Mega Backdoor Roth - How to setup?

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Topic Author
KiloRomeo
Posts: 34
Joined: Tue Jul 29, 2014 8:41 pm

Mega Backdoor Roth - How to setup?

Post by KiloRomeo » Wed Jun 12, 2019 12:47 pm

Long story short, during the interview phase my new employer said they offered a Mega Back Door Roth. Now that the dust is settled, it appears no one in the HR department really knows what that means or how to set it up.

They keep saying "we offer after tax contributions with a roth in plan conversion".

Do I just need to tell them to contribute X of my paycheck to hit $56k (both employer + employee) and then tell them to do the Roth conversion immediately every paycheck?

I've never done this before so I'm hoping you guys can help me help them figure this out. Thank you!

life in slices
Posts: 57
Joined: Mon Apr 15, 2019 6:00 pm

Re: Mega Backdoor Roth - How to setup?

Post by life in slices » Wed Jun 12, 2019 1:24 pm

KiloRomeo wrote:
Wed Jun 12, 2019 12:47 pm
Long story short, during the interview phase my new employer said they offered a Mega Back Door Roth. Now that the dust is settled, it appears no one in the HR department really knows what that means or how to set it up.

They keep saying "we offer after tax contributions with a roth in plan conversion".

Do I just need to tell them to contribute X of my paycheck to hit $56k (both employer + employee) and then tell them to do the Roth conversion immediately every paycheck?

I've never done this before so I'm hoping you guys can help me help them figure this out. Thank you!
Here are a couple of good places to start:

Here is the wiki article on it:
https://www.bogleheads.org/wiki/After-tax_401(k)

An older but decent blogs on it:
https://thefinancebuff.com/rollover-aft ... -roth.html
https://www.whitecoatinvestor.com/the-m ... -roth-ira/

retiredjg
Posts: 36311
Joined: Thu Jan 10, 2008 12:56 pm

Re: Mega Backdoor Roth - How to setup?

Post by retiredjg » Wed Jun 12, 2019 1:30 pm

KiloRomeo wrote:
Wed Jun 12, 2019 12:47 pm
They keep saying "we offer after tax contributions with a roth in plan conversion".
This is one version of the mega back door. Another version is to roll the money out to Roth IRA. That may or may not be offered by your plan. Until you get this all figured out, use the in-plan Roth rollover.
Do I just need to tell them to contribute X of my paycheck to hit $56k (both employer + employee) and then tell them to do the Roth conversion immediately every paycheck?
That is the basic idea but they may or may not allow you to convert every paycheck. If yes, all the better.
I've never done this before so I'm hoping you guys can help me help them figure this out. Thank you!
This is a tremendous benefit if you can save money that would otherwise go to a taxable account. It sounds like they know what they are doing so just follow their instructions and you should be OK.

imyeti2
Posts: 90
Joined: Fri May 31, 2013 3:45 pm

Re: Mega Backdoor Roth - How to setup?

Post by imyeti2 » Wed Jun 12, 2019 1:36 pm

Who is your 401k administrator? You need to contact them. Check all your plan documents. You need an in-service distribution to be able to do that.

How big is your company? HR people rarely understand these nuances. You need to talk to someone in your finance organization.

Pigeye Brewster
Posts: 357
Joined: Thu Oct 05, 2017 7:33 pm

Re: Mega Backdoor Roth - How to setup?

Post by Pigeye Brewster » Wed Jun 12, 2019 2:41 pm

Are you going to be a highly compensated employee (HCE)? If so, you need to be aware that after-tax contributions are subject to ACP testing even if the plan is a safe harbor plan. That might limit your utilization of the Mega Backdoor Roth.

Topic Author
KiloRomeo
Posts: 34
Joined: Tue Jul 29, 2014 8:41 pm

Re: Mega Backdoor Roth - How to setup?

Post by KiloRomeo » Thu Jun 13, 2019 9:06 am

imyeti2 wrote:
Wed Jun 12, 2019 1:36 pm
Who is your 401k administrator? You need to contact them. Check all your plan documents. You need an in-service distribution to be able to do that.

How big is your company? HR people rarely understand these nuances. You need to talk to someone in your finance organization.
Very large multi national. I've been talking to the 401k administrator which is Fidelity.

Topic Author
KiloRomeo
Posts: 34
Joined: Tue Jul 29, 2014 8:41 pm

Re: Mega Backdoor Roth - How to setup?

Post by KiloRomeo » Thu Jun 13, 2019 9:07 am

Pigeye Brewster wrote:
Wed Jun 12, 2019 2:41 pm
Are you going to be a highly compensated employee (HCE)? If so, you need to be aware that after-tax contributions are subject to ACP testing even if the plan is a safe harbor plan. That might limit your utilization of the Mega Backdoor Roth.

