A new kind of a roth back door.

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sai
Posts: 182
Joined: Tue Apr 15, 2014 12:09 pm

A new kind of a roth back door.

Post by sai » Tue Apr 19, 2016 8:09 pm

hi,

I discovered a new kind of roth back door, please see if my understanding is right.


1. say you have 100k in roth 401k
2. say your allocation is 50% bonds and 50% stock
3. Lets say you can take loan up to 50% of the money in roth 401k at 5% that you pay back to yourself (minus any loan administration fee)
4. lets take 25k loan(sell 25k from bonds)
5. just put that money in savings account(you pretty much get the same interest or may be less), say 0.5% interest you get
6.at the end of the year now the money in savings is 25.125k basically earned $125, say you have to pay $25 as tax and have gain of just $100
7. so you have 25100 in savings finally
8. you have to pay back 26250 which is 1250 more than you took initially.
9. you use 25100 from savings and remaining from some other earnings to pay back 26250

Thus now you are able to shovel extra money into roth(401k)

does the above theory sounds right?
Did i invent/discover a new backdoor :) ?

Braje
Posts: 48
Joined: Wed Jun 03, 2015 10:06 pm

Re: A new kind of a roth back door.

Post by Braje » Tue Apr 19, 2016 8:50 pm

Can you take the loan from just one fund or does it get taken out of all funds? Pretty sure you have to start pay back right away so all money wouldn't be sitting in your saving account for the year. Sound like a lot of work for $100.00.

sai
Posts: 182
Joined: Tue Apr 15, 2014 12:09 pm

Re: A new kind of a roth back door.

Post by sai » Tue Apr 19, 2016 9:12 pm

Braje wrote:Can you take the loan from just one fund or does it get taken out of all funds? Pretty sure you have to start pay back right away so all money wouldn't be sitting in your saving account for the year. Sound like a lot of work for $100.00.
This is not about 100 dollars, this is about shoveling additional $1250 dollars into Roth. i.e. back door

jjface
Posts: 2524
Joined: Thu Mar 19, 2015 6:18 pm

Re: A new kind of a roth back door.

Post by jjface » Tue Apr 19, 2016 9:38 pm

For one if your bonds would have earned 2%, 3% or even 5% then you are losing money by moving it into a .5% savings account. If at 5% that $25k would be $26250 in your roth if you did nothing anyway!

So you would have to use the same bonds in taxable to not take that risk of having a mismatch. Then it costs you whatever the tax on that income costs. Say the bonds make 3% which is $750. That costs you $187.50 in tax at 25%. So net is $25562.50. You add $687.50 in extra roth contributions to make it $26250.

So basically you paid $187.50 tax plus a lot of work for an extra $687.50 contribution. So no not a great idea unfortunately :(

Plus as someone else said you probably have to pay it back monthly rather than annually.

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ogd
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Joined: Thu Jun 14, 2012 11:43 pm

Re: A new kind of a roth back door.

Post by ogd » Tue Apr 19, 2016 9:42 pm

You can do this, but I would call it expensive.

So you added another 5%, and this cost you taxes on a year's worth of gains of whatever would have been in your Roth (or else it cost you a lot more). Best case is bonds, which you relocate to taxable, make 2% and lose 0.5% to taxes; but in more normal times lose 1% to taxes. Stocks are about the same or worse. This is on top of the taxes that you paid on the 5% when you got it as income.

Plus the effort. Overall, I'd say it's not terrible but it's not worth it. Doing this with a Traditional 401k is much worse, but I'd guess you know this already.

sai
Posts: 182
Joined: Tue Apr 15, 2014 12:09 pm

Re: A new kind of a roth back door.

Post by sai » Wed Apr 20, 2016 6:41 am

how about using LEAP in roth to get leverage and just pay back the money from savings for loan repayment. thus no change in exposure of stock in roth, so no loss of earnings?

Thanks.

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dmcmahon
Posts: 1870
Joined: Fri Mar 21, 2008 10:29 pm

Re: A new kind of a roth back door.

Post by dmcmahon » Wed Apr 20, 2016 6:57 am

I'm not sure it's a new idea and it's not limited to Roth accounts so it's more of a general retirement savings back door.
I first heard the idea that's at the core of your proposal in the context of a company 401k plan. Basically the idea was to take a loan and then pay it back, thus adding the loan "interest" to the account. At root, the idea seems to work because the loan interest rate on the plan was a lot higher than safe investments were going to yield over the same time period. From the lender's perspective there is risk of default, which demands a higher rate. You may choose to view the transaction as having lower risk since you're the borrower. It is this that you're exploiting. There was a limit to the % of assets that could be borrowed, thus capping the amounts involved unless you already had a big account.
I never tried this, it seemed like too much of a headache for a very minor gain.

sai
Posts: 182
Joined: Tue Apr 15, 2014 12:09 pm

Re: A new kind of a roth back door.

Post by sai » Wed Apr 20, 2016 9:15 pm

Thank you all.

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