jan 21, 2018 12:43 pm

sdsu04 wrote:
Sun Jan 21, 2018 11:56 am
Thanks everyone for your replies. This is very helpful. Apologies for late reply as I was out travelling.

Update on my end: I called ML (they manage my wife's 401K) and spoke to 3 different people over phone who all gave me conflicting reply. After further digging it turns out they do allow out of plan Roth conversion at any time upto 4 times a year. So my original question does not hold. In this process I did get a few good links and material that helped understand this better. Thanks!
From time to time the employer may change the rules. For example, my 401k had an after tax contribution but with no way to do an in-service conversion. Then the plan allowed for a in-service mega Roth rollover for after tax contributions and a tIRA rollover for the gains on the after tax contributions. This allows for no taxes for the 401k to Roth and tIRA rollovers. After I discovered that a mega conversion was allowed, I wished I had made more after tax contributions. Now the 401k plan has a Roth account within the 401k plan and the employee can simply transfer the after tax to the Roth 401k without a taxable event. Years ago the after tax contribution to me appeared not to be all that valuable, now I believe the after tax contributions were quite valuable that has growth that should not be taxed again and without RMDs. It is an important part of my how my assets are structured.

sailaway
Posts: 418
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Re: Mega back door roth

Post by sailaway » Sun Jan 21, 2018 12:50 pm

2pedals wrote:
Sun Jan 21, 2018 12:43 pm
sdsu04 wrote:
Sun Jan 21, 2018 11:56 am
Thanks everyone for your replies. This is very helpful. Apologies for late reply as I was out travelling.

Update on my end: I called ML (they manage my wife's 401K) and spoke to 3 different people over phone who all gave me conflicting reply. After further digging it turns out they do allow out of plan Roth conversion at any time upto 4 times a year. So my original question does not hold. In this process I did get a few good links and material that helped understand this better. Thanks!
From time to time the employer may change the rules. For example, my 401k had an after tax contribution but with no way to do an in-service conversion. Then the plan allowed for a in-service mega Roth rollover for after tax contributions and a tIRA rollover for the gains on the after tax contributions. This allows for no taxes for the 401k to Roth and tIRA rollovers. After I discovered that a mega conversion was allowed, I wished I had made more after tax contributions. Now the 401k plan has a Roth account within the 401k plan and the employee can simply transfer the after tax to the Roth 401k without a taxable event. Years ago the after tax contribution to me appeared not to be all that valuable, now I believe the after tax contributions were quite valuable that has growth that should not be taxed again and without RMDs. It is an important part of my how my assets are structured.
A Roth 401k will have RMDs. These disbursements themselves are not taxable, but any of the money that you do not spend will end up in a taxable account and no longer be tax sheltered. For those who expect to live long and prosper, this should be taken into account when choosing between leaving funds in a Roth 401k and converting to a Roth IRA.

2pedals
Posts: 628
Joined: Wed Dec 31, 2014 12:31 pm

Re: Mega back door roth

Post by 2pedals » Sun Jan 21, 2018 1:19 pm

sailaway wrote:
Sun Jan 21, 2018 12:50 pm
2pedals wrote:
Sun Jan 21, 2018 12:43 pm
sdsu04 wrote:
Sun Jan 21, 2018 11:56 am
Thanks everyone for your replies. This is very helpful. Apologies for late reply as I was out travelling.

