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

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
confused1
Posts: 17
Joined: Mon Jul 27, 2015 12:03 am

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

Post by confused1 » Fri Oct 12, 2018 12:09 pm

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
Posts: 564
Joined: Fri Sep 07, 2012 12:18 am

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

Post by FoolStreet » Fri Oct 12, 2018 1:01 pm

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.

User avatar
Earl Lemongrab
Posts: 5637
Joined: Tue Jun 10, 2014 1:14 am

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

Post by Earl Lemongrab » Fri Oct 12, 2018 2:58 pm

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).
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
Earl Lemongrab
Posts: 5637
Joined: Tue Jun 10, 2014 1:14 am

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

Post by Earl Lemongrab » Fri Oct 12, 2018 3:01 pm

FoolStreet wrote:
Fri Oct 12, 2018 1:01 pm
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.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

FoolStreet
Posts: 564
Joined: Fri Sep 07, 2012 12:18 am

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

Post by FoolStreet » Fri Oct 12, 2018 3:57 pm

Earl Lemongrab wrote:
Fri Oct 12, 2018 3:01 pm
FoolStreet wrote:
Fri Oct 12, 2018 1:01 pm
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

User avatar
Earl Lemongrab
Posts: 5637
Joined: Tue Jun 10, 2014 1:14 am

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

Post by Earl Lemongrab » Fri Oct 12, 2018 4:01 pm

FoolStreet wrote:
Fri Oct 12, 2018 3:57 pm
Earl Lemongrab wrote:
Fri Oct 12, 2018 3:01 pm
FoolStreet wrote:
Fri Oct 12, 2018 1:01 pm
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?
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

FoolStreet
Posts: 564
Joined: Fri Sep 07, 2012 12:18 am

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

Post by FoolStreet » Fri Oct 12, 2018 4:04 pm

Earl Lemongrab wrote:
Fri Oct 12, 2018 4:01 pm
FoolStreet wrote:
Fri Oct 12, 2018 3:57 pm
Earl Lemongrab wrote:
Fri Oct 12, 2018 3:01 pm
FoolStreet wrote:
Fri Oct 12, 2018 1:01 pm
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
Posts: 476
Joined: Mon Nov 24, 2014 11:30 pm

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

Post by Soon2BXProgrammer » Fri Oct 12, 2018 4:13 pm

FoolStreet wrote:
Fri Oct 12, 2018 4:04 pm
Earl Lemongrab wrote:
Fri Oct 12, 2018 4:01 pm
FoolStreet wrote:
Fri Oct 12, 2018 3:57 pm
Earl Lemongrab wrote:
Fri Oct 12, 2018 3:01 pm
FoolStreet wrote:
Fri Oct 12, 2018 1:01 pm
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
Posts: 564
Joined: Fri Sep 07, 2012 12:18 am

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

Post by FoolStreet » Fri Oct 12, 2018 4:26 pm

Soon2BXProgrammer wrote:
Fri Oct 12, 2018 4:13 pm
FoolStreet wrote:
Fri Oct 12, 2018 4:04 pm
Earl Lemongrab wrote:
Fri Oct 12, 2018 4:01 pm
FoolStreet wrote:
Fri Oct 12, 2018 3:57 pm
Earl Lemongrab wrote:
Fri Oct 12, 2018 3:01 pm

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
Posts: 17
Joined: Mon Jul 27, 2015 12:03 am

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

Post by confused1 » Mon Oct 15, 2018 8:00 pm

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

danaht
Posts: 527
Joined: Sun Oct 18, 2015 11:28 am

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

Post by danaht » Mon Oct 15, 2018 8:12 pm

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
Posts: 408
Joined: Fri May 12, 2017 1:11 pm

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

Post by sailaway » Mon Oct 15, 2018 8:42 pm

danaht wrote:
Mon Oct 15, 2018 8:12 pm
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
Posts: 660
Joined: Fri Jun 01, 2018 4:00 pm

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

Post by megabad » Tue Oct 16, 2018 7:02 pm

confused1 wrote:
Fri Oct 12, 2018 12:09 pm
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
Posts: 564
Joined: Fri Sep 07, 2012 12:18 am

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

Post by FoolStreet » Tue Oct 16, 2018 8:19 pm

megabad wrote:
Tue Oct 16, 2018 7:02 pm
confused1 wrote:
Fri Oct 12, 2018 12:09 pm
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
Posts: 149
Joined: Thu Feb 09, 2012 4:15 pm

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

Post by pyld76 » Tue Oct 16, 2018 8:43 pm

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
Posts: 660
Joined: Fri Jun 01, 2018 4:00 pm

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

Post by megabad » Thu Oct 18, 2018 1:59 pm

FoolStreet wrote:
Tue Oct 16, 2018 8:19 pm
#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. :happy Typically this is a minor issue since the gains are usually low for most. Just a minor potential gotcha.

User avatar
Earl Lemongrab
Posts: 5637
Joined: Tue Jun 10, 2014 1:14 am

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

Post by Earl Lemongrab » Thu Oct 18, 2018 3:00 pm

megabad wrote:
Thu Oct 18, 2018 1:59 pm
FoolStreet wrote:
Tue Oct 16, 2018 8:19 pm
#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. :happy 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.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Pigeye Brewster
Posts: 224
Joined: Thu Oct 05, 2017 7:33 pm

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

Post by Pigeye Brewster » Thu Oct 18, 2018 3:51 pm

pyld76 wrote:
Tue Oct 16, 2018 8:43 pm
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
Posts: 660
Joined: Fri Jun 01, 2018 4:00 pm

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

Post by megabad » Thu Oct 18, 2018 7:26 pm

Earl Lemongrab wrote:
Thu Oct 18, 2018 3:00 pm
megabad wrote:
Thu Oct 18, 2018 1:59 pm
FoolStreet wrote:
Tue Oct 16, 2018 8:19 pm
#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. :happy 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
Posts: 6756
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

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

Post by KyleAAA » Thu Oct 18, 2018 7:32 pm

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
Posts: 17
Joined: Mon Jul 27, 2015 12:03 am

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

Post by confused1 » Fri Oct 19, 2018 10:54 am

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

User avatar
Earl Lemongrab
Posts: 5637
Joined: Tue Jun 10, 2014 1:14 am

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

Post by Earl Lemongrab » Fri Oct 19, 2018 11:05 am

confused1 wrote:
Fri Oct 19, 2018 10:54 am
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.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Post Reply