Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

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anon_investor
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Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by anon_investor » Sat Jun 15, 2019 5:11 pm

For the last few months I have been doing the mega backdoor roth every pay check (after tax 401k contributions beyond $19k limit and completing in plan roth conversions with no tax liabilities). I have so far kept these contributions in my Roth 401k, but I have the option to do in service rollovers to my Roth IRA at Vanguard. My 401k has good index fund options with lower expense ratios than Vanguard. With that in mind, since I am decades away from retirement are there any real advantages to do the in service rollover to my Vanguard Roth IRA?

djsander2022
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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by djsander2022 » Sat Jun 15, 2019 5:37 pm

Moving it to a ROTH IRA will allow the gains to be withdrawn tax free in the future. After tax contributions gains in a 401k will be taxable.

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anon_investor
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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by anon_investor » Sat Jun 15, 2019 6:25 pm

djsander2022 wrote:
Sat Jun 15, 2019 5:37 pm
Moving it to a ROTH IRA will allow the gains to be withdrawn tax free in the future. After tax contributions gains in a 401k will be taxable.
To clarify, all the after tax 401k contributions I make are immediately converted in plan to roth 401k. So there is no additional tax benefit to rollover to my Roth IRA. Since I am decades away from retirement the RMD issue is not a concern, are there any other advantaged to make the rollover to roth IRA?

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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by lakpr » Sat Jun 15, 2019 6:27 pm

djsander2022 wrote:
Sat Jun 15, 2019 5:37 pm
Moving it to a ROTH IRA will allow the gains to be withdrawn tax free in the future. After tax contributions gains in a 401k will be taxable.
The OP did say their plan allows in plan Roth conversions, and that he/she is doing it. The question of gains being taxable does not arise.

Now, to answer the question in particular:
- Contributions to Roth IRA are accessible for withdrawal immediately. If you roll the money from Roth 401k to Roth IRA, it is treated as a contribution. You cannot withdraw from a Roth 401k except perhaps as a 401k loan, and even then I believe the loan amount is deemed a proportional distribution of before tax and after tax amounts. Meaning say you have $300k pretax and $100k in Roth in 401k, and you take a loan for $40k, it is assumed to be a loan of $30k pretax and $10k Roth.

- On the other hand, money in 401k plans is protected from creditors. Asset protection for 401k is absolute. If you are in a state like California which allows creditors to seize your IRAs, you might want to keep your Roth money in 401k than IRA

- Roth 401k has RMDs starting age 70.5 just like regular 401k. But that problem is easily solved by rolling out the money to Roth IRA at that time to avoid having to take money out of the Roth account.

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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by ThriftyPhD » Sat Jun 15, 2019 6:52 pm

A few aspects to consider:

Choice of funds. If your current plan has good low cost index funds, this might not be an issue. The only concern might be if they make changes, either passing more fees to you, or getting rid of an index fund that you need/want. This is probably an unlikely event, especially if you're at a big stable Mega Corp, but something to consider.

Transfer bonus. If you have your funds in a IRA rather than 401k, you can move them around and collect brokerage transfer bonuses. See Earl Lemongrab's extensive thead: viewtopic.php?t=196884. For example, if you transfer $20k to Merrill Edge, you'll get $100 in your Roth, tax free, in 90 days. You can then do the same to other brokerages. Line up 4 of those transfers a year and that's $400, a 2% return above and beyond the return on your investments.

Ease of withdrawal. You can take out your contributions tax and penalty free. If maxing the mega backdoor is a stretch, having access to the funds by transferring to an IRA might make it an easier choice.

Creditor protection. As lakpr mentioned, money in the 401k might be better protected from creditors, in your current state or future states you might move to.

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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by bradpevans » Sat Jun 15, 2019 9:11 pm

While it’s very anti boglehead, the IRA account almost certainly has far more investment choices (ie individual stocks can be purchased) compared to the 401

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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by anon_investor » Sat Jun 15, 2019 10:49 pm

Thanks everyone for the replies!

