Mega Backdoor Roth Question

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richard37
Posts: 59
Joined: Wed Mar 20, 2013 10:38 am

Mega Backdoor Roth Question

Post by richard37 » Sat Jun 16, 2018 9:06 am

Hi there. Hoping someone can help..

My company allows after tax contributions to my 401K (fidelity). They also allow in service distributions twice a year.

I understand that i can then roll over the after tax dollars into my Schwab Roth IRA and take advantage of the mega Backdoor Roth IRA.

My question is really around the process / mechanics. Fidelity will send me a check for the after tax dollars which i can then take to my schwab branch. Do i have to deposit that check into my traditional Ira and then do a conversion online the same way i do my annual Backdoor Roth IRA conversion or can i deposit that check straight into my schwab Roth IRA???

Thanks in advance. Don’t want to mess it up!!

Cheers

terran
Posts: 686
Joined: Sat Jan 10, 2015 10:50 pm

Re: Mega Backdoor Roth Question

Post by terran » Sat Jun 16, 2018 9:31 am

I think that would depend on how the check is written. If it's to you then you'll deposit and write another check to Schwab. If it's to Scwhab for the benefit of richard37 then you'll deposit it straight with schwab.

You might consider whether it would be worth opening a Roth IRA with Fidelity -- it's possible that would let them make the distribution straight to the IRA and might be something you could do all over the phone. Seems like that would be worth asking Fidelity about.

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

Re: Mega Backdoor Roth Question

Post by Spirit Rider » Sat Jun 16, 2018 9:55 am

You have to rollover both the after-tax contributions and any pre-tax earnings.

You can either rollover both in a single check containing both after-tax and pre-tax amounts or one after-tax check and one pre-tax check. In either case the check containing after-tax assets should be directly rolled over to a Roth IRA. If there is a pre-tax check it can be rolled over to a traditional IRA or traditional employer plan.

If you rollover both the after-tax and the pre-tax amounts directly to a Roth IRA, the pre-tax amount will be taxable. However, the amounts are never in a pre-tax IRA, never show up on Form 8606 and do not cause pro-rata taxation of Roth conversions such as with a Backdoor Roth.

If you rollover the after-tax amount directly to a Roth IRA, the amount does not interfere with any Roth conversions. If you rollover the pre-tax amounts to an IRA it will interfere with Roth conversions including a Backdoor Roth unless you roll it over to a non-IRA employer plan.

It is technically possible to roll both the after-tax and the pre-tax amouts to a traditional IRA and then do a Roth conversion. However, you NEVER want to do that, because any pre-tax IRA assets in all traditional, SEP and SIMPLE IRA accounts will be subject to pro-rata taxation.

Anyways, the direct rollover to a Roth IRA is far simpler and less prone to error.

Lafder
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Location: East of the Rio Grande

Re: Mega Backdoor Roth Question

Post by Lafder » Sat Jun 16, 2018 10:28 am

I agree it would be much simpler to open a Roth at Fidelity so the transaction is all withing the same system.

In our case, with my husbands 401k was at Fidelity, so he opened a Roth with Fidelity as well. The agents were able to complete the transaction on the phone. But you had to find someone who knew the process. The first times I called I was transferred many times to get someone who could do it. But I kept the final number, extension and it was much easier the subsequent times. You have to get someone who handles your employer plan to start. Since mega back door Roths are getting more common, it shouldn't be too hard to find someone who knows what you are talking about.

You are allowed to have multiple Roths at different places. So you can keep your Schwab account as well.

As mentioned, the simplest is to transfer the post tax contribution plus any gains to your Roth. You will pay income tax on the tiny bit of gains.

lafder

richard37
Posts: 59
Joined: Wed Mar 20, 2013 10:38 am

Re: Mega Backdoor Roth Question

Post by richard37 » Sat Jun 16, 2018 10:34 am

Thanks guys. Will look into opening a Roth with fidelity to keep things simple. Seems like we are lucky to have the ability to do the mega Backdoor Roth so i want to take advantage but don’t want to mess up the transfer and cause issues down the road.

Cheers

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Earl Lemongrab
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Joined: Tue Jun 10, 2014 1:14 am

Re: Mega Backdoor Roth Question

Post by Earl Lemongrab » Sat Jun 16, 2018 4:16 pm

richard37 wrote:
Sat Jun 16, 2018 10:34 am
Thanks guys. Will look into opening a Roth with fidelity to keep things simple. Seems like we are lucky to have the ability to do the mega Backdoor Roth so i want to take advantage but don’t want to mess up the transfer and cause issues down the road.
Still the greatest thing I ever read about on Bogleheads. Even though I can no longer take advantage of it, it boosted my Roth contributions for over ten years.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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