Origin of the backdoor Roth?

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poundwise
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Origin of the backdoor Roth?

Post by poundwise »

With all of the fascinating discussions and news stories about tax changes, I've been curious about the origins of tax breaks we've come to know and love.

Does anyone know who the first person was to recognize the backdoor Roth loophole? And was this intentionally left in by congress, or did they just miss this?

This is the earliest reference to the term "backdoor" I was able to find on Bogleheads. This article gives a little bit of detail about how the 2006 Tax Increase Prevention and Reconciliation Act introduced the allowance of conversions from traditional to Roth, if I am interpreting correctly, beginning in 2010. So that may have been what triggered the opportunity, and by the time 2010 rolled around everyone was lined up and ready to do this. This post suggests at least one Boglehead was waiting for 2010 in anticipation.

Hoping the collective mind of of Bogleheads recalls these days of yore...
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Duckie
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Re: Origin of the backdoor Roth?

Post by Duckie »

poundwise wrote: Tue Sep 14, 2021 11:41 am Does anyone know who the first person was to recognize the backdoor Roth loophole?
Probably several people noticed in 2010. I remember reading an article about it in late 2011, but it wasn't called a "Backdoor Roth" yet. I think that label took a couple more years. It might even have started here on Bogleheads.
And was this intentionally left in by congress, or did they just miss this?
They missed it. Congress lifted the income cap on conversions so that a lot of people with high incomes would convert pre-tax IRAs creating higher taxes. That would mean more money for Congress to spend. I doubt they had a clue about the potential loophole. It's not the first time their laws have had unintended consequences. Just consider how 401k plans got started.
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Re: Origin of the backdoor Roth?

Post by Lee_WSP »

Probably some income tax or estate planning attorney. Changes to the tax laws happen frequently and very smart people scour the text for the year's new tax planning guidance.

As far as when it first received the moniker "backdoor", I do not know. Probably some news reporter or financial columnist as blogging wasn't terribly common back then.

Before the estate tax exemption increase, family LLC's used to be extremely popular devices. Lots of tax strategies have fallen by the wayside and have cropped up over the hundred or so years since the income tax was introduced.
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poundwise
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Re: Origin of the backdoor Roth?

Post by poundwise »

Duckie wrote: Tue Sep 14, 2021 3:17 pm They missed it. Congress lifted the income cap on conversions so that a lot of people with high incomes would convert pre-tax IRAs creating higher taxes. That would mean more money for Congress to spend. I doubt they had a clue about the potential loophole. It's not the first time their laws have had unintended consequences. Just consider how 401k plans got started.
This seems so predictable (in hindsight, of course). Why not just allow conversions, but disallow after-tax contributions? What was the point of ever allowing after-tax contributions to traditional IRAs.

Congress should hire a team of "white hat" tax attorneys to identify loopholes before legislation is released.
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poundwise
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Re: Origin of the backdoor Roth?

Post by poundwise »

Lee_WSP wrote: Tue Sep 14, 2021 4:29 pm Before the estate tax exemption increase, family LLC's used to be extremely popular devices. Lots of tax strategies have fallen by the wayside and have cropped up over the hundred or so years since the income tax was introduced.
Very interesting. I suppose family LLCs are still used, but only when estate values are above 25M or so. Or maybe GRATs and IDGTs and such have superseded family LLCs altogether.
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Re: Origin of the backdoor Roth?

Post by Katietsu »

poundwise wrote: Tue Sep 14, 2021 10:26 pm What was the point of ever allowing after-tax contributions to traditional IRAs..
I do not know the “point”. But when I made my first after tax contribution in the 1990’s, there was no such thing as a Roth IRA. And capital gains and qualified dividends were taxed at the same rate as ordinary income. There was a significant marriage penalty. (Two working married people frequently paid a lot more than if they stayed single.)

This is why I like to do things in moderation if the tax consequences will not be known until well into the future.
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Re: Origin of the backdoor Roth?

Post by Alan S. »

Non deductible IRA contributions go back to the early 80s when Congress limited the deduction for those with a workplace retirement plan and income over a certain amount. There was never an intent to stifle contributions, just the deduction.

