Can a 403b convert to Mega backdoor Roth?

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UncleBogle
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Can a 403b convert to Mega backdoor Roth?

Post by UncleBogle » Sun Sep 02, 2018 8:38 am

I have a 403B with an old employer, and could not find out if a 403B could be converted into a Mega backdoor Roth or not. Does anyone know, or has anyone done this?

DavidRoseMountain
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Re: Can a 403b convert to Mega backdoor Roth?

Post by DavidRoseMountain » Sun Sep 02, 2018 8:51 am

A mega backdoor Roth is a way to transfer after tax contributions to a Roth.

But if you're no longer with this employer I don't think you can make after tax contributions to this 403 b anymore.

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Earl Lemongrab
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Re: Can a 403b convert to Mega backdoor Roth?

Post by Earl Lemongrab » Sun Sep 02, 2018 12:42 pm

I'm not sure you understand what a Mega Backdoor Roth is. Can you outline what you think it is and how it would be accomplished with an old 401(k)?

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Nate79
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Re: Can a 403b convert to Mega backdoor Roth?

Post by Nate79 » Sun Sep 02, 2018 1:03 pm

You can roll it to a traditional IRA and then convert the IRA to a Roth, paying taxes on the conversion. Is this what you are actually wanting to do?

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Earl Lemongrab
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Re: Can a 403b convert to Mega backdoor Roth?

Post by Earl Lemongrab » Sun Sep 02, 2018 1:29 pm

Nate79 wrote:
Sun Sep 02, 2018 1:03 pm
You can roll it to a traditional IRA and then convert the IRA to a Roth, paying taxes on the conversion. Is this what you are actually wanting to do?
If the OP wanted to convert the entire thing, just roll straight into the Roth. For someone needing backdoor Roth, that's a questionable strategy over leaving it where it is.

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UncleBogle
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Re: Can a 403b convert to Mega backdoor Roth?

Post by UncleBogle » Sun Sep 02, 2018 7:13 pm

Earl Lemongrab wrote:
Sun Sep 02, 2018 12:42 pm
I'm not sure you understand what a Mega Backdoor Roth is. Can you outline what you think it is and how it would be accomplished with an old 401(k)?
Sorry for any confusion. All that comes to mind is a line from The Princess Bride. " I do not think it means what you think it means..." 😊

I'll rephrase the question:

When still employed, can you convert a standard 403b to a 403b-Roth(provided plan allows for it), and then use it as a Mega backdoor Roth, or can that only be done with 401k's.

I must admit that the subject is rather confusing for me, despite reading subject matter repeatedly.

Essentially, I am a higher earner, with a high tax bracket. I have maxed out all qualified accounts. I'm just trying to make every effort to maximize my tax efficiency / Retirement savings.

gostars
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Re: Can a 403b convert to Mega backdoor Roth?

Post by gostars » Sun Sep 02, 2018 9:14 pm

A mega backdoor Roth IRA is where you make after-tax contributions to a 401k, then while still employed make a distribution of that money and roll it in to a Roth IRA. There isn't a conversion involved on the contributions; however, any gains it makes would be considered pre-tax and would either need to be rolled to a traditional IRA or converted to Roth IRA money. This whole process is only possible if the plan explicitly allows both after-tax contributions and in-service distributions. These are often not part of the default plan document that forms the basis of what most employers end up with, and have to be explicitly requested by whoever is responsible for maintaining the retirement plans. You'll need to find and read your plan document, because it will tell you exactly what is allowed.

There is one possible intricacy to this: if your plan allows after-tax contributions, but does not allow in-service distributions, but you are planning to leave the employer soon, you can make those contributions, then when you leave the employer, complete the rollovers of that money. You probably don't want to use this option if you are planning to stay with the employer for a long time, as you'll pay income tax on the original money, then eventually income tax on all the growth, and most people would be better off investing in a taxable account where they will pay income tax on the original money but only capital gains tax on the growth.

