Mega Backdoor Roth at 32% federal marginal tax rate?

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Topic Author
fingoals
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Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

I'm considering taking advantage of my employer's 401(k) plan's Roth 401(k) in-plan conversion/rollover feature for Mega Backdoor Roth (MBR). However, I'm not sure how to properly and comprehensively compare the MBR option with alternatives (e.g., taxable; anything else that I forgot about or am missing?), considering that my federal marginal tax rate in 2023 and beyond will be 32% (or, perhaps, even 35% - if salary will be decently indexed for inflation and/or annual bonus will be significant enough). I expect to be in much lower tax brackets at retirement, for the most part (probably, 10%-12%). Additional details are here: viewtopic.php?t=382880. Your clarifications and advice will be much appreciated.
lakpr
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by lakpr »

If you already max out the Traditional 401(k) contribution limit, any extra money you earn will incur that 32% marginal rate, whether you invest that money in MBR or not.

Not investing in MBR just means you are foregoing the opportunity. It will be gone by the end of the year. It is not even like Roth IRA that you can make up by April 15th of next year.

Unless you are squeezed for cash if you do participate, my advice is to max out.
Topic Author
fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

lakpr wrote: Tue Jan 24, 2023 12:13 am If you already max out the Traditional 401(k) contribution limit, any extra money you earn will incur that 32% marginal rate, whether you invest that money in MBR or not.

Not investing in MBR just means you are foregoing the opportunity. It will be gone by the end of the year. It is not even like Roth IRA that you can make up by April 15th of next year.

Unless you are squeezed for cash if you do participate, my advice is to max out.
I much appreciate your advice. Let's see if other people here will share any additional thoughts or considerations.

By the way, do I understand correctly that those in-plan conversions will occur every pay period?
lakpr
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by lakpr »

fingoals wrote: Tue Jan 24, 2023 12:30 am By the way, do I understand correctly that those in-plan conversions will occur every pay period?
Depends on the plan. My employer requires written and signed form, to be sent by snail mail or Fax (gasp, still in 20th century!!) for In Plan Roth Conversions. As a result, I end up either with a taxable gain or non-claimable loss at the end of the year. I ended up subscribing to an online fax service because of this antiquated stupidity, where I upload PDFs of my filled out form.

Fidelity administered plans, on the other hand, are set a setting online and forget -- contributions and conversions happen on the same days, with no taxable gains or losses.
Topic Author
fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

lakpr wrote: Tue Jan 24, 2023 12:37 am
fingoals wrote: Tue Jan 24, 2023 12:30 am By the way, do I understand correctly that those in-plan conversions will occur every pay period?
Depends on the plan. My employer requires written and signed form, to be sent by snail mail or Fax (gasp, still in 20th century!!) for In Plan Roth Conversions. As a result, I end up either with a taxable gain or non-claimable loss at the end of the year. I ended up subscribing to an online fax service because of this antiquated stupidity, where I upload PDFs of my filled out form.

Fidelity administered plans, on the other hand, are set a setting online and forget -- contributions and conversions happen on the same days, with no taxable gains or losses.
I see. Thank you very much for sharing your experience and clarifying this aspect.
SnowBog
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by SnowBog »

To add to what was already noted, on the "funding priority list", MBR is after all other tax-advantaged but before taxable. https://www.bogleheads.org/wiki/Priorit ... nvestments

Again, the way to think about it, the money that would go into MBR is already taxed, and the only "alternative" location is taxable. So "going in" - is the same - both are "after-tax" contributions. (To be more specific, you'd typically max out pre-tax 401k, HSA, etc. before putting money into an MBR.)

Ideally, your plan allows for automatic conversions to Roth. If not automatic, then frequent and with minimal effort or cost. But this part varies highly based on your plan. For an example, my plan didn't initially have any "automatic" conversions, then offered quarterly, but I'd call in and do manual conversions after each pay period, and now they offer automatic "daily" conversions. Depending on the timing and details of your plan, you might have $0 - $x "extra" taxes after conversion. But generally, these should be very small amounts - as you should convert ASAP and thus not have big "gains" before conversion.

Once converted, the difference is MBR grows tax-free, and can be withdrawn tax-free after 59.5. (Assuming your plan supports doing so while employed, or assuming you've left the company by then, you can also do a rollover to a Roth IRA, which potentially opens up access even sooner of your contributions.)

The only way a taxable account would be "as good" is if your withdrawals (and other income) always kept you in the 0% capital gains bracket (and you have no state taxes on capital gains). Under all* other conditions, you'll pay more taxes by using a taxable account instead of an MBR.

* OK, there is one scenario where taxable might be favorable to some people, and that's if you'll never spend the money, and it passes to your heirs and under current law they get a "step-up" in cost basis. But to my two cents, I still think an MBR is better. While both would have $0 tax if liquidated on the day you pass away (when taxable gets the "step up"), Roth remains tax-free for the life of the account. The "downside" with a Roth is your heirs will likely be forced to take withdrawals and liquidate the account within IIRC 10-years. But those will all be tax-free withdrawals, and would have a higher cost basis going forward (thus less future taxes after re-investment spread out over 10-years) vs. the one time taxable step-up.
Last edited by SnowBog on Tue Jan 24, 2023 1:17 am, edited 3 times in total.
SnowBog
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by SnowBog »

lakpr wrote: Tue Jan 24, 2023 12:37 am Fidelity administered plans, on the other hand, are set a setting online and forget -- contributions and conversions happen on the same days, with no taxable gains or losses.
Not sure if this is entirely true...

