Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

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ThisJustIn
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Joined: Sun Mar 11, 2018 10:53 pm

Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by ThisJustIn » Sun Jul 22, 2018 7:05 pm

I recently started contributing to my after-tax account in Fidelity, making use of Mega Backdoor Roth benefit of my company. I also set automatic quarterly transfer from after-tax account to Roth IRA account. Now that a quarter has passed and I see one instance of Roth In-plan conversion, I have a couple of follow-up questions:

1) Looking at the transactions history of my company plan account in Fidelity, I see transactions related to Roth In-plan conversion which happened on 7/3/2018. There are two items here for each fund: a) Transfers (from After-tax account with Roth In-plan conversion), b) "Change in market value", which are positive / negative values depending on the find. What is this "Change in target value" exactly? What are the tax implications of Roth in-plan conversion exactly?

2) I was actually expecting to see my Mega Backdoor Roth contributions in my private Roth IRA account, but the email from Fidelity suggested that "The Roth In Plan conversion you selected is to transition your After tax contributions each quarter to Roth, but the money remains in your 401(k), it is not sent to your private IRA account.", and when asked how to move the funds there, they said: "To move your Roth source to your Roth IRA requires a rollover distribution. You do have this option available, but due to the complexity, you would not be able to complete this online. Because you are wishing to move just the Roth source, requires a source specific rollover which requires our service colleagues on the phone to process for you.". And when asked for the fee, they said: "There is a fee of $25.00 for each In Service withdrawal transaction", which I think is a joke. Now, i want my asset allocation and fund choices in my 401K and private Roth IRA to be different, so I want to move my Roth source to Roth IRA as soon as possible. A couple of questions here:
2.1. Is there a way to do this "Roth source to private Roth IRA" without a fee. Ideally I want this transfer to happen every quarter, but $25 every quarter for this transfer is a steal.
2.2. Is there any tax implication or disadvantage to keeping Roth money in Roth source for a long time, and moving them to private Roth IRA later, say in a year? The only disadvantage I see is the fact that my 401K and Roth contributions will have to have the same asset allocation and fund choices. Are there any other disadvantages I might be missing?

Thanks.

Lafder
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by Lafder » Sun Jul 22, 2018 9:03 pm

With my husband's 401k there was no way to do the transaction on line or set up for it to occur automatically. We had to call in every time.

You want the in plan distribution to a Roth you control outside of the 401k but fine and simpler if also with Fidelity. You do not want it simply moved to the 401k Roth.

lafder

jacoavlu
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by jacoavlu » Sun Jul 22, 2018 11:12 pm

It should not be a great difference to you to leave it in the Roth 401k account as long as you have good investment options in the 401k. The dollars are Roth and tax free whether in the 401k or IRA. Invest them the same or differently, do whatever you want. If you had poor investment choices in 401k with high expense ratios then that would be a good reason to want to move the funds out to an IRA. Some people also consider asset protection a factor and those laws vary state to state as to which monies might be available to creditors.

Regarding tax implications of the in plan rollover, if the entire after tax account was rolled over to Roth, you would pay income tax on the earnings in the after tax account (value rolled over minus total contributions). This is why it is best to do the in plan roth conversion as soon as is reasonably possible after the contributions.

Spirit Rider
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by Spirit Rider » Mon Jul 23, 2018 10:30 am

ThisJustIn wrote:
Sun Jul 22, 2018 7:05 pm
I recently started contributing to my after-tax account in Fidelity, making use of Mega Backdoor Roth benefit of my company. I also set automatic quarterly transfer from after-tax account to Roth IRA account.

...

"To move your Roth source to your Roth IRA requires a rollover distribution. You do have this option available, but due to the complexity, you would not be able to complete this online. Because you are wishing to move just the Roth source, requires a source specific rollover which requires our service colleagues on the phone to process for you.". And when asked for the fee, they said: "There is a fee of $25.00 for each In Service withdrawal transaction", which I think is a joke.
There are real costs for human intervention and rollovers out of the plan. A distinct minority of employees will be doing after-tax contributions and in-service rollovers. So what you are saying is that you expect all other employees to pay for your specific optional service. I think not.

I agree with jacoavlu: Since your plan separately tracks the IRR assets and allows in-service withdrawals for them. You can just do the IRRs and then do one in-service rollover/year. Also,if your plan allows more frequent IRRs than once/quarter, you should select the most frequent option. This combination will minimize any taxation on the earnings and rollover fees.

After-tax contributions, In-plan Roth Rollovers (IRR) and in-service distributions of either/both is a great benefit. Don't look a gift horse in the month because of some sense of entitlement that it should all be free.

retiredjg
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by retiredjg » Mon Jul 23, 2018 12:01 pm

While some companies do this for free, your plan is not alone in having a charge for the in-service distribution (rollover to Roth IRA). Some companies just allow this type of rollover once or a few times a year

I think the plan to do quarterly (or more frequent) in plan rollovers (to Roth 401k) accompanied by a once a year distribution out to Roth IRA should work for most situations. If you are contributing to Roth 401k with your elective deferrals (the $18.5 a year), that money is not included in what can be rolled out to the Roth IRA while you are still working there.

