Mega Backdoor ROTH Clarification

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sapper1371
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Mega Backdoor ROTH Clarification

Post by sapper1371 » Fri Jan 11, 2019 2:34 pm

So last year I contributed about $200 to my 401k over the $18.5k limit so my plan automatically added the excess as an “after tax” contribution. I figured this might be the perfect time to see if I can do a MBR so I asked them if I was allowed to roll that excess into a ROTH IRA that I had with another provider.

They said that they can do this but it will be in the form of a check to TD Ameritrade (my ROTH provider) in the name of my account that I will need to pass on to TDA. They said they cannot do a direct transfer or send the check directly to TDA

Any issues with this or does this mean that I am eligible to do a MBR?

Alan S.
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Re: Mega Backdoor ROTH Clarification

Post by Alan S. » Fri Jan 11, 2019 3:19 pm

Not a problem.
This is the standard direct rollover process. You will get a 1099R showing the taxable amount (a few bucks of earnings) in Box 2a.

What your W-2 shows is another issue. I think the plan must record 18.7 of elective deferrals and treat the excess as distributed to you and recontributed by you to the after tax sub account, even though you never received the funds. If that is the case, you will be adding the 200 to your W-2 wages for 2018, and will also get a 1099R for the distribution of the excess.


Of course, it would be easier if they could consider the excess as intercepted and contributed as after tax before it triggers an excess deferral. In a couple weeks post back and tell us what your W-2 reports and if you got a 1099R. Again, this is about how the excess deferral got into the after tax account, not your MBR, which will be reported in 2019.

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cockersx3
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Re: Mega Backdoor ROTH Clarification

Post by cockersx3 » Fri Jan 11, 2019 8:58 pm

Alan S. wrote:
Fri Jan 11, 2019 3:19 pm
Not a problem.
This is the standard direct rollover process. You will get a 1099R showing the taxable amount (a few bucks of earnings) in Box 2a.

What your W-2 shows is another issue. I think the plan must record 18.7 of elective deferrals and treat the excess as distributed to you and recontributed by you to the after tax sub account, even though you never received the funds. If that is the case, you will be adding the 200 to your W-2 wages for 2018, and will also get a 1099R for the distribution of the excess.


Of course, it would be easier if they could consider the excess as intercepted and contributed as after tax before it triggers an excess deferral. In a couple weeks post back and tell us what your W-2 reports and if you got a 1099R. Again, this is about how the excess deferral got into the after tax account, not your MBR, which will be reported in 2019.
I routinely do mega backdoor Roth conversions, and just got my company W-2 this week. It shows a elective deferral of $18500 (code D) in one of the line 12 blocks. The amount I contributed above this didn't show up on my W-2, presumably because it is after tax and has no impact on anything shown in the W-2. I would think it would be the same for the OP - ie there should be no need to adjust whatever the OP's W-2 lists as income.

As an alternative - if the OP's 401(k) provider offers Roth IRA's and the fees are reasonable, the OP could just start a new Roth IRA with them. That's what I do with my 401K provider, which is Fidelity. This would eliminate the need to deal with paper checks and moving the amounts between brokerages. I actually just did my MBR for last year this evening, and the funds will be in my Roth IRA account at close of business Monday.

My taxable brokerage account is with Vanguard, but I decided to keep my Roth IRA there at Fidelity to make things easier. I figure that when I retire, I can simply roll everything back over to Vanguard if I feel the need to keep everything in one spot.

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Earl Lemongrab
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Re: Mega Backdoor ROTH Clarification

Post by Earl Lemongrab » Sat Jan 12, 2019 3:09 pm

Yeah, I did Mega Backdoor at my company for years. It's just part of the plan rules that when you reach the deferral limit the contributions automatically change to after-tax. Nothing on the W2 about excess deferrals.

You could have a specific contribution percentage to AT if you wanted at Megacorp, but I never did that. I preferred the AT to backload in the year to reduce earnings before rollover, plus it's the easy way to do it. No calcutions needed.

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sapper1371
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Re: Mega Backdoor ROTH Clarification

Post by sapper1371 » Fri Jan 18, 2019 2:53 pm

OK I tried to roll the excess from the after tax contribution into my ROTH but the plan administrator said that I cannot just pull from the after tax portion alone. She said that if I make a request it will pull from all of my accounts. I thought this seemed odd but I looked through my Summary plan description in the "in-service withdraws" section and it does have a statement that says:
Withdrawal requests are made against the total assets available in all four accounts (Pre-Tax, After-Tax, Employer Match, and Rollover).
Has anyone seen something similar? Does this mean that I cannot do a MBR?

bradpevans
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Re: Mega Backdoor ROTH Clarification