For my current plan, at Fidelity, it is true. But prior plans I've had, at Fidelity, it was not true...

My understanding is plans can vary drastically, even those at the same administrator (aka Fidelity). So you'll need to look at the specifics of your plan to understand how it works, what your options are, etc.
Luckywon
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by Luckywon »

SnowBog wrote: Tue Jan 24, 2023 1:08 am The only way a taxable account would be "as good" is if your withdrawals (and other income) always kept you in the 0% capital gains bracket (and you have no state taxes on capital gains). Under all* other conditions, you'll pay more taxes by using a taxable account instead of an MBR.
There is at least one other condition: If the investments decrease in value in the Roth before being distributed then he may pay more in taxes as he would not realize the capital loss. It's not likely but stranger things have happened. Unless my Roth contributions last year take a u-turn it could happen to me.

Anyway, I agree OP should maximize MBR.
Topic Author
fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

SnowBog wrote: Tue Jan 24, 2023 1:08 am To add to what was already noted, on the "funding priority list", MBR is after all other tax-advantaged but before taxable. https://www.bogleheads.org/wiki/Priorit ... nvestments

Again, the way to think about it, the money that would go into MBR is already taxed, and the only "alternative" location is taxable. So "going in" - is the same - both are "after-tax" contributions. (To be more specific, you'd typically max out pre-tax 401k, HSA, etc. before putting money into an MBR.)

Ideally, your plan allows for automatic conversions to Roth. If not automatic, then frequent and with minimal effort or cost. But this part varies highly based on your plan. For an example, my plan didn't initially have any "automatic" conversions, then offered quarterly, but I'd call in and do manual conversions after each pay period, and now they offer automatic "daily" conversions. Depending on the timing and details of your plan, you might have $0 - $x "extra" taxes after conversion. But generally, these should be very small amounts - as you should convert ASAP and thus not have big "gains" before conversion.

Once converted, the difference is MBR grows tax-free, and can be withdrawn tax-free after 59.5. (Assuming your plan supports doing so while employed, or assuming you've left the company by then, you can also do a rollover to a Roth IRA, which potentially opens up access even sooner of your contributions.)

The only way a taxable account would be "as good" is if your withdrawals (and other income) always kept you in the 0% capital gains bracket (and you have no state taxes on capital gains). Under all* other conditions, you'll pay more taxes by using a taxable account instead of an MBR.

* OK, there is one scenario where taxable might be favorable to some people, and that's if you'll never spend the money, and it passes to your heirs and under current law they get a "step-up" in cost basis. But to my two cents, I still think an MBR is better. While both would have $0 tax if liquidated on the day you pass away (when taxable gets the "step up"), Roth remains tax-free for the life of the account. The "downside" with a Roth is your heirs will likely be forced to take withdrawals and liquidate the account within IIRC 10-years. But those will all be tax-free withdrawals, and would have a higher cost basis going forward (thus less future taxes after re-investment spread out over 10-years) vs. the one time taxable step-up.
Thank you for your detailed feedback. Much appreciated.

It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
SnowBog
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by SnowBog »

fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Topic Author
fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

SnowBog wrote: Tue Jan 24, 2023 2:24 am
fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
CletusCaddy
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by CletusCaddy »

fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am
fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
SnowBog
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by SnowBog »

CletusCaddy wrote: Tue Jan 24, 2023 4:34 am
fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am
fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
Good point on the match. It's not a problem in my case, my company only matches my non-MBR contributions, so I know exactly how much they'll match for the year, and I don't run into this situation.
SnowBog
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by SnowBog »

fingoals wrote: Tue Jan 24, 2023 2:37 am My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
For me, it's about a 5 - 10 minute phone call to Fidelity to do the rollover. So it's more a judgment call on "when it's worth my time" to make that phone call. I personally won't for < $5k (unless it's the last of the contribution for the year), I'll just wait until it's more then that. But there's no "wrong" answer here.

For what it's worth, I also don't start my after-tax/MBR until after I've maxed out my pre-tax (plus employer match) for the year. My plan does not require I contribute all year for the match, so I can "front load". The time I switch over is usually around the time I've hit my SSN contribution limit, so my net pay remains closer switching over as while I pay more taxes (due to no pre-tax deduction) I'm done paying Social Security taxes for the year which offsets some of the higher taxes. Coincidently, it's also around the time of my annual bonus (assuming I get one), so I usually plow as much of that into my MBR as well.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by wetgear »

CletusCaddy wrote: Tue Jan 24, 2023 4:34 am
fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am
fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
My plan at Fidelity only takes a 5 minute phone call to roll out. My in plan conversion doesn't allow me to direct the MBR to different investments than my trad 401k funds which leads to less tax efficient placement of funds than I'd like so I roll them out to my Roth IRA. https://www.bogleheads.org/wiki/Tax-eff ... _placement
CletusCaddy
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by CletusCaddy »

wetgear wrote: Tue Jan 24, 2023 9:42 am
CletusCaddy wrote: Tue Jan 24, 2023 4:34 am
fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am
fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
My plan at Fidelity only takes a 5 minute phone call to roll out. My in plan conversion doesn't allow me to direct the MBR to different investments than my trad 401k funds which leads to less tax efficient placement of funds than I'd like so I roll them out to my Roth IRA. https://www.bogleheads.org/wiki/Tax-eff ... _placement
You don’t have stocks or bonds in your 401k?
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by muffins14 »

SnowBog wrote: Tue Jan 24, 2023 8:45 am
For me, it's about a 5 - 10 minute phone call to Fidelity to do the rollover. So it's more a judgment call on "when it's worth my time" to make that phone call. I personally won't for < $5k (unless it's the last of the contribution for the year), I'll just wait until it's more then that. But there's no "wrong" answer here.

