Moving to company that allows Mega Backdoor Roth Conversion - Any prep needed?

[confused1]

All

So I start at a new company in 3 weeks that allows a Mega Backdoor Roth Conversion, which is great. Wondering if there are anything I need to be aware of as I have exiting IRA and Roth Accounts and would like to make the first Mega Backdoor Roth Conversion before the end of 2018.

I currently have the following Vanguard accounts that have been used over the past few years for the regular Backdoor Roth.

Traditional IRA Brokerage Account - Balance $0
Roth IRA Brokerage Account - Balance - ~$26k
Current Company 401k

So do I allow the new company to create a new Roth IRA account for the rollover? ie can I have 2 Roth IRA accounts and combine them at a later date?

Any other gotchas?

Thanks
Confused

[FoolStreet]

I am in the same situation. We can research it together and loop back.

It might be that you put post tax money into a corporate savings plan and the plan tracks that amount separately so as not to commingle the funds with your pretax money.

Then, once per year or once per quarter, you transfer that money to your regular traditional IRA. Then you transfer the money from the traditional IRA to your existing Roth account.

It is just like a regular backdoor rollover except you are allowed to put more into the traditional iRA up to something like $56k/year. Let’s double check that limit. Not sure if it has changed or if it includes the 18k of your regular 401k.

One gotcha: make sure you don’t have pre-tax money in an IRa or else you will have to count some of t as part of the conversion. It’s just messy.

Does that make sense? Let me summarize with account names.

You get a big bonus. You tell your plan to put all of it into your post-tax sub account in your plan (say fidelity?). Then, you tell fidelity to transfer the money to your Vanguard traditional IRA account, which is normally kept at zero balance since you just use it for roll overs. After it clears, you transfer the money from your Vanguard traditional IRA to your Vanguard Roth IRA. If there was a gain in the market since you originally received the money from your paycheck, you are aware you have to pay taxes on the gain.

By the way, if the new company has a good enough plan to offer mega back door roths, they may have good index funds at low expense ratios. You might (maybe) consider rolling any old 401k funds into the new one.

[Earl Lemongrab]

Generally you don't have the plan create an IRA. I doubt most would anyway. You can have as many Roth accounts as you want, but most people just roll into an existing one.

Any after-tax rollover will bring a share of pretax earnings (if any) along. Some plans will split the rollover so you could roll the pretax into a TIRA. If it's a small amount, it might be best to roll it into the Roth as well (tax due of course).

[Earl Lemongrab]

Then, once per year or once per quarter, you transfer that money to your regular traditional IRA. Then you transfer the money from the traditional IRA to your existing Roth account.

DON'T follow this advice. At best it's needless work. At worst you end up pro-rata problems if you have existing TIRAs with pretax amounts.

Always roll the after-tax directly into a Roth IRA. Easy, problem-free.

[FoolStreet]

Then, once per year or once per quarter, you transfer that money to your regular traditional IRA. Then you transfer the money from the traditional IRA to your existing Roth account.

DON'T follow this advice. At best it's needless work. At worst you end up pro-rata problems if you have existing TIRAs with pretax amounts.

Always roll the after-tax directly into a Roth IRA. Easy, problem-free.

could be huge if true

[Earl Lemongrab]

Then, once per year or once per quarter, you transfer that money to your regular traditional IRA. Then you transfer the money from the traditional IRA to your existing Roth account.

DON'T follow this advice. At best it's needless work. At worst you end up pro-rata problems if you have existing TIRAs with pretax amounts.

Always roll the after-tax directly into a Roth IRA. Easy, problem-free.

could be huge if true

I don't understand the comment. If what is true?

[FoolStreet]

Then, once per year or once per quarter, you transfer that money to your regular traditional IRA. Then you transfer the money from the traditional IRA to your existing Roth account.

DON'T follow this advice. At best it's needless work. At worst you end up pro-rata problems if you have existing TIRAs with pretax amounts.

Always roll the after-tax directly into a Roth IRA. Easy, problem-free.

could be huge if true

I don't understand the comment. If what is true?

If what you say is true, it could save a lot of work

[Soon2BXProgrammer]

Then, once per year or once per quarter, you transfer that money to your regular traditional IRA. Then you transfer the money from the traditional IRA to your existing Roth account.

DON'T follow this advice. At best it's needless work. At worst you end up pro-rata problems if you have existing TIRAs with pretax amounts.

Always roll the after-tax directly into a Roth IRA. Easy, problem-free.

could be huge if true

I don't understand the comment. If what is true?

If what you say is true, it could save a lot of work

i tell my 401k custodian to do a direct rollover from aftertax 401k to my roth ira. They actually ask me what they want done with the basis and i respond roth ira. then they ask about the gains, and i respond roth ira.. (i just pay the taxes on the gains as they are typically small).