Update on my end: I called ML (they manage my wife's 401K) and spoke to 3 different people over phone who all gave me conflicting reply. After further digging it turns out they do allow out of plan Roth conversion at any time upto 4 times a year. So my original question does not hold. In this process I did get a few good links and material that helped understand this better. Thanks!
From time to time the employer may change the rules. For example, my 401k had an after tax contribution but with no way to do an in-service conversion. Then the plan allowed for a in-service mega Roth rollover for after tax contributions and a tIRA rollover for the gains on the after tax contributions. This allows for no taxes for the 401k to Roth and tIRA rollovers. After I discovered that a mega conversion was allowed, I wished I had made more after tax contributions. Now the 401k plan has a Roth account within the 401k plan and the employee can simply transfer the after tax to the Roth 401k without a taxable event. Years ago the after tax contribution to me appeared not to be all that valuable, now I believe the after tax contributions were quite valuable that has growth that should not be taxed again and without RMDs. It is an important part of my how my assets are structured.
A Roth 401k will have RMDs. These disbursements themselves are not taxable, but any of the money that you do not spend will end up in a taxable account and no longer be tax sheltered. For those who expect to live long and prosper, this should be taken into account when choosing between leaving funds in a Roth 401k and converting to a Roth IRA.
Very good point. :beer

I have been making mega Roth IRA conversions annually to my Fidelity account because it's customizable and eliminates RMDs. I recommend doing a mega Roth IRA rollover if allowed by your plan. I have not looked into the Roth 401K but I does exist in my 401k account and started in 2017. The 401K with optional Roth 401k gives the employee a workplace-sponsored retirement plan to use tax deferred or Roth that was not available before. After you leave your company, I expect a one time Roth 401K to Roth IRA rollover would be simple enough for most, but laws do change. Well run companies for year have trying improve the 401k options since most now do not have defined pension plans.

Alan S.
Posts: 7803
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Mega back door roth

Post by Alan S. » Sun Jan 21, 2018 1:27 pm

2pedals wrote:
Sun Jan 21, 2018 12:43 pm
sdsu04 wrote:
Sun Jan 21, 2018 11:56 am
Thanks everyone for your replies. This is very helpful. Apologies for late reply as I was out travelling.

Update on my end: I called ML (they manage my wife's 401K) and spoke to 3 different people over phone who all gave me conflicting reply. After further digging it turns out they do allow out of plan Roth conversion at any time upto 4 times a year. So my original question does not hold. In this process I did get a few good links and material that helped understand this better. Thanks!
From time to time the employer may change the rules. For example, my 401k had an after tax contribution but with no way to do an in-service conversion. Then the plan allowed for a in-service mega Roth rollover for after tax contributions and a tIRA rollover for the gains on the after tax contributions. This allows for no taxes for the 401k to Roth and tIRA rollovers. After I discovered that a mega conversion was allowed, I wished I had made more after tax contributions. Now the 401k plan has a Roth account within the 401k plan and the employee can simply transfer the after tax to the Roth 401k without a taxable event. Years ago the after tax contribution to me appeared not to be all that valuable, now I believe the after tax contributions were quite valuable that has growth that should not be taxed again and without RMDs. It is an important part of my how my assets are structured.
This sounds like your plan has joined a growing trend toward requiring distributions from the after tax sub account to be done as an in plan Roth rollover (IRR) to the designated Roth portion of the plan in lieu of a direct rollover to a Roth IRA or Roth/TIRA for gains. The added accounting costs for plans that allow IRRs can be offset by retaining assets in the plan for economy of scale. Some plans may still allow a choice between IRR and the IRA rollover, and if so the rollover to IRAs is preferable, although you might lose creditor protection in some states. And if you direct the gains in the after tax sub account to a TIRA to avoid taxes on the gains, it will compromise your regular back door Roth plans. If the gains are relatively small at the time of distribution, you should generally just move the entire distribution to the Roth and pay taxes on the small gains.

2pedals
Posts: 628
Joined: Wed Dec 31, 2014 12:31 pm

Re: Mega back door roth

Post by 2pedals » Sun Jan 21, 2018 2:41 pm

Alan S. wrote:
Sun Jan 21, 2018 1:27 pm
2pedals wrote:
Sun Jan 21, 2018 12:43 pm
sdsu04 wrote:
Sun Jan 21, 2018 11:56 am
Thanks everyone for your replies. This is very helpful. Apologies for late reply as I was out travelling.