In my case I can do it online (after an automatic in-plan conversion from after-tax 401k -> roth 401k)

I can go to my 401k page on fidelity, click "rollover" -> roll out of 401k -> roll into Roth IRA. It just takes 1-2 minutes per 2 weeks, if I want to do it that often
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by retired@50 »

lakpr wrote: Tue Jan 24, 2023 12:37 am ... I ended up subscribing to an online fax service ...
Which one?

A friend recently paid close to $40 to have a multi-page document faxed from a Kinko's. I'm wondering if there are free or low cost alternatives.

Regards,
This is one person's opinion. Nothing more.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by muffins14 »

CletusCaddy wrote: Tue Jan 24, 2023 9:45 am
You don’t have stocks or bonds in your 401k?
I think what they are saying is they can't differentiate Roth 401k investment selections from traditional 401k selections.

So if one wants 30% bonds and 70% stocks, boglehead preference might be stocks in roth and bonds in traditional, but he has to have a mirrored allocation in both, due to restrictions in the fidelity back-end or UI

It is the same for me, which is why I roll-out the Roth portion
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lakpr
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by lakpr »

retired@50 wrote: Tue Jan 24, 2023 9:51 am
lakpr wrote: Tue Jan 24, 2023 12:37 am ... I ended up subscribing to an online fax service ...
Which one?

A friend recently paid close to $40 to have a multi-page document faxed from a Kinko's. I'm wondering if there are free or low cost alternatives.

Regards,
gotfreefax.com. Bought 300 page credit for $10, never expires. The pages will have to be turned to PDF by yourself first, though. At the rate of 5 pages I need to fax per request for In-Plan Roth Conversions, that's 60 paychecks or approximately 2.5 years. I have not had to use that for anything else.

As an aside ... there are no more Kinko's, it would have to be a FedEx ??
Last edited by lakpr on Tue Jan 24, 2023 9:57 am, edited 2 times in total.
CletusCaddy
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by CletusCaddy »

muffins14 wrote: Tue Jan 24, 2023 9:53 am
CletusCaddy wrote: Tue Jan 24, 2023 9:45 am
You don’t have stocks or bonds in your 401k?
I think what they are saying is they can't differentiate Roth 401k investment selections from traditional 401k selections.

So if one wants 30% bonds and 70% stocks, boglehead preference might be stocks in roth and bonds in traditional, but he has to have a mirrored allocation in both, due to restrictions in the fidelity back-end or UI

It is the same for me, which is why I roll-out the Roth portion
I see. I hold fixed income outside my 401k and IRA entirely (in the form of I bonds and tax-deferred MYGA), so this decision point doesn’t occur to me.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by retired@50 »

lakpr wrote: Tue Jan 24, 2023 9:54 am
As an aside ... there are no more Kinko's, it would have to be a FedEx ??
Correct. It used to be a Kinko's and I haven't adjusted to the name change yet. Thanks for letting me know about gotfreefax.com

Regards,
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mervinj7
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by mervinj7 »

muffins14 wrote: Tue Jan 24, 2023 9:47 am
SnowBog wrote: Tue Jan 24, 2023 8:45 am
For me, it's about a 5 - 10 minute phone call to Fidelity to do the rollover. So it's more a judgment call on "when it's worth my time" to make that phone call. I personally won't for < $5k (unless it's the last of the contribution for the year), I'll just wait until it's more then that. But there's no "wrong" answer here.

In my case I can do it online (after an automatic in-plan conversion from after-tax 401k -> roth 401k)

I can go to my 401k page on fidelity, click "rollover" -> roll out of 401k -> roll into Roth IRA. It just takes 1-2 minutes per 2 weeks, if I want to do it that often
Why not just keep it in your work Roth 401k and maybe transfer just twice a year?
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by muffins14 »

mervinj7 wrote: Tue Jan 24, 2023 10:43 am
muffins14 wrote: Tue Jan 24, 2023 9:47 am
SnowBog wrote: Tue Jan 24, 2023 8:45 am
For me, it's about a 5 - 10 minute phone call to Fidelity to do the rollover. So it's more a judgment call on "when it's worth my time" to make that phone call. I personally won't for < $5k (unless it's the last of the contribution for the year), I'll just wait until it's more then that. But there's no "wrong" answer here.

In my case I can do it online (after an automatic in-plan conversion from after-tax 401k -> roth 401k)

I can go to my 401k page on fidelity, click "rollover" -> roll out of 401k -> roll into Roth IRA. It just takes 1-2 minutes per 2 weeks, if I want to do it that often
Why not just keep it in your work Roth 401k and maybe transfer just twice a year?
I’d rather invest differently. I have SCV stocks in my Roth IRA that and I don’t mind the cumulative 45 annual minute cost so much
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rob
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by rob »

Do it! This is my first year where this is available (I cannot do regular backdoor roth, so been on the sidelines annoyed at the broken process).... Spent last night trying to figure out cash flow so I can get a chunk of post tax $ in there... If you can swing it, it's a no brainer IMO.