Roth IRAs were introduced in 1998 with max income limits to contribute, and there was also a conversion limit of 100k. Therefore, taxpayers not eligible to make a regular Roth contribution were also mostly not eligible to convert. The back door was really born in 2010 when Congress eliminated the conversion income limit and anyone could convert. They would then make a non deductible TIRA contribution and convert it.

Some tax pundits felt the back door had a step transaction risk, but the IRS never challenged these two step transactions. Then at the end of 2017, Congress endorsed the back door process and all fears of step transactions ended. Since 2010, more employer plans also began to accept IRA rollovers including rollovers from contributary IRAs and these rollovers enabled taxpayers to convert their entire TIRA basis without taxes.
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Re: Origin of the backdoor Roth?

Post by Lee_WSP »

poundwise wrote: Tue Sep 14, 2021 10:29 pm
Lee_WSP wrote: Tue Sep 14, 2021 4:29 pm Before the estate tax exemption increase, family LLC's used to be extremely popular devices. Lots of tax strategies have fallen by the wayside and have cropped up over the hundred or so years since the income tax was introduced.
Very interesting. I suppose family LLCs are still used, but only when estate values are above 25M or so. Or maybe GRATs and IDGTs and such have superseded family LLCs altogether.
Family LLCs are virtually extinct as a modern planning tool. So much so that my only working knowledge of them is from reading some really old case law and private letter rulings. Of course, by old I mean before I was licensed. Plenty of older attorneys are probably very familiar with them. And older LLC s are still in existence just as older dynasty trusts likewise are still in existence.
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Re: Origin of the backdoor Roth?

Post by randomguy »

Duckie wrote: Tue Sep 14, 2021 3:17 pm
poundwise wrote: Tue Sep 14, 2021 11:41 am Does anyone know who the first person was to recognize the backdoor Roth loophole?
Probably several people noticed in 2010. I remember reading an article about it in late 2011, but it wasn't called a "Backdoor Roth" yet. I think that label took a couple more years. It might even have started here on Bogleheads.
And was this intentionally left in by congress, or did they just miss this?
They missed it. Congress lifted the income cap on conversions so that a lot of people with high incomes would convert pre-tax IRAs creating higher taxes. That would mean more money for Congress to spend. I doubt they had a clue about the potential loophole. It's not the first time their laws have had unintended consequences. Just consider how 401k plans got started.
People thought about this almost as soon as the law was passed. I made nonDeductible contributions in 2008-9 to have more money to convert when 2010 rolled around.

As to how much something is intentional or not is hard to say. This seems pretty obvious and straight forward so I would think they they just didn't care. But you never know.
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Re: Origin of the backdoor Roth?

Post by BolderBoy »

poundwise wrote: Tue Sep 14, 2021 11:41 amDoes anyone know who the first person was to recognize the backdoor Roth loophole? And was this intentionally left in by congress, or did they just miss this?
This was intended as a nice tax avoidance gift by the Bush II administration. They knew exactly what they were doing.

In 2006 Money Magazine did a piece on the recently passed, 2006 tax law. The article explained that the Roth conversion income cap was to be repealed in 2010 and some special provisions would be in place for the 2010 & 2011 tax years for folks to pay taxes on the conversions. Some of the congress critters were lickin' their chops at the massive Roth conversion taxes that they envisioned the government would be hauling in. I instantly recognized the incredible opportunity it presented and started that very year making plans to take advantage of it in 2010. And I started telling everyone I knew, about the fabulous opportunity but no one believed me. At that point it wasn't called a "Backdoor Roth".

In December 2009 I rolled the entire taxable portion of my tIRA into my employer's 401k.

On January 2, 2010 I made my usual, non-deductible tIRA contribution and on January 3, converted the entire tIRA balance to my Roth IRA (was around $100k). When tax-time rolled around not only did I not owe any taxes on the conversion, but the IRS sent me a fat refund of $5k directly tied to the conversion (never understood why). And every year after that I repeated the same Jan 2 & 3 process until I retired.

One of my coworkers with the same income I had, asked her financial advisor about taking advantage of the 2010 opportunity I described and was told, "He is going to go to jail if he does that." So my friend followed her advisor's advice about doing the Roth conversion (without transferring the taxable portion of her tIRA to the employer's 401k), converted $75k and was handed a $25k tax bill for her trouble. She was pretty upset that she'd listened to her advisor and canned her not long after.

