New Employer - Mega-Backdoor Roth Available?

[Valdeselad]

Hi All,

I started working for a new company last year, and as of January have access to their 401k plan. I was looking through the plan documents, and it appears I have the ability to do a Mega-backdoor Roth via their 401k plan structure. My old company did not offer this, so this was a pleasant surprise. I would appreciate a second (or many more) set of eyes to make sure I'm thinking through this correctly.

First it's my understanding via the Wiki that 2 conditions need to be met:

1) The plan offers After-Tax Contributions to the 401k
- I have confirmed this is the case, after-tax contributions are allowed

2) The plan must offer the ability to do Roth conversions, either as in-plan conversions or an in-service distribution
This is the language from the plan documents:
- "You may withdraw all or any portion of your after-tax sub-account for any reason, up to twice per calendar year."
It also says:
- "You may withdraw money from your rollover, Roth rollover or in-Plan Roth conversion sub-accounts at any time for any reason."

Am I overlooking anything? When the language says "withdraw" does that mean the same thing as in-plan conversion or in-service distribution?

[placeholder]

Am I overlooking anything? When the language says "withdraw" does that mean the same thing as in-plan conversion or in-service distribution?

That sounds like distribution so I'd drill down and find out if in plan rollover is also available.

[anon_investor]

Hi All,

I started working for a new company last year, and as of January have access to their 401k plan. I was looking through the plan documents, and it appears I have the ability to do a Mega-backdoor Roth via their 401k plan structure. My old company did not offer this, so this was a pleasant surprise. I would appreciate a second (or many more) set of eyes to make sure I'm thinking through this correctly.

First it's my understanding via the Wiki that 2 conditions need to be met:

1) The plan offers After-Tax Contributions to the 401k
- I have confirmed this is the case, after-tax contributions are allowed

2) The plan must offer the ability to do Roth conversions, either as in-plan conversions or an in-service distribution
- This is the language from the plan documents: "You may withdraw all or any portion of your after-tax sub-account for any reason, up to twice per calendar year." It also says "You may withdraw money from your rollover, Roth rollover or in-Plan Roth conversion sub-accounts at any time for any reason."

Am I overlooking anything? When the language says "withdraw" does that mean the same thing as in-plan conversion or in-service distribution?

If they have in plan conversions of the after-tax contributoons and the plan is low cost, that is good enought.

[sailaway]

I would use the in plan conversion and maybe move that to an IRA once a year. This will minimize your taxes while maximizing flexibility. Great plan.

Just check on whether or not this interacts with your match in any way.

[placeholder]

I would use the in plan conversion and maybe move that to an IRA once a year. This will minimize your taxes while maximizing flexibility. Great plan.

Just because they allow distribution of after tax doesn't necessarily mean they will allow it for converted amounts so it would be another thing to check.

[sailaway]

I would use the in plan conversion and maybe move that to an IRA once a year. This will minimize your taxes while maximizing flexibility. Great plan.

Just because they allow distribution of after tax doesn't necessarily mean they will allow it for converted amounts so it would be another thing to check.

The quoted text in OP specifically does allow this.

[invest4]

Regardless of the good advice from our forum, I strongly encourage you to talk with your plan provider...there is simply no substitute.

In particular, if the conversion process is not automated, the manual process of conversion can be a bit tricky for the uninitiated and mistakes can be made. Furthermore, first line reps from the plan provider may have limited knowledge of this process and you may need to get to the next level to get solid answers. The fact is the Mega Backdoor Roth is not that widely used when you consider how much most people can and / or are willing to save.

Make sure you are fully educated and confident in how it works to ensure smooth saving ahead.

Best wishes.

[retiredjg]

Am I overlooking anything? When the language says "withdraw" does that mean the same thing as in-plan conversion or in-service distribution?

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

I do not see any wording that suggests you can do an in-plan Roth rollover (IRR).