Unfortunately - Mine is a manual check in the snail mail process... so will only bother one or twice a year probably.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
Gronnie
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by Gronnie »

One point I often see overlooked in MBR discussions is that it is a completely separate bucket from your traditional and/or Roth contributions.

This could be beneficial if you change jobs at some point in the year or work more than one job.
8301
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by 8301 »

fingoals wrote: Tue Jan 24, 2023 12:30 am
lakpr wrote: Tue Jan 24, 2023 12:13 am If you already max out the Traditional 401(k) contribution limit, any extra money you earn will incur that 32% marginal rate, whether you invest that money in MBR or not.

Not investing in MBR just means you are foregoing the opportunity. It will be gone by the end of the year. It is not even like Roth IRA that you can make up by April 15th of next year.

Unless you are squeezed for cash if you do participate, my advice is to max out.
I much appreciate your advice. Let's see if other people here will share any additional thoughts or considerations.

By the way, do I understand correctly that those in-plan conversions will occur every pay period?
I am in a similar situation. I agree with lakpr on every point. Mine converts on the same day automatically with a minimal gain or loss once an arrangement is set. I have to plan and adjust the after-tax contributions carefully not to lose the employer match.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by wetgear »

CletusCaddy wrote: Tue Jan 24, 2023 9:45 am
wetgear wrote: Tue Jan 24, 2023 9:42 am
CletusCaddy wrote: Tue Jan 24, 2023 4:34 am
fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am

Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
My plan at Fidelity only takes a 5 minute phone call to roll out. My in plan conversion doesn't allow me to direct the MBR to different investments than my trad 401k funds which leads to less tax efficient placement of funds than I'd like so I roll them out to my Roth IRA. https://www.bogleheads.org/wiki/Tax-eff ... _placement
You don’t have stocks or bonds in your 401k?
My trad 401k is primarily bonds. My Roth IRA is primarily stocks. This is optimized for tax efficient placement:

https://www.bogleheads.org/wiki/Tax-eff ... _placement

If I leave the MBR in my 401k then I can’t help but invest the Roth portion the same way as the trad portion which is suboptimal so I roll it out.
CletusCaddy
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by CletusCaddy »

wetgear wrote: Tue Jan 24, 2023 11:41 am
My trad 401k is primarily bonds. My Roth IRA is primarily stocks. This is optimized for tax efficient placement:

https://www.bogleheads.org/wiki/Tax-eff ... _placement

If I leave the MBR in my 401k then I can’t help but invest the Roth portion the same way as the trad portion which is suboptimal so I roll it out.
I understand, but couldn’t you just keep track of the commingled allocation until it’s time to retire and withdraw, and then just roll out once at that point? Wouldn’t that be the same result?

I have the same commingled 401k in Fidelity, and the Sources screen tells me what % of my total balance is pre-tax vs post-tax. If it is 70% pre-tax 30% post-tax, then couldn’t I just keep the commingled investment mix at 70% bonds and 30% stocks and end up with the same outcome as rolling out to Roth IRA every two weeks?
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by lakpr »

wetgear wrote: Tue Jan 24, 2023 11:41 am
My trad 401k is primarily bonds. My Roth IRA is primarily stocks. This is optimized for tax efficient placement:

https://www.bogleheads.org/wiki/Tax-eff ... _placement

If I leave the MBR in my 401k then I can’t help but invest the Roth portion the same way as the trad portion which is suboptimal so I roll it out.
This is a constraint in my employer plan also. Both the Traditional and Roth sub-accounts must be invested in exactly the same proportions.

I am fortunate in that I have another 401(k) from a previous employer where I have access to VBTIX (Institutional version of the Vanguard Total Bond Index fund) that's about 50% of my retirement portfolio. My asset allocation calls for only 70:30 division. So at my current employer I invest 100% in stocks, nothing else, so this restriction is a meaningless non-restriction for me. I get my "bond fix" in previous employer plan, rebalancing once an year.

I am also embarking on a journey, slowly replacing the bond portion of my portfolio with I-bonds. Biggest lesson learned in 2022 is that the bond index funds do NOT serve as ballast at precisely the time you need them to be. So I will be buying at a clip of $20k of I-bonds per year. In about two decades, they should replace the entire bond portion of my portfolio in taxable accounts instead of tax-deferred accounts. I buy into the guarantee that these bonds will never go down in nominal value, and never be less than what I paid for them, regardless of when I choose to sell.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by rob »

CletusCaddy wrote: Tue Jan 24, 2023 12:23 pm I understand, but couldn’t you just keep track of the commingled allocation until it’s time to retire and withdraw, and then just roll out once at that point? Wouldn’t that be the same result?
Not really (even though the plan tracks by contribution sources) because the time in between contribution and retirement the $ has been in bonds rather than stock..... With roth been tax free... most would want that in stock to get the greater return on the tax free side (although losses are not reducing taxes so it's not a given).
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wetgear
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by wetgear »

CletusCaddy wrote: Tue Jan 24, 2023 12:23 pm
wetgear wrote: Tue Jan 24, 2023 11:41 am
My trad 401k is primarily bonds. My Roth IRA is primarily stocks. This is optimized for tax efficient placement:

https://www.bogleheads.org/wiki/Tax-eff ... _placement

If I leave the MBR in my 401k then I can’t help but invest the Roth portion the same way as the trad portion which is suboptimal so I roll it out.
I understand, but couldn’t you just keep track of the commingled allocation until it’s time to retire and withdraw, and then just roll out once at that point? Wouldn’t that be the same result?