It wasn't until I joined this forum in April 2010 that I read the term "Backdoor Roth".

Reading the Money Magazine article was one of those, "Do you remember where you were when that happened?", moments for me. Still remember to this day. IMO, this law and the HSA law also passed in the 00s were the two best tax pieces to come from that decade.
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Re: Origin of the backdoor Roth?

Post by MBB_Boy »

BolderBoy wrote: Wed Sep 15, 2021 1:34 pm
poundwise wrote: Tue Sep 14, 2021 11:41 amDoes anyone know who the first person was to recognize the backdoor Roth loophole? And was this intentionally left in by congress, or did they just miss this?
This was intended as a nice tax avoidance gift by the Bush II administration. They knew exactly what they were doing.

In 2006 Money Magazine did a piece on the recently passed, 2006 tax law. The article explained that the Roth conversion income cap was to be repealed in 2010 and some special provisions would be in place for the 2010 & 2011 tax years for folks to pay taxes on the conversions. Some of the congress critters were lickin' their chops at the massive Roth conversion taxes that they envisioned the government would be hauling in. I instantly recognized the incredible opportunity it presented and started that very year making plans to take advantage of it in 2010. And I started telling everyone I knew, about the fabulous opportunity but no one believed me. At that point it wasn't called a "Backdoor Roth".

In December 2009 I rolled the entire taxable portion of my tIRA into my employer's 401k.

On January 2, 2010 I made my usual, non-deductible tIRA contribution and on January 3, converted the entire tIRA balance to my Roth IRA (was around $100k). When tax-time rolled around not only did I not owe any taxes on the conversion, but the IRS sent me a fat refund of $5k directly tied to the conversion (never understood why). And every year after that I repeated the same Jan 2 & 3 process until I retired.

One of my coworkers with the same income I had, asked her financial advisor about taking advantage of the 2010 opportunity I described and was told, "He is going to go to jail if he does that." So my friend followed her advisor's advice about doing the Roth conversion (without transferring the taxable portion of her tIRA to the employer's 401k), converted $75k and was handed a $25k tax bill for her trouble. She was pretty upset that she'd listened to her advisor and canned her not long after.

It wasn't until I joined this forum in April 2010 that I read the term "Backdoor Roth".

Reading the Money Magazine article was one of those, "Do you remember where you were when that happened?", moments for me. Still remember to this day. IMO, this law and the HSA law also passed in the 00s were the two best tax pieces to come from that decade.
Wait, are you saying it was a tax avoidance gift, or a way for Congress to give themselves a gift in a gusher of new tax revenue NOW (vs later in the future when someone else would get to spend it)? It doesn't follow for it to be both
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Re: Origin of the backdoor Roth?

Post by Eagle33 »

MBB_Boy wrote: Thu Sep 16, 2021 8:14 am
BolderBoy wrote: Wed Sep 15, 2021 1:34 pm
poundwise wrote: Tue Sep 14, 2021 11:41 amDoes anyone know who the first person was to recognize the backdoor Roth loophole? And was this intentionally left in by congress, or did they just miss this?
This was intended as a nice tax avoidance gift by the Bush II administration. They knew exactly what they were doing.

In 2006 Money Magazine did a piece on the recently passed, 2006 tax law. The article explained that the Roth conversion income cap was to be repealed in 2010 and some special provisions would be in place for the 2010 & 2011 tax years for folks to pay taxes on the conversions. Some of the congress critters were lickin' their chops at the massive Roth conversion taxes that they envisioned the government would be hauling in. I instantly recognized the incredible opportunity it presented and started that very year making plans to take advantage of it in 2010. And I started telling everyone I knew, about the fabulous opportunity but no one believed me. At that point it wasn't called a "Backdoor Roth".

In December 2009 I rolled the entire taxable portion of my tIRA into my employer's 401k.

On January 2, 2010 I made my usual, non-deductible tIRA contribution and on January 3, converted the entire tIRA balance to my Roth IRA (was around $100k). When tax-time rolled around not only did I not owe any taxes on the conversion, but the IRS sent me a fat refund of $5k directly tied to the conversion (never understood why). And every year after that I repeated the same Jan 2 & 3 process until I retired.