[w5000]

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

So this sounds like it would be an indirect rollover, i.e. OP withdraws from the after-tax sub account of the 401(k), receives a check made out to him/her, and deposits into Roth IRA within 60 days?

[retiredjg]

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

So this sounds like it would be an indirect rollover, i.e. OP withdraws from the after-tax sub account of the 401(k), receives a check made out to him/her, and deposits into Roth IRA within 60 days?

From my reading here, I'd say that few people do this as an indirect rollover. And I don't see any reason it would need to be indirect. The trustees apparently handle this easily.

[sailaway]

Am I overlooking anything? When the language says "withdraw" does that mean the same thing as in-plan conversion or in-service distribution?

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

I do not see any wording that suggests you can do an in-plan Roth rollover (IRR).

While OP did not quote the in plan rollover section, the withdrawal section explicitly mentions them and the ability to withdrawal them at any time.

[retiredjg]

Agree that in-plan Roth rollover could be in a section not mentioned yet. My guess is there is no such option, but it is certainly worth looking for.

[scophreak]

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

So this sounds like it would be an indirect rollover, i.e. OP withdraws from the after-tax sub account of the 401(k), receives a check made out to him/her, and deposits into Roth IRA within 60 days?

My 401k custodian is Fidelity and I have access to MBR. I simply call (up to 4x per year) and request a rollover of my after-tax contributions to an existing Fidelity Roth IRA. Quick and painless each time and the funds are transferred electronically, no need for an indirect rollover and paper check.

[Valdeselad]

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

So this sounds like it would be an indirect rollover, i.e. OP withdraws from the after-tax sub account of the 401(k), receives a check made out to him/her, and deposits into Roth IRA within 60 days?

My 401k custodian is Fidelity and I have access to MBR. I simply call (up to 4x per year) and request a rollover of my after-tax contributions to an existing Fidelity Roth IRA. Quick and painless each time and the funds are transferred electronically, no need for an indirect rollover and paper check.

OP here, thank you all. The plan document language can be somewhat confusing with some admitted uncertainty.

Like @scophreak, my 401k custodian is Fidelity and I'm hoping what he/she states is essentially my situation. The one caveat is my current Roth IRA is held at Vanguard, and if I go forward with this, I may open a Roth IRA account at Fidelity just to simplify any transfer mechanisms (Fidelity to Fidelity sounds like a straightforward process).

I'm also hesitant to simply call someone at Fidelity and ask what is allowed - quite frankly, I trust the collective wisdom of Bogleheads over someone who may (or may not) know the ins and outs of this topic.

[Valdeselad]

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

So this sounds like it would be an indirect rollover, i.e. OP withdraws from the after-tax sub account of the 401(k), receives a check made out to him/her, and deposits into Roth IRA within 60 days?

My 401k custodian is Fidelity and I have access to MBR. I simply call (up to 4x per year) and request a rollover of my after-tax contributions to an existing Fidelity Roth IRA. Quick and painless each time and the funds are transferred electronically, no need for an indirect rollover and paper check.

When you request a rollover to your Roth IRA, does Fidelity convert directly to the Roth IRA account, or do they send to a traditional IRA which you then convert to a Roth IRA afterwards? I assume the former, just curious if the after-tax 401k to the Roth IRA (directly) is the “back door” in this case…

[retiredjg]

Mega-backdoor Roth should NEVER go through a traditional IRA because that would trigger the conversion step being pro-rated with all of a person's IRAs (other than Roth IRA).

An In-service distribution should always go 401k ---> Roth IRA. An in-plan Roth rollover goes directly to Roth 401k.

[Valdeselad]

Mega-backdoor Roth should NEVER go through a traditional IRA because that would trigger the conversion step being pro-rated with all of a person's IRAs (other than Roth IRA).

An In-service distribution should always go 401k ---> Roth IRA. An in-plan Roth rollover goes directly to Roth 401k.

Makes sense, thank you for confirming.

