Just to be clear - Mega Backdoor Roth

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Topic Author
Johnny99
Posts: 24
Joined: Thu Mar 02, 2017 8:48 am

Just to be clear - Mega Backdoor Roth

Post by Johnny99 »

I discovered in late 2017 that my company 401K administered by Fidelity "allows" a mega backdoor Roth. That is, they allow me to contribute after tax money into the 401K (up to the yearly limit, which is a bit higher for me since I am now 51) and then move it into a Roth within the 401K.

I've been maxing this amount the last two years and have about $55K in an account they call 'Roth In-plan Conversion'.

I read the WIki and I'm still a bit confused about the tax rule regarding IRAs. I do have another IRA at Vanguard from an old 401K that I transferred. Does having this other IRA affect the money in this In-plan conversion account? If I quit, do I need to keep this money in my current employers 401K to avoid any tax consequences?

Thank you.
lakpr
Posts: 5973
Joined: Fri Mar 18, 2011 9:59 am

Re: Just to be clear - Mega Backdoor Roth

Post by lakpr »

Mega Backdoor Roth, which is conversion to Roth within the plan of after-tax contributions, is NOT affected by the presence of a Rollover /Traditional IRA. Only the regular backdoor Roth is.

Why not roll over that traditional IRA into 401k plan, and start contributing to backdoor Roth IRA too? That is another 7k to Roth space per year that right now you are not able to.

Edited to answer your question about what happens when you leave the employer. My understanding is that it depends on your specific plan. Some employers will allow account specific rollover, so you can roll over only Roth 401k portion into Roth IRA, and leave the traditional 401k within the plan. Some others require that you either keep all in the plan or none in the plan. But even in that case, you can roll the Roth 401k portion to Roth IRA, and traditional 401k to Rollover IRA.
Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Just to be clear - Mega Backdoor Roth

Post by Spirit Rider »

Note: To clarify if you were not aware, when you are >= age 50 you qualify for a catch-up contribution (2019 = $6K), but the catch-up contribution is not included in the annual addition limit (2019 = $56K. The catch-up contribution only applies after you have maximized the employee elective contribution limit (2019 = $19K). The maximum 2019 Mega Backdoor Roth contribution = $56K - (employee elective contributions + employer contributions). The catch-up contributions and any combined limit ($56K + $6K) is irrelevant.

Neither in-plan Roth Rollovers and subsequent rollovers to a Roth IRA or direct Rollovers of employee after-tax contributions to a Roth IRA go through a traditional IRA. Therefore, they are never reported on Form 8606 Line 6 and are never subject to pro-rata tax considerations.
Topic Author
Johnny99
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Joined: Thu Mar 02, 2017 8:48 am

Re: Just to be clear - Mega Backdoor Roth

Post by Johnny99 »

Thank you for the replies. I think my main questions are answered, especially the one about my other IRA affecting the backdoor Roth. But...
Spirit Rider wrote: Mon Jun 24, 2019 7:55 pm The catch-up contributions and any combined limit ($56K + $6K) is irrelevant
I'm confused by this. I earn $200K so I'm restricted in what I can invest, hence the appeal of the mega backdoor. I'm currently maxing my employee contribution to my 401K ($19K), adding the catch-up ($6K) and getting the max employer match. Anything leftover is going into the mega backdoor conversion up to the total limit for 2019. How does total become "irrelevant"?
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Just to be clear - Mega Backdoor Roth

Post by lakpr »

If I understand Spirit Rider correctly, he is saying that the after tax contribution is limited to ($56k - employer pretax contribution up to $19k - employer match on the amount up to $19k)

You are eligible to catch up being age 50+, but the catch up contribution cannot be included as part of after tax contributions.

If you choose to contribute only $10k for exams to traditional or Roth 401k directly, and assume there is a $5k match on it, theoretically (your plan must permit it) you can make an after tax contribution of $41k ($56k - $15k). NOT $47k ($62k - $15k)

If you choose to max out traditional or Roth direct contribution to $25k, and there is an employer match of $5k (max match), your after tax contribution is limited to $56k - $19k - $5k = $32k.

I hope I got the gist right
Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Just to be clear - Mega Backdoor Roth

Post by Spirit Rider »

Johnny99 wrote: Mon Jun 24, 2019 9:10 pm Thank you for the replies. I think my main questions are answered, especially the one about my other IRA affecting the backdoor Roth. But...
Spirit Rider wrote: Mon Jun 24, 2019 7:55 pm The catch-up contributions and any combined limit ($56K + $6K) is irrelevant
I'm confused by this. I earn $200K so I'm restricted in what I can invest, hence the appeal of the mega backdoor. I'm currently maxing my employee contribution to my 401K ($19K), adding the catch-up ($6K) and getting the max employer match. Anything leftover is going into the mega backdoor conversion up to the total limit for 2019. How does total become "irrelevant"?
My point is the annual addition limit is $56K. Any catch-up contributions are not included in that limit. So it is not useful and possibly misleading to say there is a $62K limit. Your maximum employee after-tax contribution is always the annual addition limit (2019 = $56K) - (employee elective + employer contributions) regardless whether you make catch-up contributions or not.
DEBTINATOR
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Re: Just to be clear - Mega Backdoor Roth

Post by DEBTINATOR »

Said another way, a 30year old at your company has the exact same amount of after tax space, assuming enough or equal salary.