I'm not sure what the cutoffs are for that. I make mid/low 6 figures.

Pigeye Brewster
Posts: 357
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Re: Mega Backdoor Roth - How to setup?

Post by Pigeye Brewster » Thu Jun 13, 2019 12:26 pm

KiloRomeo wrote:
Thu Jun 13, 2019 9:07 am
Pigeye Brewster wrote:
Wed Jun 12, 2019 2:41 pm
Are you going to be a highly compensated employee (HCE)? If so, you need to be aware that after-tax contributions are subject to ACP testing even if the plan is a safe harbor plan. That might limit your utilization of the Mega Backdoor Roth.

I'm not sure what the cutoffs are for that. I make mid/low 6 figures.
Check with your HR. But the basic number for 2019 is $125K.

And to be clear, being HCE doesn't mean you can't make after-tax contributions. It just might limit the amount you can make. It all depends on the ACP test results, which in turn are driven by the amount of non-HCE after-tax contributions (if any).

Some plans that have long had after-tax contributions have non-HCE participation. That's the case at my company. Some folks use it as a payroll deduction savings plan to save up for Christmas or vacation.

And if you aren't HCE, you're good to go. And your after-tax contributions might help someone who is HCE participate.

retiredjg
Posts: 36311
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Re: Mega Backdoor Roth - How to setup?

Post by retiredjg » Thu Jun 13, 2019 12:33 pm

KiloRomeo wrote:
Thu Jun 13, 2019 9:07 am
I'm not sure what the cutoffs are for that. I make mid/low 6 figures.
I think this is specific to your employer and involves who and how many people participate in what plan and how much they each make and how much they each contribute. In other words, ask your employer. And I think the answer may be different from year to year.

megabad
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Re: Mega Backdoor Roth - How to setup?

Post by megabad » Thu Jun 13, 2019 1:01 pm

KiloRomeo wrote:
Thu Jun 13, 2019 9:07 am
Pigeye Brewster wrote:
Wed Jun 12, 2019 2:41 pm
Are you going to be a highly compensated employee (HCE)? If so, you need to be aware that after-tax contributions are subject to ACP testing even if the plan is a safe harbor plan. That might limit your utilization of the Mega Backdoor Roth.

I'm not sure what the cutoffs are for that. I make mid/low 6 figures.
HCE is 125k for 2019 I believe. Depending on what you mean by "mid/low" 6 figures, an after tax 401k may or may not be of limited value to you. You will need to determine the HCE impacts from your corporate plan. Typically contribution limits are reduced drastically for HCEs. If you make 500k per year, this probably doesn't mean anything to you (and after tax 401k is great). If you make 126k per year than it can have a huge impact and can really hurt your tax advantaged space.

PS. Technically, I would not call what you are describing a "megabackdoor Roth IRA" but rather an "after-tax 401k option with an available in-plan Roth conversion". Of course, technically (legally) there is no such thing as a "megabackdoor Roth IRA" anyway.

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kenyan
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Re: Mega Backdoor Roth - How to setup?

Post by kenyan » Thu Jun 13, 2019 4:17 pm

Definitely find out how many in-plan Roth conversions are allowed per year from Fidelity. Mine only allows four; it would be a bummer to use them all up in the first couple of months. I actually roll mine out of the plan to a Roth IRA, but I'm still subject to four of those transactions per year, and it's done manually. Perhaps there are some plans that will allow you to automate all of this, but my guess would be that the majority don't, and you need to take some action (even if it's just a few clicks on a website each time you want to convert).

My administrator - also Fidelity - also wrongly under the impression that I could execute these transactions online, but unfortunately it requires a phone call each time. That may or may not be the case for you.
Retirement investing is a marathon.

m1collector
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Re: Mega Backdoor Roth - How to setup?

Post by m1collector » Thu Jun 13, 2019 7:50 pm

My employer who uses Fidelity just started offering an After-Tax option with the capability to do an automatic rollover to a Roth. Here is how it works. You enter your contribution percentages on Fidelity’s NetBenefits web site for traditional 401K, Roth 401K, and After-Tax. They are different sources within the 401K that Fidelity tracks for you. Then with the After-Tax, you can call Fidelity and have them setup an automatic conversion of the After-Tax to Roth. So on the day the money is deposited into the After-Tax source, that night they will convert the money to the Roth source. A one time setup and executes every time money is deposited into After-Tax. So essentially the money is transferred to your Roth 401K source, and not some other account.