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g$$
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by g$$ » Mon Jul 23, 2018 12:16 pm

tax-wise, i don't believe there is any difference between an in-plan conversion versus a rollover to your personal Roth IRA. You have a bit more control in the Roth IRA but you may also have slightly higher expense ratios that way. I realize most expect that the expense ratios will be higher in the 401(k), but at my mega corp we have negotiated extremely competitive shares (e.g. 0.01% for a S&P 500 index fund).

Spirit Rider
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by Spirit Rider » Mon Jul 23, 2018 1:49 pm

There is no difference in the taxation of earnings between an IRR and an in-service rollover to a Roth IRA.

However, an in-service rollover of after-tax accounts can be split with contributions going to a Roth IRA and earnings to a traditional IRA. These would both be tax-free rollovers.

ThisJustIn
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by ThisJustIn » Mon Jul 23, 2018 10:09 pm

jacoavlu wrote:
Sun Jul 22, 2018 11:12 pm
It should not be a great difference to you to leave it in the Roth 401k account as long as you have good investment options in the 401k. The dollars are Roth and tax free whether in the 401k or IRA. Invest them the same or differently, do whatever you want. If you had poor investment choices in 401k with high expense ratios then that would be a good reason to want to move the funds out to an IRA. Some people also consider asset protection a factor and those laws vary state to state as to which monies might be available to creditors.

Regarding tax implications of the in plan rollover, if the entire after tax account was rolled over to Roth, you would pay income tax on the earnings in the after tax account (value rolled over minus total contributions). This is why it is best to do the in plan roth conversion as soon as is reasonably possible after the contributions.
Better investment options is the reason why I want to move to Roth IRA. Someone in another website suggested me to open a BrokerageLink account within my 401K account, and place my Roth source investments there. I will see if this is possible.

ThisJustIn
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by ThisJustIn » Mon Jul 23, 2018 10:15 pm

Spirit Rider wrote:
Mon Jul 23, 2018 1:49 pm
There is no difference in the taxation of earnings between an IRR and an in-service rollover to a Roth IRA.

However, an in-service rollover of after-tax accounts can be split with contributions going to a Roth IRA and earnings to a traditional IRA. These would both be tax-free rollovers.
Why would someone do "an in-service rollover of after-tax accounts that can be split with contributions going to a Roth IRA and earnings to a traditional IRA."? Is there any advantage to doing this?

jacoavlu
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by jacoavlu » Mon Jul 23, 2018 10:56 pm

ThisJustIn wrote:
Mon Jul 23, 2018 10:15 pm
Spirit Rider wrote:
Mon Jul 23, 2018 1:49 pm
There is no difference in the taxation of earnings between an IRR and an in-service rollover to a Roth IRA.

However, an in-service rollover of after-tax accounts can be split with contributions going to a Roth IRA and earnings to a traditional IRA. These would both be tax-free rollovers.
Why would someone do "an in-service rollover of after-tax accounts that can be split with contributions going to a Roth IRA and earnings to a traditional IRA."? Is there any advantage to doing this?
The advantage is deferral of tax.

between the time you contribute to the after tax account, and subsequently rollover to IRA, there are/may be earnings. Within the 401k plan, these earnings are pre-tax - you will eventually pay tax on these earnings, at ordinary income rates.

1) if you perform a rollover of the entire after tax sub account (contributions plus earnings) to Roth IRA, you will pay ordinary income tax now on the earnings

2) if you perform a split rollover - after tax contributions to Roth IRA and earnings to traditional IRA - you pay no tax now. You will eventually pay tax on those earnings, when funds come out out your tIRA.

Note, if you also do a yearly backdoor IRA, option 2 complicates things because of the pro rata calculation. If you chose option 2 and still wanted to do backdoor Roth IRA, you would have to do a rollover of the tIRA back to the 401k plan so that tIRA balance is $0 on 12/31.

The fact that the earnings on the after tax account are pre tax is why you should instruct your plan to perform an in plan roth rollover of the after tax contributions as soon as is reasonably possible, after the contribution is made. Because, earnings on dollars in the Roth sub account are tax free.

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Earl Lemongrab
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Re: Mega Backdoor Roth: automatic quarterly Roth In-plan conversion and transfer to private Roth IRA

Post by Earl Lemongrab » Tue Jul 24, 2018 1:21 pm

This is one of those topics where specific plan rules matter a lot. At Megacorp, things were set up so that you could contribute up to 30% of salary in any combination of deferred, Roth, or after-tax. If you made contributions to deferred or Roth, when the deferral limit was reached the contributions would switch to after-tax. The company would match any of those, but there was not true-up so you needed to contribute at least 8% each pay period to get full match.

So what I did was put 30% in to deferred. This way the after-tax all accumulated in the latter part of the year, and I would do a rollover out early the next year. Depending on what my pay was the deferral limit was usually reached in seven to nine months. Megacorp didn't charge for rollovers, so I could have done it more frequently, but my 401(k) was dominated by fixed income so the earnings weren't great.
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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