Mega Backdoor Roth IRA problem

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Hulk
Posts: 226
Joined: Mon Oct 12, 2015 1:08 pm

Mega Backdoor Roth IRA problem

Post by Hulk » Tue Oct 23, 2018 3:45 pm

I am talking with HR and 403(b) plan provider to try to get the rules changed to allow a mega-backdoor Roth IRA according to the 4 rules spelled out by White coat investor

https://www.whitecoatinvestor.com/the-m ... ent-502464

We have gone back and forth a bit but they are unfamiliar with the the ideas and the 4 rules explained. I am trying to site IRS publications to back me up and I came across this…

https://www.irs.gov/retirement-plans/ro ... ment-plans

This states you cannot just roll out after-tax contributions and leave pretax behind. That sounds like it is saying you would have to roll all or none, both after-tax AND pre-tax. Maybe I am reading it wrong. But if i am not, first, the employer (and even more the plan provider) would never go for it and second, rolling to to a traditional IRA would screw up your normal 5.5k BD Roth IRA.

Am I confused here. I am not finding any IRS publication back-up for after-tax contributions or the ability to then roll non-hardship in-service withdrawals of after-tax contributions. Can anyone help me find IRS publication on this?

magicrat
Posts: 465
Joined: Sat Nov 29, 2014 7:04 pm

Re: Mega Backdoor Roth IRA problem

Post by magicrat » Tue Oct 23, 2018 3:51 pm

You basically have to roll out after-tax contributions and the gains on those contributions at the same time. You can send the contributions to a Roth and the gains to a Traditional IRA. If the plan allows for it, you can then roll the gains from the Traditional IRA back into the pre-tax portion of the plan, solving the backdoor Roth issue. Or, if the plan is setup so you can roll out close to the time you make the contribution, gains will be minimal and you can just pay a few dollars in tax.

retiredjg
Posts: 34193
Joined: Thu Jan 10, 2008 12:56 pm

Re: Mega Backdoor Roth IRA problem

Post by retiredjg » Tue Oct 23, 2018 3:54 pm

Many people have stumbled on this and had the same questions. What the IRS says in that paragraph does not mean what it appears to say.

If your after-tax account is held in a separate account, when you roll out the after-tax money you must also roll out the earnings the after-tax money has made. It does not affect the rest of the 401k, much of which is not even eligible to be rolled out anyway.

It is not surprising that HR doesn't know what you are talking about. But your 403b provider should know exactly what an after-tax account is. After-tax contributions have been allowed for many years. This is not new.

I do recall seeing something in an IRS document about what can be rolled out of a 401k account. Maybe I'll stumble over it again.

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