Update on my end: I called ML (they manage my wife's 401K) and spoke to 3 different people over phone who all gave me conflicting reply. After further digging it turns out they do allow out of plan Roth conversion at any time upto 4 times a year. So my original question does not hold. In this process I did get a few good links and material that helped understand this better. Thanks!
From time to time the employer may change the rules. For example, my 401k had an after tax contribution but with no way to do an in-service conversion. Then the plan allowed for a in-service mega Roth rollover for after tax contributions and a tIRA rollover for the gains on the after tax contributions. This allows for no taxes for the 401k to Roth and tIRA rollovers. After I discovered that a mega conversion was allowed, I wished I had made more after tax contributions. Now the 401k plan has a Roth account within the 401k plan and the employee can simply transfer the after tax to the Roth 401k without a taxable event. Years ago the after tax contribution to me appeared not to be all that valuable, now I believe the after tax contributions were quite valuable that has growth that should not be taxed again and without RMDs. It is an important part of my how my assets are structured.
This sounds like your plan has joined a growing trend toward requiring distributions from the after tax sub account to be done as an in plan Roth rollover (IRR) to the designated Roth portion of the plan in lieu of a direct rollover to a Roth IRA or Roth/TIRA for gains. The added accounting costs for plans that allow IRRs can be offset by retaining assets in the plan for economy of scale. Some plans may still allow a choice between IRR and the IRA rollover, and if so the rollover to IRAs is preferable, although you might lose creditor protection in some states. And if you direct the gains in the after tax sub account to a TIRA to avoid taxes on the gains, it will compromise your regular back door Roth plans. If the gains are relatively small at the time of distribution, you should generally just move the entire distribution to the Roth and pay taxes on the small gains.
My employer's 401K plan allows for in-service mega rollover funds to be separated and directed into two checks as follows (the administrator keeps track).
1) after tax contributions to Roth IRA
2) gains on after tax contributions to tIRA

It is simple enough to do annually and does not trigger a taxable event. I understand other plans may not be administrated this way and may only send a single check.

Alan S.
Posts: 7803
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Mega back door roth

Post by Alan S. » Sun Jan 21, 2018 2:51 pm

Yes, a single check is a bad idea and should be avoided if possible. People have reported that incorrect amounts were deposited into the IRA accounts.

However, the split rollover will affect any regular back door Roth you are doing now or later. Perhaps you are not doing a back door Roth because the much larger after tax 401k plan contributions make it unnecessary?

2pedals
Posts: 628
Joined: Wed Dec 31, 2014 12:31 pm

Re: Mega back door roth

Post by 2pedals » Sun Jan 21, 2018 3:08 pm

I am not doing a backdoor Roth conversion, just the mega backdoor. After I retire I plan doing some Roth conversions from my 401k and tIRA amounts.

bada bing
Posts: 73
Joined: Fri Sep 09, 2016 10:45 am

Re: Mega back door roth

Post by bada bing » Sun Jan 21, 2018 3:39 pm

Alan S. wrote:
Sun Jan 21, 2018 2:51 pm
Yes, a single check is a bad idea and should be avoided if possible. People have reported that incorrect amounts were deposited into the IRA accounts.

However, the split rollover will affect any regular back door Roth you are doing now or later. Perhaps you are not doing a back door Roth because the much larger after tax 401k plan contributions make it unnecessary?
An imperfect but workable solution to avoiding tIRA balances impacting regular backdoor Roth plans is
to roll the gains out into a tIRA and then roll them back into the 401K plan. The only date that matters
for pro-rata calculations on tIRA balances is Dec 31. It is a hassle to do the roll out and then roll back in,
but is only needed once a year to make the balances 0 on Dec 31. For my employer's plan, a roll in requires
a paper check, FBO account holder, be mailed to the account holder and then returned and deposited
into the 401K. Imperfect, but doable.

All plans do not allow roll ins of rollover IRA money, so check on that if considering this.

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