Post by bradpevans » Fri Jan 18, 2019 4:15 pm

sapper1371 wrote:
Fri Jan 18, 2019 2:53 pm
OK I tried to roll the excess from the after tax contribution into my ROTH but the plan administrator said that I cannot just pull from the after tax portion alone. She said that if I make a request it will pull from all of my accounts. I thought this seemed odd but I looked through my Summary plan description in the "in-service withdraws" section and it does have a statement that says:
Withdrawal requests are made against the total assets available in all four accounts (Pre-Tax, After-Tax, Employer Match, and Rollover).
Has anyone seen something similar? Does this mean that I cannot do a MBR?
Can you call again (and get a different representative)?
That language may be generic and your specific case would only come from the after tax bucket.
For instance, my plan allows the "employer match" funds to be sold off and moved to IRA - which massively increases
the number of investment choices as compared to 'new money from my paycheck'

And it definitely allows After Tax 401K --> Roth 401K (in service rollover / in service withdraw )

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sapper1371
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Re: Mega Backdoor ROTH Clarification

Post by sapper1371 » Fri Jan 18, 2019 6:33 pm

I can try calling again but I asked the rep on the phone to double check and she seemed confident. That plus the wording in the plan description has me thinking I’m not going to be able to do it.

What I don’t get though is why they would combine everything for an in-service withdraw/rollover given that some portions of the account have been taxed and others have not.

retiredjg
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Re: Mega Backdoor ROTH Clarification

Post by retiredjg » Fri Jan 18, 2019 7:27 pm

sapper1371 wrote:
Fri Jan 18, 2019 2:53 pm
OK I tried to roll the excess from the after tax contribution into my ROTH but the plan administrator said that I cannot just pull from the after tax portion alone. She said that if I make a request it will pull from all of my accounts. I thought this seemed odd but I looked through my Summary plan description in the "in-service withdraws" section and it does have a statement that says:
Withdrawal requests are made against the total assets available in all four accounts (Pre-Tax, After-Tax, Employer Match, and Rollover).
Has anyone seen something similar? Does this mean that I cannot do a MBR?
We have not seen a plan like this for awhile. Most plans seem to have "separate accounts" and you are allowed to withdraw from some of them without affecting the others. It seems your plan is not using the "separate account" method.

I think this makes you ineligible to use the Mega back door unless there is some misunderstanding going on.

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sapper1371
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Re: Mega Backdoor ROTH Clarification

Post by sapper1371 » Fri Jan 25, 2019 2:13 pm

I tried calling one more time to see what a 3rd rep said and got the same answer. I can do a rollover but it will withdraw some from all contributions (rollover, pre-tax, post-tax and employer match).

I asked if this was rare but the rep said it was pretty common. Too bad 🤔

pdavi21
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Re: Mega Backdoor ROTH Clarification

Post by pdavi21 » Fri Jan 25, 2019 2:31 pm

EDIT: Incorrect comment.

Mega Backdoor ROTHs could definitely be considered a loophole that was never intended to be legally possible. Your 401k provider is taking the cautious route.

I see no reason why you couldn't roll over the entire amount to IRAs upon separation or age 59.5. (Assuming they allow in-service distribution). That would allow you to do the less efficient version of Mega Backdoor ROTH.
Last edited by pdavi21 on Fri Jan 25, 2019 2:57 pm, edited 2 times in total.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Earl Lemongrab
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Re: Mega Backdoor ROTH Clarification

Post by Earl Lemongrab » Fri Jan 25, 2019 2:42 pm

pdavi21 wrote:
Fri Jan 25, 2019 2:31 pm
I thought the subaccount method was determined to be unecessary and that the Pro Rata Rule only applied to IRA to IRA Conversions.

Either way, Mega Backdoor ROTHs could definitely be considered a loophole that was never intended to be legally possible. Your 401k provider is taking the cautious route.
Not really. The IRS has even issued guidelines on how to split the rollover to direct the pretax part to TIRA and the basis to Roth.

pdavi21
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Re: Mega Backdoor ROTH Clarification

Post by pdavi21 » Fri Jan 25, 2019 2:47 pm

I stand corrected. Subaccount is required.
From IRS regarding after-tax rollovers from 401ks:

"Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?
No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:

pretax amounts to a traditional IRA or another eligible retirement plan, and
after-tax amounts to a Roth IRA."

Seems like the subaccount method is a pretty big loophole though. I hope my Megas never get a second look from the IRS.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

lakpr
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Re: Mega Backdoor ROTH Clarification

Post by lakpr » Fri Jan 25, 2019 2:52 pm

Wondering if the term “withdrawal” is tripping them up? Can you check what happens if you opt for an in-plan Roth conversion? Surely there is a certain hierarchy in which the funds are sourced from, not pro-rata? The statement you pasted from your plan only says funds will be sourced from all these categories, but does not necessarily mention the term pro-rata or equal proportions...

retiredjg
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Re: Mega Backdoor ROTH Clarification

Post by retiredjg » Fri Jan 25, 2019 5:48 pm

pdavi21 wrote:
Fri Jan 25, 2019 2:31 pm
Mega Backdoor ROTHs could definitely be considered a loophole that was never intended to be legally possible. Your 401k provider is taking the cautious route.
It is not a loophole. It is specifically allowed by the IRS (which presumably means it is specifically allowed by law).