I have the same commingled 401k in Fidelity, and the Sources screen tells me what % of my total balance is pre-tax vs post-tax. If it is 70% pre-tax 30% post-tax, then couldn’t I just keep the commingled investment mix at 70% bonds and 30% stocks and end up with the same outcome as rolling out to Roth IRA every two weeks?
The problem is not the tracking it’s the investments. I don’t want my Roth funds invested in any bonds which is what I’m buying predominately in my 401k.

Your example wouldn’t yield the same results.

You’d have trad invested at 70/30 and Roth invested at 70/30. I want trad at 0/100 and Roth at 100/0. In the short term it wouldn’t make much difference but after 30 years it’s likely to be way different. I’d rather pay no tax on the large balance generated from stocks and tax on the small balance generated by bonds than any other combination.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by SnowBog »

wetgear wrote: Tue Jan 24, 2023 1:17 pm
CletusCaddy wrote: Tue Jan 24, 2023 12:23 pm
wetgear wrote: Tue Jan 24, 2023 11:41 am
My trad 401k is primarily bonds. My Roth IRA is primarily stocks. This is optimized for tax efficient placement:

https://www.bogleheads.org/wiki/Tax-eff ... _placement

If I leave the MBR in my 401k then I can’t help but invest the Roth portion the same way as the trad portion which is suboptimal so I roll it out.
I understand, but couldn’t you just keep track of the commingled allocation until it’s time to retire and withdraw, and then just roll out once at that point? Wouldn’t that be the same result?

I have the same commingled 401k in Fidelity, and the Sources screen tells me what % of my total balance is pre-tax vs post-tax. If it is 70% pre-tax 30% post-tax, then couldn’t I just keep the commingled investment mix at 70% bonds and 30% stocks and end up with the same outcome as rolling out to Roth IRA every two weeks?
The problem is not the tracking it’s the investments. I don’t want my Roth funds invested in any bonds which is what I’m buying predominately in my 401k.

Your example wouldn’t yield the same results.

You’d have trad invested at 70/30 and Roth invested at 70/30. I want trad at 0/100 and Roth at 100/0. In the short term it wouldn’t make much difference but after 30 years it’s likely to be way different. I’d rather pay no tax on the large balance generated from stocks and tax on the small balance generated by bonds than any other combination.
Just to add to this, and again this can vary wildly by plan, so you need to understand how your plan works...

In my plan, I can direct sources (like Roth or pre-tax) to a limited selection of funds - none of which are "three fund" type options (I do have a decent S&P 500, but no good bond or international option). I can optimally send funds to a co-mingled BrokerageLink account, where I can basically buy whatever I want. But to the point above, if I use that BrokerageLink account, my selection applies to all money in the account.

Let's say I have a 50:50 AA there, magically aligned with a 50:50 Roth:pre-tax split (I'm no where near the, but makes the example easier). In reality, that means my Roth is 50:50 and my pre-tax is 50:50. If I try to call up and say I want to withdraw my Roth funds to move to my Roth IRA, they will liquidate 50% (my hypothetical Roth % of account) of all funds - meaning 50% stocks and 50% bonds. I've thus lost half[ish] of my tax-free growth as the Roth wasn't invested at 100/0.

If I had good funds in my 401k and/or if my plan allowed for more than one BrokerageLink account, such that I could invest my money aligned with the tax-efficent placement recommendations, then I'd just leave the funds in the 401k.

As to "how often" to do the rollover, as I originally mentioned, I do it when there is "enough" for me to make the call (I can't do my rollover online). If I'm busy with other things, maybe I only do it twice a year (which is essentially one a quarter in my case). Usually I'll do it every 1-1.5 months. But on big paychecks (like annual bonus), I might call in right away. Again, when there's "enough" for me to think "I should spend 10 minutes getting that money moved and invested..."
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

CletusCaddy wrote: Tue Jan 24, 2023 4:34 am
fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am
fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
Good points, will keep them in mind. Thank you for sharing your thoughts.
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fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

SnowBog wrote: Tue Jan 24, 2023 8:45 am
fingoals wrote: Tue Jan 24, 2023 2:37 am My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
For me, it's about a 5 - 10 minute phone call to Fidelity to do the rollover. So it's more a judgment call on "when it's worth my time" to make that phone call. I personally won't for < $5k (unless it's the last of the contribution for the year), I'll just wait until it's more then that. But there's no "wrong" answer here.

For what it's worth, I also don't start my after-tax/MBR until after I've maxed out my pre-tax (plus employer match) for the year. My plan does not require I contribute all year for the match, so I can "front load". The time I switch over is usually around the time I've hit my SSN contribution limit, so my net pay remains closer switching over as while I pay more taxes (due to no pre-tax deduction) I'm done paying Social Security taxes for the year which offsets some of the higher taxes. Coincidently, it's also around the time of my annual bonus (assuming I get one), so I usually plow as much of that into my MBR as well.
Thank you for sharing those details. I'm confused, though, how can you do MBR around time of your annual bonus, when it already would be next year ...
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

rob wrote: Tue Jan 24, 2023 10:58 am Do it! This is my first year where this is available (I cannot do regular backdoor roth, so been on the sidelines annoyed at the broken process).... Spent last night trying to figure out cash flow so I can get a chunk of post tax $ in there... If you can swing it, it's a no brainer IMO.