One of my coworkers with the same income I had, asked her financial advisor about taking advantage of the 2010 opportunity I described and was told, "He is going to go to jail if he does that." So my friend followed her advisor's advice about doing the Roth conversion (without transferring the taxable portion of her tIRA to the employer's 401k), converted $75k and was handed a $25k tax bill for her trouble. She was pretty upset that she'd listened to her advisor and canned her not long after.

It wasn't until I joined this forum in April 2010 that I read the term "Backdoor Roth".

Reading the Money Magazine article was one of those, "Do you remember where you were when that happened?", moments for me. Still remember to this day. IMO, this law and the HSA law also passed in the 00s were the two best tax pieces to come from that decade.
Wait, are you saying it was a tax avoidance gift, or a way for Congress to give themselves a gift in a gusher of new tax revenue NOW (vs later in the future when someone else would get to spend it)? It doesn't follow for it to be both
Not to put words into BoulderBoys mouth, I believe he is saying Congress removed the income limit so large RA owners would convert and pay taxes. They probably missed the fact one could rollover the pre-tax portion into company benefit plan and then could make non-deductible contributions & convert for every year thereafter when they still had earned income.
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Re: Origin of the backdoor Roth?

Post by BolderBoy »

Eagle33 wrote: Thu Sep 16, 2021 3:26 pm Not to put words into BoulderBoys mouth, I believe he is saying Congress removed the income limit so large RA owners would convert and pay taxes. They probably missed the fact one could rollover the pre-tax portion into company benefit plan and then could make non-deductible contributions & convert for every year thereafter when they still had earned income.
I don't think the folks who actually wrote this part of the law missed anything. The folks actually writing the various parts of tax legislation are very smart and quite able to look down the road at most of the possibilities. That they don't share their "insights" with the members who will be voting on the legislation isn't a mystery.

No, this was planned out behind closed doors explicitly for its ultimate tax benefit to those who could take advantage of it. That it has garnered so much publicity in the last bunch of years and that it might benefit one group more than all groups is what has gotten the critters to looking at it so closely.
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Re: Origin of the backdoor Roth?

Post by Darwin »

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Re: Origin of the backdoor Roth?

Post by Miguelito »

I read about the back door Roth back in 2006 in an article from CNN/Money in the web. That’s when the law was changed to remove limits on conversions. I started funding after tax IRAs for my wife and I since 2006 and converted the full balance as soon as it was allowed in 2010. Thanks to the recession our cumulative gains were small, so we ripped the bandaid, paid taxes on the gains and started yearly conversions since 2011.
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Re: Origin of the backdoor Roth?

Post by ClassII »

Something that's always bugged me about the 401k saving mechanism is how so much of it is wholly dependent on the "generosity" of the employer. So the total limit is $58k but I can only put in $19.5k. To me that's just dumb. Make the limit X dollars and whether that's filled by me or my employer should not be of the IRS' concern.

Yes the employer contribution is something I (or my union) negotiate but that's oversimplifying the situation most of us are in where the company rate is fixed (and woefully pitiful, usually) and thus really limits how much we can take advantage of a 401k. Maybe in the good old days when +10% employee match was common but these days people are lucky to get a few percent if anything. At least lets all have the same shot to max our plans out regardless of how much each party is putting into the pot.
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Re: Origin of the backdoor Roth?

Post by poundwise »

BolderBoy wrote: Wed Sep 15, 2021 1:34 pm On January 2, 2010 I made my usual, non-deductible tIRA contribution and on January 3, converted the entire tIRA balance to my Roth IRA (was around $100k).
Amazing! Thank you for sharing your story.

How did you have the foresight to have 100K after tax sitting in your tIRA? I recall my account recommending in 2006 or so that I move some after tax money into tIRA each year for the mild benefit of deferred taxes on the gains. So I feel lucky that I started doing that. I don't remember if he had a future conversion in mind or not - I was too inexperienced to have grasped that at the time.
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Re: Origin of the backdoor Roth?

Post by poundwise »

ClassII wrote: Thu Sep 16, 2021 11:57 pm Something that's always bugged me about the 401k saving mechanism is how so much of it is wholly dependent on the "generosity" of the employer. So the total limit is $58k but I can only put in $19.5k. To me that's just dumb. Make the limit X dollars and whether that's filled by me or my employer should not be of the IRS' concern.