You can max out $19K between the traditional and Roth sources in the 401K and contribute another $37K to the After-Tax source which then ends up in the Roth source if you setup the automatic conversion.

Topic Author
KiloRomeo
Posts: 34
Joined: Tue Jul 29, 2014 8:41 pm

Re: Mega Backdoor Roth - How to setup?

Post by KiloRomeo » Fri Jun 14, 2019 7:41 am

megabad wrote:
Thu Jun 13, 2019 1:01 pm

PS. Technically, I would not call what you are describing a "megabackdoor Roth IRA" but rather an "after-tax 401k option with an available in-plan Roth conversion". Of course, technically (legally) there is no such thing as a "megabackdoor Roth IRA" anyway.
Because it's potentially being converted to a Roth 401k instead of IRA?

Topic Author
KiloRomeo
Posts: 34
Joined: Tue Jul 29, 2014 8:41 pm

Re: Mega Backdoor Roth - How to setup?

Post by KiloRomeo » Fri Jun 14, 2019 7:42 am

m1collector wrote:
Thu Jun 13, 2019 7:50 pm
My employer who uses Fidelity just started offering an After-Tax option with the capability to do an automatic rollover to a Roth. Here is how it works. You enter your contribution percentages on Fidelity’s NetBenefits web site for traditional 401K, Roth 401K, and After-Tax. They are different sources within the 401K that Fidelity tracks for you. Then with the After-Tax, you can call Fidelity and have them setup an automatic conversion of the After-Tax to Roth. So on the day the money is deposited into the After-Tax source, that night they will convert the money to the Roth source. A one time setup and executes every time money is deposited into After-Tax. So essentially the money is transferred to your Roth 401K source, and not some other account.

You can max out $19K between the traditional and Roth sources in the 401K and contribute another $37K to the After-Tax source which then ends up in the Roth source if you setup the automatic conversion.

Thank you.

Topic Author
KiloRomeo
Posts: 34
Joined: Tue Jul 29, 2014 8:41 pm

Re: Mega Backdoor Roth - How to setup?

Post by KiloRomeo » Fri Jun 14, 2019 7:42 am

life in slices wrote:
Wed Jun 12, 2019 1:24 pm

Here are a couple of good places to start:

Here is the wiki article on it:
https://www.bogleheads.org/wiki/After-tax_401(k)

An older but decent blogs on it:
https://thefinancebuff.com/rollover-aft ... -roth.html
https://www.whitecoatinvestor.com/the-m ... -roth-ira/


The finance buff post here has been very helpful. Thanks for this!

Spirit Rider
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Re: Mega Backdoor Roth - How to setup?

Post by Spirit Rider » Fri Jun 14, 2019 7:59 am

m1collector wrote:
Thu Jun 13, 2019 7:50 pm
You can max out $19K between the traditional and Roth sources in the 401K and contribute another $37K to the After-Tax source which then ends up in the Roth source if you setup the automatic conversion.
The annual addition limit (2019 = $56K) includes all employee and employer contributions.

Therefore, for 2019 the maximum employee after-tax contribution = $56K - employee elective contributions - employer contributions - forfeitures (not common).

If you make the 2019 $19K maximum employee elective contribution, the maximum employee after-tax contribution is only $37K if there are no employer match and/or non-elective (AKA profit sharing) contributions.

m1collector
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Joined: Mon Dec 25, 2017 8:24 pm

Re: Mega Backdoor Roth - How to setup?

Post by m1collector » Fri Jun 14, 2019 5:02 pm

Thank you Spirit Rider for clarifying. My employer matches 50% on first 8%.

flah
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Joined: Tue Feb 23, 2016 9:20 am

Re: Mega Backdoor Roth - How to setup?

Post by flah » Fri Jun 14, 2019 7:05 pm

Spirit Rider wrote:
Fri Jun 14, 2019 7:59 am
m1collector wrote:
Thu Jun 13, 2019 7:50 pm
You can max out $19K between the traditional and Roth sources in the 401K and contribute another $37K to the After-Tax source which then ends up in the Roth source if you setup the automatic conversion.
The annual addition limit (2019 = $56K) includes all employee and employer contributions.

Therefore, for 2019 the maximum employee after-tax contribution = $56K - employee elective contributions - employer contributions - forfeitures (not common).

If you make the 2019 $19K maximum employee elective contribution, the maximum employee after-tax contribution is only $37K if there are no employer match and/or non-elective (AKA profit sharing) contributions.
You can contribute more than $37K to after-tax if you reduce elective contributions, but this is only useful if for some weird reason your plan does not have a Roth 401k option and you really want to contribute to Roth, or if you changed jobs and had already made some elective contributions at the old job.

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