Unfortunately - Mine is a manual check in the snail mail process... so will only bother one or twice a year probably.
Thank you for sharing your advice and experience.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

Gronnie wrote: Tue Jan 24, 2023 11:14 am One point I often see overlooked in MBR discussions is that it is a completely separate bucket from your traditional and/or Roth contributions.

This could be beneficial if you change jobs at some point in the year or work more than one job.
Good point, thank you for mentioning it.
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fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

8301 wrote: Tue Jan 24, 2023 11:29 am
fingoals wrote: Tue Jan 24, 2023 12:30 am
lakpr wrote: Tue Jan 24, 2023 12:13 am If you already max out the Traditional 401(k) contribution limit, any extra money you earn will incur that 32% marginal rate, whether you invest that money in MBR or not.

Not investing in MBR just means you are foregoing the opportunity. It will be gone by the end of the year. It is not even like Roth IRA that you can make up by April 15th of next year.

Unless you are squeezed for cash if you do participate, my advice is to max out.
I much appreciate your advice. Let's see if other people here will share any additional thoughts or considerations.

By the way, do I understand correctly that those in-plan conversions will occur every pay period?
I am in a similar situation. I agree with lakpr on every point. Mine converts on the same day automatically with a minimal gain or loss once an arrangement is set. I have to plan and adjust the after-tax contributions carefully not to lose the employer match.
Thank you for sharing your thoughts and experience.
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fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

I have just learned that my employer limits post-tax contributions to 10% of "eligible compensation" (I think this terms refers to salary, because Fidelity platform that manages my 401(k) plan has separate bonus-focused categories, except for after-tax contributions, though). It means that there will be a gap between my desired MBR amount and one that actually could be used due to the above-mentioned limit. Based on my calculations, that gap for 2023 will be $28,800* - $18,500 = $10,300. I guess, I could use most of that money ($7,500) to fund my Roth IRA via Backdoor Roth and shove the rest into taxable. Please let me know your thoughts on this.

*) It's $28,800 instead of $36,300 as I originally planned, because I was told today that my employer does not include the $7,500 catch-up limit in their 401(k) plan (I'm surprised, because it is a part of federal / IRS regulations), so the maximum amount that I can contribute to 401(k) post-tax is $66,000 (total 401(k) limit) - $30,000 (pre-tax 401(k) limit) - $7,200 (maximum amount of my employer's contributions/match) = $28,800.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by backpacker61 »

That's a pity about the 10% limit, but I would sure do it in any case.

My impression is that very few employees make use of MBR; I think few even contribute up to the regular 401(k) or "catch-up" limits.

The MBR option hasn't been available at my employer for very long. MBR forces me to be very disciplined about my cash flows; I'm just not that highly compensated. I have to take income from distributions from my taxable accounts (instead of reinvesting them) to keep the lights on. But getting the funds into a Roth registration is worthwhile in my opinion.
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by sailaway »

fingoals wrote: Tue Jan 24, 2023 6:04 pm I have just learned that my employer limits post-tax contributions to 10% of "eligible compensation" (I think this terms refers to salary, because Fidelity platform that manages my 401(k) plan has separate bonus-focused categories, except for after-tax contributions, though). It means that there will be a gap between my desired MBR amount and one that actually could be used due to the above-mentioned limit. Based on my calculations, that gap for 2023 will be $28,800* - $18,500 = $10,300. I guess, I could use most of that money ($7,500) to fund my Roth IRA via Backdoor Roth and shove the rest into taxable. Please let me know your thoughts on this.

*) It's $28,800 instead of $36,300 as I originally planned, because I was told today that my employer does not include the $7,500 catch-up limit in their 401(k) plan (I'm surprised, because it is a part of federal / IRS regulations), so the maximum amount that I can contribute to 401(k) post-tax is $66,000 (total 401(k) limit) - $30,000 (pre-tax 401(k) limit) - $7,200 (maximum amount of my employer's contributions/match) = $28,800.
While 401k plans have many things that the IRS allows, but does not require, I did not realize that this included catch up contributions. This is why I keep reading!

The oddest limitation was probably where someone's plan allowed for MBR, but only after maxing out deferrals. But in order to get the full match, you had spread the deferrals across every paycheck. So, they allowed for the MBR, but it didn't make sense to use it.

On the happy surprise end of the spectrum, a few people have reported that their employer matches even the MBR contributions!
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fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

fingoals wrote: Tue Jan 24, 2023 6:04 pm I have just learned that my employer limits post-tax contributions to 10% of "eligible compensation" (I think this terms refers to salary, because Fidelity platform that manages my 401(k) plan has separate bonus-focused categories, except for after-tax contributions, though). It means that there will be a gap between my desired MBR amount and one that actually could be used due to the above-mentioned limit. Based on my calculations, that gap for 2023 will be $28,800* - $18,500 = $10,300. I guess, I could use most of that money ($7,500) to fund my Roth IRA via Backdoor Roth and shove the rest into taxable. Please let me know your thoughts on this.