Yes the employer contribution is something I (or my union) negotiate but that's oversimplifying the situation most of us are in where the company rate is fixed (and woefully pitiful, usually) and thus really limits how much we can take advantage of a 401k. Maybe in the good old days when +10% employee match was common but these days people are lucky to get a few percent if anything. At least lets all have the same shot to max our plans out regardless of how much each party is putting into the pot.
Great question. I have spent 10 yrs trying to figure out how to get to ~58K each year (employers, consulting etc - often failing), without questioning the law itself. Right now this opportunity depends way too much on working for an employer who offers the Mega-Backdoor Roth.
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Re: Origin of the backdoor Roth?

Post by wrongfunds »

I mean why stop at $58K only? Congress should have made that $580K instead!

(I have a feeling you consider the number 580K to be preposterous; why? Is it because *you* will NOT be able to defer $580K amount but are in position to defer $58K?)
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Re: Origin of the backdoor Roth?

Post by knowledge »

I recall a Suze Orman article on Yahoo finance alerting me about this. It was timely since 2007 was the first year we bumped up against the Roth contribution limits.
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Re: Origin of the backdoor Roth?

Post by ClassII »

wrongfunds wrote: Fri Sep 17, 2021 12:53 pm I mean why stop at $58K only? Congress should have made that $580K instead!

(I have a feeling you consider the number 580K to be preposterous; why? Is it because *you* will NOT be able to defer $580K amount but are in position to defer $58K?)
$58k is a considerable amount of tax-advantaged space. Of course I'd love to see the total amount be as high as politically possible. I just think it should apply to all retirement contributions whether it's from my take home pay or a company match. If my job doesn't want to contribute why should I be penalized by only being able to put $19.5k in over someone who's employer has a generous matching program and can get the whole $58k covered? In the end it's all compensation as far as the IRS is concerned anyway.
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Re: Origin of the backdoor Roth?

Post by randomguy »

wrongfunds wrote: Fri Sep 17, 2021 12:53 pm I mean why stop at $58K only? Congress should have made that $580K instead!

(I have a feeling you consider the number 580K to be preposterous; why? Is it because *you* will NOT be able to defer $580K amount but are in position to defer $58K?)
The issue isn't if 58k is preposterous (it is. There is no reason for the government to be subsidizing people who can afford to save 58k/year). The complaint is why do some people get to do 6k (only have IRAs), others can do 19k (have a 401(k), and other can do 58k? And some people get to double dip and others don't. In what world does that make any type of sense? Of course it doesn't but it is the system we have as it has evolved over time. All you can do is push your plan administrator to add the option to do the megaRoth. But it is stupid for all involved that you have to do all that extra paperwork to contribute 58k instead of just 19k but again it is the system we have.
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Re: Origin of the backdoor Roth?

Post by wrongfunds »

I don't believe employer match is needed to reach the magic $58K. So I do not quite get the argument. Employer only has to allow after tax contribution; there is no requirement that employer to match even a penny.

As to why 6K vs 19.5K vs 58K specific numbers? I can not really get behind that argument. Of course, doing that would lock this topic too!

But I do want to understand what specific complaint or rather unfairness is being brought out. Regardless we need to understand that everything is fair in love and taxes.
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Re: Origin of the backdoor Roth?

Post by Lee_WSP »

wrongfunds wrote: Sat Sep 18, 2021 10:12 am
But I do want to understand what specific complaint or rather unfairness is being brought out. Regardless we need to understand that everything is fair in love and taxes.
58k is more than the national median income. But it's actually 64k that's available (backdoor Roth IRA). Multiplied by two, it's greater than the 90th percentile of household incomes. If you don't see the disconnect, I can't make the connection for you.

But besides from that, only people at mega corps or extra highly paid solo contractors can actually access the mega backdoor. Your company needs to pass the non-discrimination tests and have a 401k. It's really not available to the vast majority of Americans even if they had the savings amount to use it.
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Re: Origin of the backdoor Roth?