Sorry I cannot lay my fingers on it just now, but I've read IRS guidance on what is allowed to be distributed without penalty and what is not allowed to be distributed without penalty.

The fact that something is allowed does not mean the plan has to allow it. The plan can have narrower rules.

From memory, allowed distributions without a penalty include a distribution from money you rolled into the 401k (or similar plan), the employer match, and the after-tax contributions. I think that's it, but there could be one more.

For all this to happen, the people keeping up with all this must account for each type of money separately.

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Epsilon Delta
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Re: Mega Backdoor ROTH Clarification

Post by Epsilon Delta » Fri Jan 25, 2019 6:30 pm

The fact that the IRS issues guidance about something does not mean it was intended or that it was not a loophole. All loopholes are allowed by law. If it's not allowed it's not a loophole -- it's tax evasion.

The initial history of the 401(k) shows that the 401(k) as we know it today was not envisioned by the legislation that enabled it. Although it is clear that having seen the consequences congress and the IRS decided that they like, or at least tolerated, the invention.

retiredjg
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Re: Mega Backdoor ROTH Clarification

Post by retiredjg » Fri Jan 25, 2019 6:40 pm

Epsilon Delta wrote:
Fri Jan 25, 2019 6:30 pm
The fact that the IRS issues guidance about something does not mean it was intended or that it was not a loophole. All loopholes are allowed by law. If it's not allowed it's not a loophole -- it's tax evasion.
That's an interesting position and I can't disagree. :D

I guess my point had more to do with a company feeling it needed to take a "cautious approach".

Loophole or not, the "mega back door" is permitted. There is nothing sneaky or underhanded or under the table about it. It is allowed by law.

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Epsilon Delta
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Re: Mega Backdoor ROTH Clarification

Post by Epsilon Delta » Fri Jan 25, 2019 6:52 pm

retiredjg wrote:
Fri Jan 25, 2019 6:40 pm
I guess my point had more to do with a company feeling it needed to take a "cautious approach".

Loophole or not, the "mega back door" is permitted. There is nothing sneaky or underhanded or under the table about it. It is allowed by law.
I agree with that.

Except perhaps "sneaky". I admire "sneaky". :twisted: At least the part that is described as crafty, cunning, wily, clever, artful, ...

Topic Author
sapper1371
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Re: Mega Backdoor ROTH Clarification

Post by sapper1371 » Fri Jan 25, 2019 7:07 pm

So just to recap, the fact that my plan doesn’t allow me to rollover that after-tax portion alone means no MBR for me correct?

retiredjg
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Re: Mega Backdoor ROTH Clarification

Post by retiredjg » Fri Jan 25, 2019 7:24 pm

Correct. :(

I suppose you could do it, but you would not want to.

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Earl Lemongrab
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Re: Mega Backdoor ROTH Clarification

Post by Earl Lemongrab » Fri Jan 25, 2019 7:57 pm

The plan can't allow you to roll your pretax or Roth contributions out unless you're age 59-1/2. The law just doesn't permit it. I'm dubious. I think the rep is getting confused with the requirement to also distribute a proportional share of pretax earnings with the after-tax. That's not the same thing a pro-rata from all accounts.

Pigeye Brewster
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Re: Mega Backdoor ROTH Clarification

Post by Pigeye Brewster » Fri Jan 25, 2019 11:22 pm

Earl Lemongrab wrote:
Fri Jan 25, 2019 2:42 pm
pdavi21 wrote:
Fri Jan 25, 2019 2:31 pm
I thought the subaccount method was determined to be unecessary and that the Pro Rata Rule only applied to IRA to IRA Conversions.

Either way, Mega Backdoor ROTHs could definitely be considered a loophole that was never intended to be legally possible. Your 401k provider is taking the cautious route.
Not really. The IRS has even issued guidelines on how to split the rollover to direct the pretax part to TIRA and the basis to Roth.
The two plan features that allow for the Mega Backdoor Roth, after-tax contributions and in-service withdrawals of those after-tax contributions, were allowable in plans long before Roth accounts were even possible. I know it goes back to at least 1986 because the TRA of 1986 required that after-tax contributions be included in section 415 limits.

My company's plan has long had both after-tax and in-service. We've always had a few folks that use it as a payroll deduction short-term savings plan. They do after-tax contributions, then withdraw them later in the year when they need the funds for vacation or Christmas. In terms of MBR, that's a good thing because they're NHCE and it helps with the ACP testing for HCEs.

So the MBR just makes use of these features. Whether or not that's a loophole is a matter of opinion, I suppose. Not that it matters, though. As Mr. Lemongrab notes, the IRS Notice 2014-54 provided official guidance on it. :beer

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