*) It's $28,800 instead of $36,300 as I originally planned, because I was told today that my employer does not include the $7,500 catch-up limit in their 401(k) plan (I'm surprised, because it is a part of federal / IRS regulations), so the maximum amount that I can contribute to 401(k) post-tax is $66,000 (total 401(k) limit) - $30,000 (pre-tax 401(k) limit) - $7,200 (maximum amount of my employer's contributions/match) = $28,800.
sailaway wrote: Tue Jan 24, 2023 6:16 pm While 401k plans have many things that the IRS allows, but does not require, I did not realize that this included catch up contributions. This is why I keep reading!
Well, as you can see, the inclusion of catch-up contributions into the total 401(k) limit is not a universal thing. :(
sailaway wrote: Tue Jan 24, 2023 6:16 pm The oddest limitation was probably where someone's plan allowed for MBR, but only after maxing out deferrals. But in order to get the full match, you had spread the deferrals across every paycheck. So, they allowed for the MBR, but it didn't make sense to use it.
Color me :shock:
sailaway wrote: Tue Jan 24, 2023 6:16 pm On the happy surprise end of the spectrum, a few people have reported that their employer matches even the MBR contributions!
Wow, that is a great option, indeed.
SnowBog
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by SnowBog »

fingoals wrote: Tue Jan 24, 2023 5:35 pm ... I'm confused, though, how can you do MBR around time of your annual bonus, when it already would be next year ...
Our bonus payout occurs mid-year... Just odd timing, but I make it work.
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fingoals
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

SnowBog wrote: Wed Jan 25, 2023 12:47 am
fingoals wrote: Tue Jan 24, 2023 5:35 pm ... I'm confused, though, how can you do MBR around time of your annual bonus, when it already would be next year ...
Our bonus payout occurs mid-year... Just odd timing, but I make it work.
I see. I'm glad that it works for you.
YoungSisyphus
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Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by YoungSisyphus »

My true “first world” experience problem is that I have to be careful about not over contributing after-tax contributions that eat up too much of the $66K maximum, because my company does match up to a % of after-tax contributions, which at times has led to me leaving a little “before tax” money on the table.

I generally try to do 50% paycheck contributions early in the year that also includes bonus $ to quickly fund a single MBR conversion for the year. Then I’ll switch down to steady before-tax contributions throughout the year to take advantage of as much company match as possible while still getting as close to before-tax match as possible.

Fidelity has always handled the MBR seamlessly. Any earnings on after-tax 401K contributions go into a Traditional IRA when the MBR is done. I will transfer this to my taxable brokerage and pay the tax generally (not sure this is optimized but it makes me “feel” better).
Topic Author
fingoals
Posts: 1327
Joined: Thu Jan 24, 2019 5:43 pm

Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

YoungSisyphus wrote: Wed Jan 25, 2023 3:18 am My true “first world” experience problem is that I have to be careful about not over contributing after-tax contributions that eat up too much of the $66K maximum, because my company does match up to a % of after-tax contributions, which at times has led to me leaving a little “before tax” money on the table.

I generally try to do 50% paycheck contributions early in the year that also includes bonus $ to quickly fund a single MBR conversion for the year. Then I’ll switch down to steady before-tax contributions throughout the year to take advantage of as much company match as possible while still getting as close to before-tax match as possible.

Fidelity has always handled the MBR seamlessly. Any earnings on after-tax 401K contributions go into a Traditional IRA when the MBR is done. I will transfer this to my taxable brokerage and pay the tax generally (not sure this is optimized but it makes me “feel” better).
Thank you for sharing your experience. As I understand, your earnings on after-tax 401(k) contributions should be minimal, since the conversion is the same-day event at Fidelity. If true, then what is the point of transferring these tiny amounts to your taxable brokerage? Sounds like extra effort to me.
sailaway
Posts: 6283
Joined: Fri May 12, 2017 1:11 pm

Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by sailaway »

YoungSisyphus wrote: Wed Jan 25, 2023 3:18 am My true “first world” experience problem is that I have to be careful about not over contributing after-tax contributions that eat up too much of the $66K maximum, because my company does match up to a % of after-tax contributions, which at times has led to me leaving a little “before tax” money on the table.

I generally try to do 50% paycheck contributions early in the year that also includes bonus $ to quickly fund a single MBR conversion for the year. Then I’ll switch down to steady before-tax contributions throughout the year to take advantage of as much company match as possible while still getting as close to before-tax match as possible.

Fidelity has always handled the MBR seamlessly. Any earnings on after-tax 401K contributions go into a Traditional IRA when the MBR is done. I will transfer this to my taxable brokerage and pay the tax generally (not sure this is optimized but it makes me “feel” better).
Why don't you roll it into the Roth IRA and pay the taxes, instead?
teamDE
Posts: 473
Joined: Tue Jun 28, 2016 9:16 pm

Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by teamDE »

CletusCaddy wrote: Tue Jan 24, 2023 4:34 am
fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am
fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
Is it common for the 401k provider to not halt your After tax contributions when you hit the limit like they would with the $20,500contribution limit? I haven't hit the limit yet but I'm bumping up close. I know I should call and find out. I'm at Fidelity and the MBR is otherwise automatic.
CletusCaddy
Posts: 1577
Joined: Sun Sep 12, 2021 4:23 am

Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by CletusCaddy »

teamDE wrote: Wed Jan 25, 2023 11:34 am
CletusCaddy wrote: Tue Jan 24, 2023 4:34 am
fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am
fingoals wrote: Tue Jan 24, 2023 1:39 am It is my understanding that one's Roth IRA accounts are absolutely independent from their Roth 401(k) ones. Correct?
Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
Is it common for the 401k provider to not halt your After tax contributions when you hit the limit like they would with the $20,500contribution limit? I haven't hit the limit yet but I'm bumping up close. I know I should call and find out. I'm at Fidelity and the MBR is otherwise automatic.
My company matches 10% of all annual compensation, including variable bonus compensation. The variable bonus is calculated toward the end of the calendar year. So the 10% match on my base salary is relatively predictable (with the exception of mid year raise) but the match on my bonus is totally unpredictable.

