Can I still do a Mega Backdoor Roth Conversion for 2018?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
CanIQuitNow
Posts: 5
Joined: Fri Mar 08, 2019 10:51 am

Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by CanIQuitNow » Fri Mar 22, 2019 4:25 am

Hi Everyone,

I recently learned that IRA and Roth IRA contributions can be made up until the tax deadline. However, does this also apply to a Mega backdoor Roth conversion?

Thanks in advance - I want to ensure I don't generate any penalties or taxes pushing while executing the transactions this side of the new year. :D

mrc
Posts: 1407
Joined: Sun Jan 10, 2016 6:39 am

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by mrc » Fri Mar 22, 2019 5:41 am

The backdoor is a conversion, not a contribution. So it must be done in the tax year proper.
Macs are for those who don’t want to know why their computer works | Linux is for those who do | DOS is for those who want to know why their computer doesn’t work | Windows is for those who don’t

Longdog
Posts: 1403
Joined: Sun Feb 09, 2014 6:56 pm
Location: Philadelphia

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by Longdog » Fri Mar 22, 2019 5:41 am

Any conversion you do this year counts against this year’s taxes. But I think you are conflating terminology. What do you mean by a Mega Backdoor Roth conversion?
Steve

2cents2
Posts: 406
Joined: Sun Mar 02, 2014 11:31 am

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by 2cents2 » Fri Mar 22, 2019 6:15 am

You can not do a conversion for 2018 in 2019, but no worries you can still do a conversion.

You’ve touched on different kinds of conversions, though. The mega back door is after tax contributions made to a 401k and then converted to a Roth IRA.

The regular back door has several conditions that must be met in order to work optimally. Assuming you’re good there, you could still make a traditional non deductible contribution for 2018 before April 15th. You would track your basis on form 8606 on with your 2018 taxes. You could then do a conversion which would be reflected on your 2019 taxes (after you receive your 1099-R from your IRA custodian). Link to 8606 https://www.irs.gov/pub/irs-prior/f8606--2018.pdf

It gets real interesting if you make a 2019 tIRA contribution at the same time and then do a conversation. This year you track the 2018 contribution on your 8606. Next year, you add your 2019 tIRA to your basis on your 8606 and then the 2019 conversion. This is just a broad brush explanation. There are web sites that have step by step examples. Here is a link to one: https://thefinancebuff.com/the-backdoor ... ow-to.html

Petra
Posts: 41
Joined: Thu Feb 16, 2017 10:40 am

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by Petra » Fri Mar 22, 2019 11:34 am

My understanding is that you would have needed to cleared out your traditional (made up of pre-tax contributions) IRA by 12/31/18 in order to make a post tax traditional IRA contribution then a conversion to Roth (backdoor).

Otherwise you'd be subjected to the pro-rata rule which I think is too complicated for me.

User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by Earl Lemongrab » Fri Mar 22, 2019 3:07 pm

Yeah, even though these terms are made-up, they still have specific meanings. Mega Backdoor Roth is making after-tax, non-Roth, contributions to a 401(k) then rolling them to either a Roth IRA or a Roth 401(k) subaccount. Nothing else. It doesn't refer to regular backdoor Roth. It isn't a large conversion of pretax IRAs.

So, OP, start over and explain exactly what you mean and what you've done already. If you made AT contributions for 2018, you can roll to an IRA at any subsequent time. If you haven't, then you're done with 2018.

Topic Author
CanIQuitNow
Posts: 5
Joined: Fri Mar 08, 2019 10:51 am

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by CanIQuitNow » Fri Mar 22, 2019 8:58 pm

Thanks everyone! I realize I wasn’t clear in my original post, so a bit more background would be appropriate...

1. I do not have tIRA or Roth IRA Accounts today.
2. 401k plan through employer. Max out annually.
3. Large amounts of cash (MMF) in taxable account
4. Income above thresholds for tIRA and Roth IRA

I have been painfully ignorant about how to manage investments in a tax efficient manner. Kept focusing on work and one day realized I had the very fortunate problem of having multiple six-figure amounts sitting in my checking account (feel free to punch me in the face here)... I promptly moved the cash into MMF’s in order to park it somewhere while figuring out my next step.

I then spent the past couple of months pouring over this forum, MMM’s ditto, and read a few of the books recommended here. Built out an IPS and are now in the initial deployment phase, ie cleaning up after mistakes made over the past 15 years...

Yesterday I reorganized my 401k, pulling money out of the high fee vehicles and shifting towards low fee index funds.

I also started pumping cash into ETF’s, having learned here that this is a more tax efficient approach vs funds in a taxable account. Having studied here, I at least used limit orders.

Now, I’d like to move as much cash as I can into sheltered accounts. After learning about the mega Backdoor approach to moving funds into Roth IRA’s I realized that this is for me. I will get this started for 2019. However, since there’s a limitation on after tax contribution allowed into the 401k, it will take me years to move the cash. Hence the question whether I could allow for a contribution now to count towards the 2018 limit. The answer is likely no... :)

Good news is that my company is being sold, so I will see a new 401k plan in my near future. If I understand the rules correctly, the 56k limit is per plan. Is this correct?

Thanks again - the information and support on this board is second to none! Seriously changed my life for the better.

Spirit Rider
Posts: 12274
Joined: Fri Mar 02, 2007 2:39 pm

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by Spirit Rider » Fri Mar 22, 2019 11:16 pm

CanIQuitNow wrote:
Fri Mar 22, 2019 8:58 pm
Good news is that my company is being sold, so I will see a new 401k plan in my near future. If I understand the rules correctly, the 56k limit is per plan. Is this correct?
Not necessarily. The 415c annual addition limit is per unaffiliated employer. Depending on the terms of the acquisition, it could be the same plan. Even if it is a different plan, it is very likely to be considered a successor plan at an affiliated employer. In either case it is highly likely likely you will still be limited to just one annual addition limit per year. This will be decided at pay grades much higher than you or I. I wouldn't be making any assumptions just yet.

