Mega Backdoor Roth: How much to expect to pay on the interest growth?

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Planner01
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Joined: Mon Dec 26, 2016 2:44 pm

Mega Backdoor Roth: How much to expect to pay on the interest growth?

Post by Planner01 » Sun Jul 28, 2019 7:11 am

For those of you that have contributed to the Mega Backdoor Roth with your employer and do a once a year conversion, how much on average have you paid in taxes? I know it depends on your tax bracket and how much you made on that money throughout that year, it doesn’t sound like it would be more than just a few hundred dollars. Is this a correct assumption?

Also, let’s say that I only have $20k to invest in after tax dollars, wouldn’t be wiser to invest $6k in a regular Roth IRA and add the rest of the $14k to the employer MBR than add it all to the MBR? For diversification purposes and also because with the regular Roth there are no extra taxes to pay on the $6k (growth).

I am learning... correct my thinking please.

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: MBR: How much to expect to pay on the interest growth?

Post by lakpr » Sun Jul 28, 2019 7:19 am

I have started MBR only last year but have made the conversion to Roth 401k within the plan only this year. Due to the market swoon in December, even now the MBR contributions are more than the amounts of Roth conversions in spite of the 20% run up in stocks in just 7 months of this year. But to use MBR effectively you should convert to Roth 401k immediately after contribution.

It sounds like your plan allows only one or two conversion events per year? Please clarify. Mine lets me do unlimited
Last edited by lakpr on Sun Jul 28, 2019 7:22 am, edited 1 time in total.

Topic Author
Planner01
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Joined: Mon Dec 26, 2016 2:44 pm

Re: MBR: How much to expect to pay on the interest growth?

Post by Planner01 » Sun Jul 28, 2019 7:20 am

lakpr wrote:
Sun Jul 28, 2019 7:19 am

It sounds like your plan allows only one or two conversion events per year? Please clarify. Mine let's me do unlimited
We are allowed only one conversion every 12 months.

lakpr
Posts: 5409
Joined: Fri Mar 18, 2011 9:59 am

Re: MBR: How much to expect to pay on the interest growth?

Post by lakpr » Sun Jul 28, 2019 7:28 am

Planner01 wrote:
Sun Jul 28, 2019 7:20 am
lakpr wrote:
Sun Jul 28, 2019 7:19 am

It sounds like your plan allows only one or two conversion events per year? Please clarify. Mine let's me do unlimited
We are allowed only one conversion every 12 months.
Bummer. In that case if you have only 20k available, I would contribute to (backdoor ?) Roth first, and only the remaining 14k to MBR, convert in October. Read somewhere that October months are usually the lowest earning /losing months for stocks. The third quarter results are usually out at that time, and with the year end around the corner, these are/will be usually the bellwether results for the year.

retiredjg
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Re: Mega Backdoor Roth: How much to expect to pay on the interest growth?

Post by retiredjg » Sun Jul 28, 2019 7:31 am

Planner01 wrote:
Sun Jul 28, 2019 7:11 am
Also, let’s say that I only have $20k to invest in after tax dollars, wouldn’t be wiser to invest $6k in a regular Roth IRA and add the rest of the $14k to the employer MBR than add it all to the MBR? For diversification purposes and also because with the regular Roth there are no extra taxes to pay on the $6k (growth).
"Wiser" is in the mind of the beholder on this question.

Using both the back door and the mega back door is more work for you and more forms on your taxes. There is no extra "diversification" if all the money ends up in Roth IRA. There likely is no extra "diversification" if some ends up in Roth 401k instead of Roth IRA. You could end up paying a little less in tax by using both. Money in Roth IRA would be a little easier to access, if needed, than from the 401k.

Either choice is fine. Look at the pros and cons and decide which you like better.

jacoavlu
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Joined: Sun Jan 06, 2013 12:06 pm

Re: Mega Backdoor Roth: How much to expect to pay on the interest growth?

Post by jacoavlu » Sun Jul 28, 2019 8:27 am

"how much will you pay in taxes on earnings before conversion?"

unanswerable beyond a wild guess, without more information

depends on how you invest the contributions - stocks, bonds, stable value fund?
contributions could experience significant growth, or loss, or be flat

depends on your marginal tax rate, which could be quite low or very high

depends obviously on how much you contribute

Topic Author
Planner01
Posts: 199
Joined: Mon Dec 26, 2016 2:44 pm

Re: MBR: How much to expect to pay on the interest growth?

Post by Planner01 » Sun Jul 28, 2019 9:51 am

lakpr wrote:
Sun Jul 28, 2019 7:28 am
Planner01 wrote:
Sun Jul 28, 2019 7:20 am
lakpr wrote:
Sun Jul 28, 2019 7:19 am

It sounds like your plan allows only one or two conversion events per year? Please clarify. Mine let's me do unlimited
We are allowed only one conversion every 12 months.
Bummer. In that case if you have only 20k available, I would contribute to (backdoor ?) Roth first, and only the remaining 14k to MBR, convert in October. Read somewhere that October months are usually the lowest earning /losing months for stocks. The third quarter results are usually out at that time, and with the year end around the corner, these are/will be usually the bellwether results for the year.
That’s what I was thinking too!

CppCoder
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Re: Mega Backdoor Roth: How much to expect to pay on the interest growth?

Post by CppCoder » Sun Jul 28, 2019 10:12 am

Planner01 wrote:
Sun Jul 28, 2019 7:11 am
For those of you that have contributed to the Mega Backdoor Roth with your employer and do a once a year conversion, how much on average have you paid in taxes?
My employer allows the mega backdoor Roth once per year. On average, I have paid $0 in taxes. My first year, I accumulated a loss from having invested in stocks in my after tax account and having converted during the market correction early in 2016. My plan lets me carry the loss forward (precisely, I can retain a nonzero basis on a zero balance). Since then, I have only invested in bonds, and due to low growth over half a year of bond investing in after tax, I am yet to consume my "loss" from my annual conversion. Some years, depending on bond performance in the second half the year, my "loss" grows.

In general, if you invest in low growth funds before conversion, you will incur, at worst*, minor gains before conversion.

* For some definition of worst, where worst means you made money and just have to pay some of it in taxes...

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