Post by wrongfunds »

Lee_WSP wrote: Sat Sep 18, 2021 10:23 am
wrongfunds wrote: Sat Sep 18, 2021 10:12 am
But I do want to understand what specific complaint or rather unfairness is being brought out. Regardless we need to understand that everything is fair in love and taxes.
58k is more than the national median income. But it's actually 64k that's available (backdoor Roth IRA). Multiplied by two, it's greater than the 90th percentile of household incomes. If you don't see the disconnect, I can't make the connection for you.

But besides from that, only people at mega corps or extra highly paid solo contractors can actually access the mega backdoor. Your company needs to pass the non-discrimination tests and have a 401k. It's really not available to the vast majority of Americans even if they had the savings amount to use it.
Of course, I do see the unfairness of this but this is something we are not allowed to comment on here!

Does the non-discrimination test also apply to the post-tax 401K? I understand that company matching is never applied to post-tax 401K. The company match is one of the significant carrot that employers use to get good participation rate to pass the non-discrimination test. I do not know what are the hurdles that company need to pass to allow contribution to post-tax 401K.

The reason I started replying because I got the feeling that somebody was under impression that company match is the way one reaches $58K which is completely wrong. The match just cuts down on how much the employee can defer. May be there are companies which fill the space between $19.5K and $58K via company match. I would like to send them my resume :-)
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Re: Origin of the backdoor Roth?

Post by sailaway »

wrongfunds wrote: Sat Sep 18, 2021 11:59 am

Does the non-discrimination test also apply to the post-tax 401K? I understand that company matching is never applied to post-tax 401K. The company match is one of the significant carrot that employers use to get good participation rate to pass the non-discrimination test. I do not know what are the hurdles that company need to pass to allow contribution to post-tax 401K.

The reason I started replying because I got the feeling that somebody was under impression that company match is the way one reaches $58K which is completely wrong. The match just cuts down on how much the employee can defer. May be there are companies which fill the space between $19.5K and $58K via company match. I would like to send them my resume :-)
Actually, a number of posters have reported that their companies do match post tax 401k contributions.

The post tax has a separate non discrimination test. It is possible for the general plan to be safe harbor, but HCEs are limited to how much after tax they can contribute.

When companies are filling the remaining space for you, it is usually on a profit sharing scheme, rather than matching.
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Re: Origin of the backdoor Roth?

Post by wrongfunds »

sailaway wrote: Sat Sep 18, 2021 12:03 pm
wrongfunds wrote: Sat Sep 18, 2021 11:59 am

Does the non-discrimination test also apply to the post-tax 401K? I understand that company matching is never applied to post-tax 401K. The company match is one of the significant carrot that employers use to get good participation rate to pass the non-discrimination test. I do not know what are the hurdles that company need to pass to allow contribution to post-tax 401K.

The reason I started replying because I got the feeling that somebody was under impression that company match is the way one reaches $58K which is completely wrong. The match just cuts down on how much the employee can defer. May be there are companies which fill the space between $19.5K and $58K via company match. I would like to send them my resume :-)
Actually, a number of posters have reported that their companies do match post tax 401k contributions.

The post tax has a separate non discrimination test. It is possible for the general plan to be safe harbor, but HCEs are limited to how much after tax they can contribute.

When companies are filling the remaining space for you, it is usually on a profit sharing scheme, rather than matching.
I think posters have reported that their companies do match contribution to Roth 401K (aka before $19.5, which uses post-tax money) I do not recall seeing anybody here who has said that their company matches any of the post-tax 401K (aka after $19.5)
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Re: Origin of the backdoor Roth?

Post by Lee_WSP »

A company match is a match of an employees contributions up to a percentage of their income. At least about 4% for a safe harbor plan.

You'd have to be quite highly compensated or the match particularly good to hit the 19.5k threshold.

But to answer the 58k question, as previously stated, it's usually a company profit sharing plan that gets large amounts of employer contributions into a 401k.
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Re: Origin of the backdoor Roth?

Post by Smilodon »

My mega corp match applies to after-tax contributions. I "spilled into" after-tax contributions earlier this year after having maxed-out my normal and catch-up limit total of $26k ($19.5 + $6.5k), and the match continued.
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Re: Origin of the backdoor Roth?

Post by illumination »

I think if it was purposely put in there, it would have pointed out as a tax benefit in the legislation. It was after all positioned as a tax cut bill. It's a great feature that the Roth was opened up to more people.