I am at a big stable Mega Corp, so it is unlikely that the fund choices will change. I am happy with the 401k fund choices since I can replicate what I would have otherwise invested in at Vanguard but with lower expense ratios. I have 0 interest in trading individual stocks with my retirement money, but apparently my 401k has that option, albeit with possibly some additional fees. I have little interest trying to snag brokerage transfer bonuses, the less paperwork I have to deal with the better!

The creditor protection is something to consider. I am currently in a state where IRAs are protected, but Mega Corp may relocate me in the future, so that's a plus for keeping it in the 401k.

The Roth 401k rollover to Roth IRA being considered a contribution and eligible to be withdrawn early without penalty is interesting. Fortunately/unfortunately I am a HCE, so my after tax 401k contributions are capped some what (but still able to contribute a large amount), so I am no stretching myself too thin by maxing out my contributions. So I do not anticipate needing to withdraw any money early, but I could always rollover my Roth 401k to Roth IRA if that ever happened.

I think I am just going to keep my money in my Roth 401k now, to take advantage of the lower expense ratios and avoid the extra hassle and paperwork needed to do the in service rollover to my Roth IRA; this also keeps my money safe from creditors in case I ever relocate to California or another state where IRAs are not protected!

Thanks again to the community, always great input!

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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by Alan S. » Sun Jun 16, 2019 12:49 pm

In your situation, a primary factor is to be sure that your plan accounting is set up to continue to flag these IRRs as "otherwise distributable amounts". That means that you could take distributions at any time including doing a direct rollover to your Roth IRA if you wish to.

Note that this sub account would differ from IRRs you might eventually do from your pre tax 401k to your Roth 401k, since those would be "otherwise non distributable amounts". Earnings generated within those two Roth 401k sub accounts must be kept separate from each other.

Roth 401k plans that allow IRRs are therefore subject to much more detailed accounting than those that do not. My impression is that your periodic plan statements will not provide you with a complete breakdown of these various amounts, so if you ever do need a distribution including a direct rollover you will need the complete breakdown. It's moot if you never take a distribution before your Roth money is qualified and totally tax free, but you never know exactly want might happen decades down the road. If you keep these amounts in the Roth 401k, you have to hope that the accounting is spot on.

Conversely, if you rolled these amounts to your Roth IRA, then the accounting for your Roth IRA falls completely on your shoulders since you would need the detail to report any Roth IRA distributions on Form 8606 under the Roth IRA ordering rules. So this boils down to trusting that the 401k accounting is correct vs taking on the accounting yourself if you move these funds to your Roth IRA. Roth IRA distributions use the much more favorable ordering rules while the Roth 401k does not. When you take a NQ Roth 401k distribution, earnings come out pro rated with your contributions, so you would be taxed and penalized on any NQ earnings distributed from the Roth 401k.

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anon_investor
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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by anon_investor » Sun Jun 16, 2019 1:43 pm

Alan S. wrote:
Sun Jun 16, 2019 12:49 pm
In your situation, a primary factor is to be sure that your plan accounting is set up to continue to flag these IRRs as "otherwise distributable amounts". That means that you could take distributions at any time including doing a direct rollover to your Roth IRA if you wish to.

Note that this sub account would differ from IRRs you might eventually do from your pre tax 401k to your Roth 401k, since those would be "otherwise non distributable amounts". Earnings generated within those two Roth 401k sub accounts must be kept separate from each other.

Roth 401k plans that allow IRRs are therefore subject to much more detailed accounting than those that do not. My impression is that your periodic plan statements will not provide you with a complete breakdown of these various amounts, so if you ever do need a distribution including a direct rollover you will need the complete breakdown. It's moot if you never take a distribution before your Roth money is qualified and totally tax free, but you never know exactly want might happen decades down the road. If you keep these amounts in the Roth 401k, you have to hope that the accounting is spot on.