Topic Author
CanIQuitNow
Posts: 5
Joined: Fri Mar 08, 2019 10:51 am

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by CanIQuitNow » Sat Mar 23, 2019 1:14 am

Spirit Rider wrote:
Fri Mar 22, 2019 11:16 pm
CanIQuitNow wrote:
Fri Mar 22, 2019 8:58 pm
Good news is that my company is being sold, so I will see a new 401k plan in my near future. If I understand the rules correctly, the 56k limit is per plan. Is this correct?
Not necessarily. The 415c annual addition limit is per unaffiliated employer. Depending on the terms of the acquisition, it could be the same plan. Even if it is a different plan, it is very likely to be considered a successor plan at an affiliated employer. In either case it is highly likely likely you will still be limited to just one annual addition limit per year. This will be decided at pay grades much higher than you or I. I wouldn't be making any assumptions just yet.
Thanks for sharing - this could very well be the case. It is a single division being sold to another mega corp...

2cents2
Posts: 406
Joined: Sun Mar 02, 2014 11:31 am

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by 2cents2 » Sat Mar 23, 2019 7:39 am

It sounds like maybe you could do both types of conversions to Roth.

As far as I know you can only do the 401k contributions through payroll deductions—so, you wouldn’t be able to do anymore for 2018.
For the mega backdoor to work optimally, your plan must allow after tax contributions and in plan rollovers. Sometimes companies will match after tax contributions, sometimes they won’t—something else to keep in mind when planning your contribution allocations. You could have new plan rules for the new company, so it would be great if you could get access to the new plan rules.

There are no income limitations to making a non deductible IRA contribution. You could still make an IRA contribution for 2018 (before April 15).

cherijoh
Posts: 6379
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by cherijoh » Sat Mar 23, 2019 8:47 am

CanIQuitNow wrote:
Fri Mar 22, 2019 8:58 pm
Now, I’d like to move as much cash as I can into sheltered accounts. After learning about the mega Backdoor approach to moving funds into Roth IRA’s I realized that this is for me. I will get this started for 2019. However, since there’s a limitation on after tax contribution allowed into the 401k, it will take me years to move the cash. Hence the question whether I could allow for a contribution now to count towards the 2018 limit. The answer is likely no... :)
Technically, you cannot "move cash" into your 401k plan - you can only defer your salary (and if your plan permits, any bonus). You can of course pay expenses out of the cash to leave more salary to be deferred into your 401k. That means of course that 2018 is history and you can only make contributions for 2019.

However, the first thing you need to do is to find out if your 401k plan even allows after-tax contributions (Step 1 of a "Mega Backdoor Roth"). Not all plans do! I worked for a Megacorp with an otherwise stellar 401k plan but no after-tax contributions were allowed. An earlier employer allowed after tax contributions, but total employee contribution were limited to 15% of salary. :annoyed

Then if the plan permits them, the next thing to check is if your plan permits in-service rollovers (Step 2 of the "Mega Backdoor Roth"). I believe some plans only allow in-service rollovers once you reach 59.5. Other plans may limit the number of in-service rollovers you can do in a calendar year.

If you can't roll the after-tax contributions into a Roth in a timely manner, it limits the utility of the idea of making after-tax contributions since you would still have to pay taxes to convert the earnings. I believe most plans now let you separate out the after-tax contributions and send it to your Roth, but I don't know if you would be required to send the earnings to a traditional IRA or if you can leave the earnings in the 401k. If it is the former, this could mess up your ability to do a garden-variety Backdoor Roth.

The next thing to keep in mind is that the 56k limit includes your regular contribution plus any company matching plus non-elective contributions (where the company makes a contribution to everyone whether or not they make an employee contribution). IF your plan does allow after-tax contributions, it would be limited to the remaining space available after considering those other contributions. (It is my understanding that the over-50 catch-up contribution is not counted in 56k the limit).

My advice is to review your plan documents to see what rules you will need to follow and if your tax-deferral plan is feasible. I think many people would argue that if you can't do a timely conversion of after-tax contributions that you might be better off just putting the money into a taxable investment account - i.e., the paying capital gains taxes every year on the earnings may beat out paying ordinary income tax on the earnings when you eventually take a distribution or do a regular Roth conversion from you 401k or IRA. YMMV

Topic Author
CanIQuitNow
Posts: 5
Joined: Fri Mar 08, 2019 10:51 am

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by CanIQuitNow » Sat Mar 23, 2019 5:16 pm

Thanks everyone - this is very helpful! Will study the plan documents and see what they say. Also have an email into HR to get confirmation.

Thanks again!

Pigeye Brewster
Posts: 400
Joined: Thu Oct 05, 2017 7:33 pm

Re: Can I still do a Mega Backdoor Roth Conversion for 2018?

Post by Pigeye Brewster » Sat Mar 23, 2019 7:54 pm

CanIQuitNow wrote:
Fri Mar 22, 2019 8:58 pm
4. Income above thresholds for tIRA and Roth IRA
Since your income is above the tIRA and Roth IRA thresholds, you are likely classified as a highly compensated employee (HCE). So even if your plan allows after-tax contributions, your ability to participate may be limited if not enough non-HCEs participate. That is because after-tax contributions are subject to ACP testing even in a safe harbor plan.

Post Reply