You, however, can put more total money into the retirement plan.
Topic Author
Johnny99
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Joined: Thu Mar 02, 2017 8:48 am

Re: Just to be clear - Mega Backdoor Roth

Post by Johnny99 »

Makes sense. Many thanks for all the replies!
deltaneutral83
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Re: Just to be clear - Mega Backdoor Roth

Post by deltaneutral83 »

lakpr wrote: Mon Jun 24, 2019 10:38 am Why not roll over that traditional IRA into 401k plan, and start contributing to backdoor Roth IRA too? That is another 7k to Roth space per year that right now you are not able to.
Why couldn't OP just put $7k into the Trad and then do a Roth conversion to avoid pro rata, does that not create the same event with regards to taxes paid ?
lakpr
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Re: Just to be clear - Mega Backdoor Roth

Post by lakpr »

deltaneutral83 wrote: Tue Jun 25, 2019 10:23 am Why couldn't OP just put $7k into the Trad and then do a Roth conversion to avoid pro rata, does that not create the same event with regards to taxes paid
Into the “Trad” meaning Traditional IRA or Traditional 401k?

If you mean 401k, yes there is no pro rata rule affecting his conversion.

If you mean traditional IRA, in the second step that you describe (conversion to Roth), the conversion is deemed to be done on whole of your traditional IRAs held anywhere at any custodian. For example, let us say you have $63k in a traditional IRA at Fidelity. You contribute 7k to a traditional IRA at Schwab. Convert 7k to Roth.

Your expectation: 7k contributed as non-deductible, tax had already been paid on the contribution; 7k converted, no tax due.

IRS interpretation: $63k deductible, $7k non-deductible, $7k basis on a $70k balance; $7k converted, so one tenth of the total IRA converted to Roth; one-tenth of this is basis, remaining nine-tenths is taxable income. Add 7000 * (9/10) = $6300 to taxable income.

This is the pro rata rule. Please work through Form8606 by hand and you will see the calculations shake out the way I calculated above.
userwithconcern
Posts: 88
Joined: Mon Dec 23, 2019 12:35 pm

Re: Just to be clear - Mega Backdoor Roth

Post by userwithconcern »

Spirit Rider wrote: Mon Jun 24, 2019 7:55 pm Note: To clarify if you were not aware, when you are >= age 50 you qualify for a catch-up contribution (2019 = $6K), but the catch-up contribution is not included in the annual addition limit (2019 = $56K. The catch-up contribution only applies after you have maximized the employee elective contribution limit (2019 = $19K). The maximum 2019 Mega Backdoor Roth contribution = $56K - (employee elective contributions + employer contributions). The catch-up contributions and any combined limit ($56K + $6K) is irrelevant.

Neither in-plan Roth Rollovers and subsequent rollovers to a Roth IRA or direct Rollovers of employee after-tax contributions to a Roth IRA go through a traditional IRA. Therefore, they are never reported on Form 8606 Line 6 and are never subject to pro-rata tax considerations.
Spirit Rider, is it true that in 2020, I can contribute 57K to my 401(k) including employer match and aftertax, AND contribute 6K non-deductible to an IRA on top, assuming I am below 50?
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Just to be clear - Mega Backdoor Roth

Post by quenchgum »

userwithconcern wrote: Tue Sep 15, 2020 4:58 pm
Spirit Rider wrote: Mon Jun 24, 2019 7:55 pm Note: To clarify if you were not aware, when you are >= age 50 you qualify for a catch-up contribution (2019 = $6K), but the catch-up contribution is not included in the annual addition limit (2019 = $56K. The catch-up contribution only applies after you have maximized the employee elective contribution limit (2019 = $19K). The maximum 2019 Mega Backdoor Roth contribution = $56K - (employee elective contributions + employer contributions). The catch-up contributions and any combined limit ($56K + $6K) is irrelevant.

Neither in-plan Roth Rollovers and subsequent rollovers to a Roth IRA or direct Rollovers of employee after-tax contributions to a Roth IRA go through a traditional IRA. Therefore, they are never reported on Form 8606 Line 6 and are never subject to pro-rata tax considerations.
Spirit Rider, is it true that in 2020, I can contribute 57K to my 401(k) including employer match and aftertax, AND contribute 6K non-deductible to an IRA on top, assuming I am below 50?
Different poster here, but that is correct! The IRA 6k limit and the 57k limit do not interact.
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