Conversely, if you rolled these amounts to your Roth IRA, then the accounting for your Roth IRA falls completely on your shoulders since you would need the detail to report any Roth IRA distributions on Form 8606 under the Roth IRA ordering rules. So this boils down to trusting that the 401k accounting is correct vs taking on the accounting yourself if you move these funds to your Roth IRA. Roth IRA distributions use the much more favorable ordering rules while the Roth 401k does not. When you take a NQ Roth 401k distribution, earnings come out pro rated with your contributions, so you would be taxed and penalized on any NQ earnings distributed from the Roth 401k.
Thanks, excellent point. Luckily my mega corp 401k is pretty good, the statements have a breakdown between current holdings in regular, roth, roth rollover and after tax categories, as well as separate accounting showing the total contributions and whether they were originally made as regular, roth or after tax. So I am comfortable with my 401k plan's accounting.

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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by THY4373 » Sun Jun 16, 2019 2:05 pm

One advantage of leaving in the 401k I didn't see mentioned though I might have missed it is you can access the 401k via the "rule of 55" if you retire/quit/lose you job with the employer holding the 401k at or after 55 years of age.

I have honestly not been able to make my mind up between these two options so I do a bit of both. Sometimes I rollover to Roth IRA other times to the Roth 401k. That way I have some flexibility.

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Re: Mega backdoor roth, keep in Roth 401k or do in service rollover to Roth IRA

Post by decapod10 » Sun Jun 16, 2019 10:06 pm

anon_investor wrote:
Sat Jun 15, 2019 10:49 pm
Thanks everyone for the replies!

I am at a big stable Mega Corp, so it is unlikely that the fund choices will change. I am happy with the 401k fund choices since I can replicate what I would have otherwise invested in at Vanguard but with lower expense ratios. I have 0 interest in trading individual stocks with my retirement money, but apparently my 401k has that option, albeit with possibly some additional fees. I have little interest trying to snag brokerage transfer bonuses, the less paperwork I have to deal with the better!

The creditor protection is something to consider. I am currently in a state where IRAs are protected, but Mega Corp may relocate me in the future, so that's a plus for keeping it in the 401k.

The Roth 401k rollover to Roth IRA being considered a contribution and eligible to be withdrawn early without penalty is interesting. Fortunately/unfortunately I am a HCE, so my after tax 401k contributions are capped some what (but still able to contribute a large amount), so I am no stretching myself too thin by maxing out my contributions. So I do not anticipate needing to withdraw any money early, but I could always rollover my Roth 401k to Roth IRA if that ever happened.

I think I am just going to keep my money in my Roth 401k now, to take advantage of the lower expense ratios and avoid the extra hassle and paperwork needed to do the in service rollover to my Roth IRA; this also keeps my money safe from creditors in case I ever relocate to California or another state where IRAs are not protected!

Thanks again to the community, always great input!
Note that if you retire before you hit 60 years old and you roll over your Roth 401k to Roth IRA, you’re only allowed to withdraw the contributions to your Roth 401k penalty free, assuming your Roth IRA is at least 5 years old. However, a Roth IRA would be in a similar situation.

My personal feeling is to just go with the Roth 401k. My understanding (though I could be wrong) is that pretty much every disadvantage of the 401k is mitigated by the ability to Roll over the Roth 401k into a Roth IRA at retirement. This avoids RMDs and allows withdrawal of contributions penalty free just like a Roth IRA would. The main advantages that are not fixed by rolling over to a Roth IRA are fund selection and also the ability to move your money around to take advantage of brokerage bonuses.

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Index Funds and ER's

Post by 747driver » Mon Jun 17, 2019 9:51 am

anon_investor wrote:
Sat Jun 15, 2019 10:49 pm
I think I am just going to keep my money in my Roth 401k now, to take advantage of the lower expense ratios and avoid the extra hassle and paperwork needed to do the in service rollover to my Roth IRA...
Lots of small points being brought up, but boiling it all down, I think this is the right call. I'm also at a MegaCorp whose accounting practices are more than fine, have great funds at institutional pricing, and I don't need the money anytime soon. I'm not rolling my Roth 401(k) out to my Roth IRA for the same for the same reasons you bring up.
A clear conscience is a great pillow.

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