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Earl Lemongrab
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Re: Can a 403b convert to Mega backdoor Roth?

Post by Earl Lemongrab » Mon Sep 03, 2018 1:31 pm

UncleBogle wrote:
Sun Sep 02, 2018 7:13 pm
When still employed, can you convert a standard 403b to a 403b-Roth(provided plan allows for it), and then use it as a Mega backdoor Roth, or can that only be done with 401k's.
It's not clear what exactly you are asking or whether you understand what a Mega is. I will throw out a fit factoids that might help or cause better questions.

1. Can you convert pretax money in a Traditional 403(b) account to Roth? Probably, if the plan allows it. You would pay tax on it.

2. Does that expand your Roth space? Not really. If the plan allows conversions then it probably allows direct Roth contributions so that would be easier and cheaper.

3. Does that expand your tax-advantaged space? No. The 18.5k is shared between deferrals (pretax) and Roth.

4. Could that converted Roth amount be rolled out to a Roth IRA? I don't think so. It started as deferrals, which are restricted for most people while still working at the employer.

5. Then what is Mega Backdoor? It's when you can make after-tax non-Roth contributions. These are in addition to the 18.5k pretax/Roth contributions. If you can convert those to Roth 403(b) or take in-service distribution then you can do some form of Mega Backdoor.

So it's relatively simple for Mega. You need both:

i. The ability to make after-tax contributions in addition to regular contributions. If you can't do that, stop. There is no Mega.

ii. One of the following:
a. In-service distributions of the after-tax contributions.
b. In-plan Roth conversions.

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UncleBogle
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Re: Can a 403b convert to Mega backdoor Roth?

Post by UncleBogle » Mon Sep 03, 2018 7:18 pm

Earl Lemongrab wrote:
Mon Sep 03, 2018 1:31 pm

1. Can you convert pretax money in a Traditional 403(b) account to Roth? Probably, if the plan allows it. You would pay tax on it.
This was my primary question.

I did not know if anyone had ever done this before. The IRS IRA conversion table shows it as such, but I have read conflicting accounts. I will need to check with the plan. Thanks!
5. Then what is Mega Backdoor? It's when you can make after-tax non-Roth contributions. These are in addition to the 18.5k pretax/Roth contributions. If you can convert those to Roth 403(b) or take in-service distribution then you can do some form of Mega Backdoor.
Understood - My understanding was that *if the plan allowed, additional post tax contributions could be made - above the 18.5k limit(Mega), however my understanding is that these contributions would be placed into a Roth account, thus the term "Mega-backdoor Roth.

If these contributions do not enter the Roth account, then why do people keep referring to these accounts as "Mega backdoor Roths" ?

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Earl Lemongrab
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Re: Can a 403b convert to Mega backdoor Roth?

Post by Earl Lemongrab » Mon Sep 03, 2018 11:01 pm

UncleBogle wrote:
Mon Sep 03, 2018 7:18 pm
Earl Lemongrab wrote:
Mon Sep 03, 2018 1:31 pm

1. Can you convert pretax money in a Traditional 403(b) account to Roth? Probably, if the plan allows it. You would pay tax on it.
This was my primary question.

I did not know if anyone had ever done this before. The IRS IRA conversion table shows it as such, but I have read conflicting accounts. I will need to check with the plan. Thanks!
5. Then what is Mega Backdoor? It's when you can make after-tax non-Roth contributions. These are in addition to the 18.5k pretax/Roth contributions. If you can convert those to Roth 403(b) or take in-service distribution then you can do some form of Mega Backdoor.
Understood - My understanding was that *if the plan allowed, additional post tax contributions could be made - above the 18.5k limit(Mega), however my understanding is that these contributions would be placed into a Roth account, thus the term "Mega-backdoor Roth.

If these contributions do not enter the Roth account, then why do people keep referring to these accounts as "Mega backdoor Roths" ?
Yes, but those are not pretax. Like I said, first find out if the plan allows after-tax non-Roth. Anything else is irrelevant until you find that out.

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