[retiredjg]

OP here, thank you all. The plan document language can be somewhat confusing with some admitted uncertainty.

Like @scophreak, my 401k custodian is Fidelity and I'm hoping what he/she states is essentially my situation. The one caveat is my current Roth IRA is held at Vanguard, and if I go forward with this, I may open a Roth IRA account at Fidelity just to simplify any transfer mechanisms (Fidelity to Fidelity sounds like a straightforward process).

I'm also hesitant to simply call someone at Fidelity and ask what is allowed - quite frankly, I trust the collective wisdom of Bogleheads over someone who may (or may not) know the ins and outs of this topic.

You absolutely should open a Roth IRA at Fidelity so that you can do this in 5 minutes over the phone.

Do not hesitate to call your plan administrators at Fidelity. There should be a phone number listed in your plan documents. They will look up your specific plan and explain things to you. That's their job - to run your plan and provide customer service for the plan's participants.

[scophreak]

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

So this sounds like it would be an indirect rollover, i.e. OP withdraws from the after-tax sub account of the 401(k), receives a check made out to him/her, and deposits into Roth IRA within 60 days?

My 401k custodian is Fidelity and I have access to MBR. I simply call (up to 4x per year) and request a rollover of my after-tax contributions to an existing Fidelity Roth IRA. Quick and painless each time and the funds are transferred electronically, no need for an indirect rollover and paper check.

When you request a rollover to your Roth IRA, does Fidelity convert directly to the Roth IRA account, or do they send to a traditional IRA which you then convert to a Roth IRA afterwards? I assume the former, just curious if the after-tax 401k to the Roth IRA (directly) is the “back door” in this case…

The funds rollover directly to the Roth IRA. Any gains can either also go to the Roth IRA (where I would owe taxes on this amount) or to a separate traditional IRA.

[Valdeselad]

Withdraw means "take out of the plan", so this means you can do an in-service (while working) distribution....i.e. roll/convert to Roth IRA, twice a year. That is one of the ways to do mega-backdoor Roth.

So this sounds like it would be an indirect rollover, i.e. OP withdraws from the after-tax sub account of the 401(k), receives a check made out to him/her, and deposits into Roth IRA within 60 days?

My 401k custodian is Fidelity and I have access to MBR. I simply call (up to 4x per year) and request a rollover of my after-tax contributions to an existing Fidelity Roth IRA. Quick and painless each time and the funds are transferred electronically, no need for an indirect rollover and paper check.

When you request a rollover to your Roth IRA, does Fidelity convert directly to the Roth IRA account, or do they send to a traditional IRA which you then convert to a Roth IRA afterwards? I assume the former, just curious if the after-tax 401k to the Roth IRA (directly) is the “back door” in this case…

The funds rollover directly to the Roth IRA. Any gains can either also go to the Roth IRA (where I would owe taxes on this amount) or to a separate traditional IRA.

Makes sense…thank you for confirming.

[Valdeselad]

OP here, thank you all. The plan document language can be somewhat confusing with some admitted uncertainty.

Like @scophreak, my 401k custodian is Fidelity and I'm hoping what he/she states is essentially my situation. The one caveat is my current Roth IRA is held at Vanguard, and if I go forward with this, I may open a Roth IRA account at Fidelity just to simplify any transfer mechanisms (Fidelity to Fidelity sounds like a straightforward process).

I'm also hesitant to simply call someone at Fidelity and ask what is allowed - quite frankly, I trust the collective wisdom of Bogleheads over someone who may (or may not) know the ins and outs of this topic.

You absolutely should open a Roth IRA at Fidelity so that you can do this in 5 minutes over the phone.

Do not hesitate to call your plan administrators at Fidelity. There should be a phone number listed in your plan documents. They will look up your specific plan and explain things to you. That's their job - to run your plan and provide customer service for the plan's participants.

Thank you @retiredjg…appreciate your thoughts and suggestions. This forum is such a wonderful resource.