So let’s say my base salary is $200k and doesn’t change for the year. And let’s say by December 31st I have maxed out my pre-tax contribution and my after tax contribution. And let’s say my annual bonus (along with its 401k match) is calculated and paid on Dec 31. So my annual contributions before the bonus hitting looks like this:

Pre-tax: $20,500
Match on base salary: $20,000
After-tax contribution maxed out: $20,500
= $61,000 IRS contribution limit for 2022

Now let’s say my bonus is $40,000. The match on that is $4k. That puts me over the $61k limit for 2022, and IRS regulations state that in this situation my after-tax contributions are returned to me such that I don’t lose out on any match. So I end up with this contribution profile for 2022:

Pre-tax: $20,500
Match on base salary: $20,000
Match on bonus: $4,000
After-tax contribution maxed out: $20,500
Return of excess after-tax contribution: -$4,000 returned to me in January 2023
= $61,000 IRS contribution limit for 2022

But if I had rolled out all of my after-tax into separate Roth IRA, there is no way for my plan to return that $4k back to me. Causing a huge headache with letters, phone calls, written explanations to the IRS, etc
Topic Author
fingoals
Posts: 1327
Joined: Thu Jan 24, 2019 5:43 pm

Re: Mega Backdoor Roth at 32% federal marginal tax rate?

Post by fingoals »

CletusCaddy wrote: Wed Jan 25, 2023 12:47 pm
teamDE wrote: Wed Jan 25, 2023 11:34 am
CletusCaddy wrote: Tue Jan 24, 2023 4:34 am
fingoals wrote: Tue Jan 24, 2023 2:37 am
SnowBog wrote: Tue Jan 24, 2023 2:24 am

Yes. And no...

Yes, in the sense that your Roth IRA is a separate account from your 401k. In that same vein, a "Backdoor" Roth is completely independent from a MBR. You can do both - independently from each other. The accounts could remain forever separate if you wanted.

But where the paths may cross, is at somepoint, you may want to transfer money from your after-tax/MBR/Roth 401k into your Roth IRA. Again, plans vary wildly... But if your MBR doesn't allow in-plan conversions (or limits then, or has fees for them, or has bad investment options), but it allows "rollovers" to your Roth IRA, that might be advantageous. Or as previously noted, if you want to access the funds before 59.5 and/or separation from employer, moving the funds into a Roth IRA might be useful.

Personally, I take advantage of "daily in-plan conversions", parking my "after-tax" (then Roth) funds in a short-term bond fund within my 401k. When there's "enough", I'll call into Fidelity and take advantage of my plan letting me do a rollover as well, so I move the funds into my Roth IRA. My primary reason is this gives me better control and better investment options for my Roth funds. As a result, I consolidate all Roth into my Roth IRA. Which is getting roughly $36k/contributions a year, $6k/year via "Backdoor" and roughly $30k/year via "Mega Backdoor". So they are still independent accounts, I just chose to consolidate the funds into my Roth IRA.
Great points, thank you so much for sharing.

My 401(k) plan allows in-plan Roth conversions as well as rollovers to a Roth IRA. What are your criteria for determining "when there's enough"?
Too much work to roll it out. Automated in-plan conversions and automated investments in your 401k plan funds is the way to go.

The other problem with rolling out your 401k funds is that if you ever get into an overcontribution situation for the year (which can happen routinely if your match is applied to variable income and ends up higher than expected) then correcting for that overcontribution in combination with already rolled out funds is a huge tax headache.
Is it common for the 401k provider to not halt your After tax contributions when you hit the limit like they would with the $20,500contribution limit? I haven't hit the limit yet but I'm bumping up close. I know I should call and find out. I'm at Fidelity and the MBR is otherwise automatic.
My company matches 10% of all annual compensation, including variable bonus compensation. The variable bonus is calculated toward the end of the calendar year. So the 10% match on my base salary is relatively predictable (with the exception of mid year raise) but the match on my bonus is totally unpredictable.

So let’s say my base salary is $200k and doesn’t change for the year. And let’s say by December 31st I have maxed out my pre-tax contribution and my after tax contribution. And let’s say my annual bonus (along with its 401k match) is calculated and paid on Dec 31. So my annual contributions before the bonus hitting looks like this:

Pre-tax: $20,500
Match on base salary: $20,000
After-tax contribution maxed out: $20,500
= $61,000 IRS contribution limit for 2022

Now let’s say my bonus is $40,000. The match on that is $4k. That puts me over the $61k limit for 2022, and IRS regulations state that in this situation my after-tax contributions are returned to me such that I don’t lose out on any match. So I end up with this contribution profile for 2022:

Pre-tax: $20,500
Match on base salary: $20,000
Match on bonus: $4,000
After-tax contribution maxed out: $20,500
Return of excess after-tax contribution: -$4,000 returned to me in January 2023
= $61,000 IRS contribution limit for 2022

But if I had rolled out all of my after-tax into separate Roth IRA, there is no way for my plan to return that $4k back to me. Causing a huge headache with letters, phone calls, written explanations to the IRS, etc
Great point and a nice explanation, thank you for sharing. By the way, congratulations on having an outstanding match by your company. Unfortunately, my employer not only offers just 4% match (for which I'm thankful, don't get me wrong!), but also limits their contributions/match just to $7,200 annually. :(
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