[FoolStreet]

DON'T follow this advice. At best it's needless work. At worst you end up pro-rata problems if you have existing TIRAs with pretax amounts.

Always roll the after-tax directly into a Roth IRA. Easy, problem-free.

could be huge if true

I don't understand the comment. If what is true?

If what you say is true, it could save a lot of work

i tell my 401k custodian to do a direct rollover from aftertax 401k to my roth ira. They actually ask me what they want done with the basis and i respond roth ira. then they ask about the gains, and i respond roth ira.. (i just pay the taxes on the gains as they are typically small).

Very cool!!

[confused1]

Sounds like I don't need to do anything special with accounts etc then.
Thanks

[danaht]

Lucky! My employer only offers a traditional, or Roth option - but no after tax bucket. To make up for it - I convert some of my Rollover IRA to a Roth IRA. I figure it's the same income tax (no difference if it was earned this year (after tax bucket) or in a previous year (rollover partial conversion)

[sailaway]

Lucky! My employer only offers a traditional, or Roth option - but no after tax bucket. To make up for it - I convert some of my Rollover IRA to a Roth IRA. I figure it's the same income tax (no difference if it was earned this year (after tax bucket) or in a previous year (rollover partial conversion)

But you are paying tax on the after tax bucket amount whether it goes into retirement savings or not, so you are paying extra tax on what you are converting...

[megabad]

All

So I start at a new company in 3 weeks that allows a Mega Backdoor Roth Conversion, which is great. Wondering if there are anything I need to be aware of as I have exiting IRA and Roth Accounts and would like to make the first Mega Backdoor Roth Conversion before the end of 2018.

I currently have the following Vanguard accounts that have been used over the past few years for the regular Backdoor Roth.

Traditional IRA Brokerage Account - Balance $0
Roth IRA Brokerage Account - Balance - ~$26k
Current Company 401k

So do I allow the new company to create a new Roth IRA account for the rollover? ie can I have 2 Roth IRA accounts and combine them at a later date?

Any other gotchas?

Thanks
Confused

As above, you can create a new IRA if you wish, but shouldn't matter either way.

Possible gotchas:
1) Clarify your plan's rules quickly.
2) Most plans have overall % contribution limits. This can affect whether a megabackdoor roth is even possible.
3) Most plans have restrictions on how many withdrawals you can make per annum. If you can only do this once a year, than you may have more gains than you planned (and more tax due).
4) Some plans will force you to get two separate checks for gains and contributions. Others will force you to get one check for everything.
5) If you are an HCE, clawbacks can make things very...interesting.
6) Make sure your 1099-R is correct or IRS could get mad and scary.
7) Remember the 5 year clock on each conversion to prevent 10% penalty (minor, but just don't take that money out before 59.5 and you'll be fine).

[FoolStreet]

All

So I start at a new company in 3 weeks that allows a Mega Backdoor Roth Conversion, which is great. Wondering if there are anything I need to be aware of as I have exiting IRA and Roth Accounts and would like to make the first Mega Backdoor Roth Conversion before the end of 2018.

I currently have the following Vanguard accounts that have been used over the past few years for the regular Backdoor Roth.

Traditional IRA Brokerage Account - Balance $0
Roth IRA Brokerage Account - Balance - ~$26k
Current Company 401k

So do I allow the new company to create a new Roth IRA account for the rollover? ie can I have 2 Roth IRA accounts and combine them at a later date?

Any other gotchas?

Thanks
Confused

As above, you can create a new IRA if you wish, but shouldn't matter either way.

Possible gotchas:
1) Clarify your plan's rules quickly.
2) Most plans have overall % contribution limits. This can affect whether a megabackdoor roth is even possible.
3) Most plans have restrictions on how many withdrawals you can make per annum. If you can only do this once a year, than you may have more gains than you planned (and more tax due).
4) Some plans will force you to get two separate checks for gains and contributions. Others will force you to get one check for everything.
5) If you are an HCE, clawbacks can make things very...interesting.
6) Make sure your 1099-R is correct or IRS could get mad and scary.
7) Remember the 5 year clock on each conversion to prevent 10% penalty (minor, but just don't take that money out before 59.5 and you'll be fine).

Really good detail. Thank you.

#7...for some reason, I thought that didn’t apply. Maybe a mega is not really a conversion, but rather a transfer. ? I will want to double check it. Or maybe I didn’t care about it because I could never do it until my next job. Ha ha

[pyld76]

Be wary if you are an HCE and it isn’t a safe harbor plan.

The advice of “roll any pretax earning/basis into the Roth” is also good advice if you are HCE “enough” because you will want to avoid a traditional IRA if st all possible to aid the “regular” backdoor Roth process (to wit, the pro-rata problem).

