Megabackdoor Roth to 401k (not IRA)

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schrute
Posts: 216
Joined: Wed Nov 05, 2014 2:27 pm

Megabackdoor Roth to 401k (not IRA)

Post by schrute » Mon Mar 12, 2018 12:02 am

I learned my 401K allows for after-tax contribution and in-plan distribution. My company allows does a match on the after-tax (which makes this extra sweet). I haven't done it yet, but wondering, when I contribute here is it part of my 401K plan? Like part of the Roth 401K? Or is the after tax money in some kind of floating nexus?

My goal would be to get the after tax contribution, plus the match, and keep it in my 401K. Eventually I'd convert everything into a Roth 401K.

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

Re: Megabackdoor Roth to 401k (not IRA)

Post by Spirit Rider » Mon Mar 12, 2018 1:03 am

Employee after-tax contributions are not included in the employee deferral limit (2018 = $18.5K), but are included in the annual addition limit (2018 = $55K) of all employee + employer contributions.

Elective employee contributions (traditional or Roth) may be safe harbored, but employee contributions are not. So if you are an HCE, you may be better of maximizing elective employee contributions first.

Technically, this is called an In-plan Roth Rollover (IRR). You should do the rollovers ASAP, because any earnings on the employee after-tax contributions will be taxable.

schrute
Posts: 216
Joined: Wed Nov 05, 2014 2:27 pm

Re: Megabackdoor Roth to 401k (not IRA)

Post by schrute » Mon Mar 12, 2018 9:32 am

Spirit Rider wrote:
Mon Mar 12, 2018 1:03 am
Employee after-tax contributions are not included in the employee deferral limit (2018 = $18.5K), but are included in the annual addition limit (2018 = $55K) of all employee + employer contributions.

Elective employee contributions (traditional or Roth) may be safe harbored, but employee contributions are not. So if you are an HCE, you may be better of maximizing elective employee contributions first.

Technically, this is called an In-plan Roth Rollover (IRR). You should do the rollovers ASAP, because any earnings on the employee after-tax contributions will be taxable.
Right, so can I roll this into my 401K Roth?

Lafder
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Location: East of the Rio Grande

Re: Megabackdoor Roth to 401k (not IRA)

Post by Lafder » Mon Mar 12, 2018 9:55 am

It depends on your plan rules, whether you can roll your post tax contributions into your 401k Roth. But if you can, why ?

Generally a mega back door Roth is rolling post tax 401k contributions to a Roth outside of the plan that you have control over. There is little advantage I can think of to rolling into your Roth 401k since you are limited by plan offerings, versus a Roth you have complete control over from day one.

As mentioned, the direct 401k pretax and 401k Roth are included in the employee maximum contribution of $18,500. So if you can afford to max your pretax with the $18,500 limit, you get the max pretax plus any post tax you can afford to do in post tax 401k contributions, which you can then do an in plan distribution to a Roth you have complete control of.

If you are age 50 or older, add $6000 to the total max allowed pretax.

When you do an in plan distribution of the post tax, you will also have to move any pretax gains and pay tax on them that tax year, unless you move them to a rollover IRA. But you have to have a zero IRA balance by 12/31, so you would roll that to a Roth anyway, so you might as well just move it all to a Roth.

My husband's employer allowed mega backdoor Roth. But they limited in service 401k distributions to 4x a year, so we did them quarterly.

lafder

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

Re: Megabackdoor Roth to 401k (not IRA)

Post by Spirit Rider » Mon Mar 12, 2018 11:17 am

As Lafder stated, you can do an IRR from your after-tax 401k account to your Roth 401k account if your 401k plan allows it.
Lafder wrote:
Mon Mar 12, 2018 9:55 am
There is little advantage I can think of to rolling into your Roth 401k since you are limited by plan offerings, versus a Roth you have complete control over from day one.
There can be sevral reasons to do an IRR instead of rolling the after-tax contributions to a Roth IRA:
  • Some plans with after-tax contributions do not allow in-service withdrawals/rollovers, but do allow IRRs.
  • Some plans with after-tax contributions place frequency restrictions on in-service withdrawals/rollovers, but not on IRRs. This can cause significant pre-tax earnings before withdrawal/rollover.
  • Many but not all 401k plans with after-tax contributions, in-service withdrawals/rollovers and IRRs, allow in-service withdrawals/rollovers of IRRs from after-tax accounts.
  • Employer Roth 401k accounts receive full ERISA anti-alienation protection against creditors. About 20% of states do not provide any creditor protection for Roth IRAs.
  • Some 401k plans have >= investment options than you can get in a retail Roth IRA.

WhiteMaxima
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Joined: Thu May 19, 2016 5:04 pm

Re: Megabackdoor Roth to 401k (not IRA)

Post by WhiteMaxima » Mon Mar 12, 2018 12:16 pm

Usually companies only allow once a year rollover. Roth or Roth401k. Either has pro and cons. In Roth you will have more choice (can be more aggressive because it is a Roth). Roth401k is simple, no check sent with better creditor protection. The fund choice would be limited. Remember you still have to pay the cap gain tax on gain from aft-tax 401k contribution. Either way, both are very good for investor with extra money to set aside.

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