Mega backdoor Roth question

[Todd.M]

Hello,

My wife recently started a new job and I’ve been going through the 401k Summary Plan Description to see if she could do a mega backdoor Roth in the future.
It seems like she could do it but then her contributions would be suspended for 6 months.
The suspension makes the mega backdoor Roth a no-go in my opinion, but I don’t know if I’m missing something.

Am I missing something? Any thoughts or opinions are appreciated.

The information below is from the Summary plan Description.
After-Tax Withdrawal
• You can withdraw all or part of your After-Tax Contribution subaccount for any reason. 6 month plan suspension.

Plan Suspension
During a plan suspension period, your Elective Deferrals and After-Tax Contributions will automatically stop.
• Your contributions will restart automatically following a suspension period.
• Changes take effect the next possible pay period. The company match will apply to your restarted Elective Deferrals and After-Tax Contributions.

I apologize if I did not include a necessary piece of information, please let me know if I’m missing something and I’ll edit my post.

Thanks all,
Todd

[whodidntante]

Ugh. Something like usually only applies to hardship withdrawals, not in-service withdrawals.

It might still be worth doing, if:
There is a true up of the employer match, or a lump sum of the employer match.
You can still max the contributions, or contribute as much as you would have anyway.

I would find out who is on the 401k/benefits committee, and possibly also the 401k administrator, and lobby them to change the plan document at the next opportunity. This rule isn't good.

[Todd.M]

Thanks for your response whodidntante.
Unfortunately, the suspension is not only for hardship withdrawals.

In-Service Withdrawals from Your Account
There are many types of withdrawals you can make while you are an employee.
Types of Withdrawals Plan Suspension :

Age 59½ In-Service Withdrawal
• You can take an in-service withdrawal of all or part of your vested Allergan 401(k) account (including amounts attributable to Profit Sharing Contributions, Retirement Contributions and your ESOP subaccount) after you reach age 59½.
Plan suspension: None

Rollover Withdrawal
• You can withdraw all or part of your Rollover Contribution subaccount for any reason.
Plan suspension: None

After-Tax Withdrawal
• You can withdraw all or part of your After-Tax Contribution subaccount for any reason.
Plan suspension: 6 months

Match
• You can withdraw all or part of your 401(k) account attributable to your vested Match for any reason, provided that such amounts were contributed at least 2 years prior to your withdrawal and you have withdrawn the portion of your 401(k) account attributable to your Rollover and After-Tax Contributions.
Plan suspension: None

Hardship Withdrawal
• You can withdraw all or part of your Elective Deferral subaccount (excluding any earnings attributable to your Elective Deferrals after December 31, 1998) and the vested portion of your Match subaccount regardless of the 2-year rule if you qualify for a hardship withdrawal. Hardship withdrawals from your Retirement Contribution subaccount or your ESOP subaccount are not permitted.
Plan suspension: 6 months (12 months for Puerto Ricobased payroll employees)

[magicrat]

How long does she expect to be with that employer? One option is to max after tax contributions, then when she leaves rollover the contributions to a rIRA and earnings to a tIRA.

[lakpr]

Does the plan offer an In-Plan Roth Rollover? The plan should have a Roth 401-k option for this to be true.

It is not strictly necessary for the plan to offer a way to roll over the after-tax contributions to a Roth IRA. As long as they end up in a Roth account it is good enough. At the time of exit from the employer, she can roll over the money into her Roth IRA and thus escape the RMD requirement.

My own Megacorp plan allows unlimited after-tax to Roth 401k conversions within the plan, but restricts the maximum amount one can contribute to after-tax plan to 10% of the annual base salary (can't contribute bonus amounts to either regular 401k or Roth 401k or after-tax 401k).

[Todd.M]

Does the plan offer an In-Plan Roth Rollover? The plan should have a Roth 401-k option for this to be true.

It is not strictly necessary for the plan to offer a way to roll over the after-tax contributions to a Roth IRA. As long as they end up in a Roth account it is good enough. At the time of exit from the employer, she can roll over the money into her Roth IRA and thus escape the RMD requirement.

My own Megacorp plan allows unlimited after-tax to Roth 401k conversions within the plan, but restricts the maximum amount one can contribute to after-tax plan to 10% of the annual base salary (can't contribute bonus amounts to either regular 401k or Roth 401k or after-tax 401k).

Nice one lakpr! Now we’re thinking!

The plan does allow In Plan Roth Conversions.

Megacorp has elected to add a provision to the Megacorp 401(k) that allows select participants to “convert” non-Roth monies to Roth 401(k) monies. If you are an active employee who is entitled to take an inservice withdrawal from the Megacorp 401(k), you may elect to take a distribution of available non-Roth money from your Megacorp 401(k) account and immediately roll it back into your Roth 401(k) account in the Megacorp 401(k). The resulting rollover does not apply to your annual contribution limit under the Megacorp 401(k).