[megabad]

#7...for some reason, I thought that didn’t apply. Maybe a mega is not really a conversion, but rather a transfer. ? I will want to double check it. Or maybe I didn’t care about it because I could never do it until my next job. Ha ha

Well if you have gains on aftertax contributions, it is difficult to get pretax gains into a Roth without a conversion. Typically this is a minor issue since the gains are usually low for most. Just a minor potential gotcha.

[Earl Lemongrab]

#7...for some reason, I thought that didn’t apply. Maybe a mega is not really a conversion, but rather a transfer. ? I will want to double check it. Or maybe I didn’t care about it because I could never do it until my next job. Ha ha

Well if you have gains on aftertax contributions, it is difficult to get pretax gains into a Roth without a conversion. Typically this is a minor issue since the gains are usually low for most. Just a minor potential gotcha.

If it goes directly into the Roth IRA, then it's a taxable rollover.

[Pigeye Brewster]

Be wary if you are an HCE and it isn’t a safe harbor plan.

Be wary if you are an HCE even if it's a safe harbor plan. After-tax contributions are subject to ACP testing regardless of safe harbor plan status.

[megabad]

#7...for some reason, I thought that didn’t apply. Maybe a mega is not really a conversion, but rather a transfer. ? I will want to double check it. Or maybe I didn’t care about it because I could never do it until my next job. Ha ha

Well if you have gains on aftertax contributions, it is difficult to get pretax gains into a Roth without a conversion. Typically this is a minor issue since the gains are usually low for most. Just a minor potential gotcha.

If it goes directly into the Roth IRA, then it's a taxable rollover.

Linguistically I would call this a "rollover conversion", but that is just my preference. I do not personally like to use only the term "rollover" here because it might imply that you are not exposed to the 5 year clock and you are to my knowledge (on the gains). I am not of the viewpoint that it has to be either or. For example, with respect to an IRA, the IRS refers to a rollover that can also be a conversion. This is just my preference on language use though.

[KyleAAA]

My 401k provider is through Fidelity and I don't need to do anything at all. I don't even need an IRA. I make after-tax contributions to my 401k and Fidelity will automatically convert the entire after-tax balance to Roth quarterly. I pay taxes on the earnings converted, but since it's done quarterly the amount is usually quite small.

[confused1]

Final question (I hope)

Will it matter that I plan to roll my old employer 401k into my new employer 401k? ie will it impact my ability to do the Mega Backdoor Roth Conversion?

Thanks

[Earl Lemongrab]

Final question (I hope)

Will it matter that I plan to roll my old employer 401k into my new employer 401k? ie will it impact my ability to do the Mega Backdoor Roth Conversion?

Plans have a lot of leeway in some things. Theoretically they could require a pro-rata distribution of the rollover and after-tax or something like that. I've never heard of one that did or think of a reason why they would.

[confused1]

Now started at the new co and appears everything is very easy and managed through Vanguard.

Options to either do the mega backdoor within the plan or send to a new Roth IRA, expense rates are much better within the plan so I will probably just leave it there.

Just need to see how close I can get to the max mega conversion with the remaining pay checks this year, maybe not all of it.

Thanks for the advice

[FoolStreet]

Now started at the new co and appears everything is very easy and managed through Vanguard.

Options to either do the mega backdoor within the plan or send to a new Roth IRA, expense rates are much better within the plan so I will probably just leave it there.

Just need to see how close I can get to the max mega conversion with the remaining pay checks this year, maybe not all of it.

Thanks for the advice

Thanks for starting this thread. It has helped me immensely as I feel like I’m in the exact same position as you.

[DarkHelmetII]

5) If you are an HCE, clawbacks can make things very...interesting.

Could you elaborate on clawbacks?

[Spirit Rider]

5) If you are an HCE, clawbacks can make things very...interesting.

Could you elaborate on clawbacks?

After-tax contributions are subject to Actual Contribution Percentage (ACP) anti-discrimination testing even in a Safe Harbor 401k plan.

ACP testing compares the Average Contribution Rate (ACR) of Highly Compensated Employees (HCEs) to Non-HCEs. If the HCEs ACR is > the NHCEs by one of three metrics, the 401k plan fails the ACP test.

If a 401k plan fails the ACP test, the correction method usually used returns excess contributions and earning by 3/15 to the 401k plan. This gets real messy if you have already rolled them both over to a Roth IRA or individually to a (Roth IRA and traditional IRA).

[DarkHelmetII]

If a 401k plan fails the ACP test, the correction method usually used returns excess contributions and earning by 3/15 to the 401k plan. This gets real messy if you have already rolled them both over to a Roth IRA or individually to a (Roth IRA and traditional IRA).

Thank you, very helpful. So if I hold my funds through say, April, should I know if the ACP test failed or not? I realize that on average this will trigger higher taxation of the earnings, but perhaps a trade-off I would be willing to make in order to prevent the potential spaghetti-mess you are referring to.