If you withdraw After-Tax Contributions and associated investment earnings and roll them back into the Roth 401(k) account, you will not owe any taxes on your contributions, as you have paid them already. However, you will owe current taxes on any associated investment earnings on these After-Tax Contributions. If, however, you choose to convert these After-Tax Contributions, when you later withdraw the Roth 401(k) amounts in a “qualified distribution,” you will not have to pay taxes on any investment earnings that accumulate after you make this conversion.

[Spirit Rider]

While @lakpr's suggestion was excellent, She should also consider petitioning her employer/plan to remove this suspension, since it is timely.

The IRS issued regulations effective 1/1/2019 that changed the 6-month suspension for hardship withdrawals to optional effective 1/1/2019 and prohibited effective 1/1/2020. There never was any requirement to have such a suspension for after-tax withdrawals.

Since the plan must amend their plan anyway to remove the suspension for hardship withdrawals by 1/1/2020, petition them to remove the after-tax withdrawal suspension at the same time. The more employees she can gather to support this change the more likelihood of a favorable outcome.

[Todd.M]

While @lakpr's suggestion was excellent, She should also consider petitioning her employer/plan to remove this suspension, since it is timely.

The IRS issued regulations effective 1/1/2019 that changed the 6-month suspension for hardship withdrawals to optional effective 1/1/2019 and prohibited effective 1/1/2020. There never was any requirement to have such a suspension for after-tax withdrawals.

Since the plan must amend their plan anyway to remove the suspension for hardship withdrawals by 1/1/2020, petition them to remove the after-tax withdrawal suspension at the same time. The more employees she can gather to support this change the more likelihood of a favorable outcome.

Thanks for the suggestion Spirit Rider.

[Earl Lemongrab]

After-Tax Withdrawal
• You can withdraw all or part of your After-Tax Contribution subaccount for any reason.
Plan suspension: 6 months

Match
• You can withdraw all or part of your 401(k) account attributable to your vested Match for any reason, provided that such amounts were contributed at least 2 years prior to your withdrawal and you have withdrawn the portion of your 401(k) account attributable to your Rollover and After-Tax Contributions.
Plan suspension: None

That's the opposite of MegaCorp. There you get a suspension if you withdraw company contributions before 59-1/2.

[seed4great]

I'm curious what are those after tax contribution subaccounts? Are they different from Roth 401K? Do they still count against $56K total contribution rule?

[Spirit Rider]

After-Tax Withdrawal
• You can withdraw all or part of your After-Tax Contribution subaccount for any reason.
Plan suspension: 6 months

Match
• You can withdraw all or part of your 401(k) account attributable to your vested Match for any reason, provided that such amounts were contributed at least 2 years prior to your withdrawal and you have withdrawn the portion of your 401(k) account attributable to your Rollover and After-Tax Contributions.
Plan suspension: None

That's the opposite of MegaCorp. There you get a suspension if you withdraw company contributions before 59-1/2.

I think that is the opposite of most plans. Employers might have a legitimate reason for discouraging the in-service distribution of vested employer contributions. However, most plans don't have such a restriction on employee after-tax contributions and to have them on employee after-tax contributions and not on employer contributions makes no rational sense.

[Spirit Rider]

I'm curious what are those after tax contribution subaccounts? Are they different from Roth 401K? Do they still count against $56K total contribution rule?

Employee after-tax contributions are totally different from designated Roth contributions. They are included in the $56K annual addition limit, which includes all employee + employer contributions.

[sailaway]

I'm curious what are those after tax contribution subaccounts? Are they different from Roth 401K? Do they still count against $56K total contribution rule?

The much announced $19k limit applies to Roth or traditional.

Then there is a separate $56k limit which includes the $19k, employer match, if offered, and after tax, if the plan allows it.

The after tax space is similar to a non deductible tIRA contribution. It doesn't really mean anything if you leave it there, except probably higher taxes because the earnings will be taxes at your ordinary income rate when you withdraw them. However, these monies can be converted to Roth, which is the only reason anyone uses them.

[lakpr]

After-Tax Withdrawal
• You can withdraw all or part of your After-Tax Contribution subaccount for any reason.
Plan suspension: 6 months

Match
• You can withdraw all or part of your 401(k) account attributable to your vested Match for any reason, provided that such amounts were contributed at least 2 years prior to your withdrawal and you have withdrawn the portion of your 401(k) account attributable to your Rollover and After-Tax Contributions.
Plan suspension: None

That's the opposite of MegaCorp. There you get a suspension if you withdraw company contributions before 59-1/2.

I think that is the opposite of most plans. Employers might have a legitimate reason for discouraging the in-service distribution of vested employer contributions. However, most plans don't have such a restriction on employee after-tax contributions and to have them on employee after-tax contributions and not on employer contributions makes no rational sense.

If I am reading it correctly, this says that before you can access the vested match, you will have to withdraw any rollover amounts first, then any after tax contributions next (thus inviting the 6 month suspension), and only then you get to access vested match. By that time you are already suspended from the plan, so “Plan suspension: none” is really meaningless isn’t it?