I personally think it was an oversight. If it was on purpose, kudos. I just think someone from Congress would have said something as soon as it was passed if it was a feature and not a bug. Bureaucrats make mistakes like this all the time. But happy to have the loophole, hope it doesn't get closed.

It really has nothing to do with the headlines you've heard regarding billion dollar Roth IRAs. That's a separate issue regarding founders getting to put in company shares that the public doesn't have access to. Someone like Thiel didn't get billions in his Roth because of the "backdoor" method.
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Re: Origin of the backdoor Roth?

Post by retiredjg »

wrongfunds wrote: Sat Sep 18, 2021 12:14 pm I think posters have reported that their companies do match contribution to Roth 401K (aka before $19.5, which uses post-tax money) I do not recall seeing anybody here who has said that their company matches any of the post-tax 401K (aka after $19.5)
I recall that several (many?) have reported their employers match the after-tax contributions.
wrongfunds
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Re: Origin of the backdoor Roth?

Post by wrongfunds »

Smilodon wrote: Sat Sep 18, 2021 12:39 pm My mega corp match applies to after-tax contributions. I "spilled into" after-tax contributions earlier this year after having maxed-out my normal and catch-up limit total of $26k ($19.5 + $6.5k), and the match continued.

Shouldn't you go for full $58K contribution even if you have to go to your local loan shark? I certainly would if I am getting "free" money.

For my megacorp, the maximum employee contribution is computed by substracting maximum company match and my pre-tax contribution from the magic number. Last year even though company stopped the match, the amount that I could contribute did NOT get adjusted.
retiredjg
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Re: Origin of the backdoor Roth?

Post by retiredjg »

I don't recall anyone ever saying they got "extra" match or "free money". Just that the employer match could be triggered by after-tax contribution as well as the usual ways.
DB2
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Re: Origin of the backdoor Roth?

Post by DB2 »

I have a Roth 401K with my employer. To my understanding, I can roll this into my personal Roth IRA at some point?
Thesaints
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Re: Origin of the backdoor Roth?

Post by Thesaints »

- Origin of the backdoor Roth: the U.S. Congress

- Who the first person was to recognize the backdoor Roth loophole? All those who were making retirement contributions and had an income above the conversion threshold (100k)

- Was this intentionally left in by congress ? The did not "left it in". They had to remove the income limit on the conversion.

- Did they just miss this? Congress members salary in 2010 was 174k...
retiredjg
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Re: Origin of the backdoor Roth?

Post by retiredjg »

DB2 wrote: Sat Sep 18, 2021 2:49 pm I have a Roth 401K with my employer. To my understanding, I can roll this into my personal Roth IRA at some point?
Yes. When you separate from employment. Some plans may allow it at/after age 59.5.
Smilodon
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Re: Origin of the backdoor Roth?

Post by Smilodon »

wrongfunds wrote: Sat Sep 18, 2021 1:09 pm Shouldn't you go for full $58K contribution even if you have to go to your local loan shark? I certainly would if I am getting "free" money.
Yes, and I do, except for involving the local lone shark. In my case the match is limited to 3% of my salary, but I get the match regardless of the contribution type. Of course, my motivation for doing after-tax contributions is to roll them into my Roth IRA which I do each year.
MrCheapo
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Re: Origin of the backdoor Roth?

Post by MrCheapo »

poundwise wrote: Tue Sep 14, 2021 11:41 am With all of the fascinating discussions and news stories about tax changes, I've been curious about the origins of tax breaks we've come to know and love.

Does anyone know who the first person was to recognize the backdoor Roth loophole? And was this intentionally left in by congress, or did they just miss this?

This is the earliest reference to the term "backdoor" I was able to find on Bogleheads. This article gives a little bit of detail about how the 2006 Tax Increase Prevention and Reconciliation Act introduced the allowance of conversions from traditional to Roth, if I am interpreting correctly, beginning in 2010. So that may have been what triggered the opportunity, and by the time 2010 rolled around everyone was lined up and ready to do this. This post suggests at least one Boglehead was waiting for 2010 in anticipation.

Hoping the collective mind of of Bogleheads recalls these days of yore...
I was thinking the same thing! A quick google finds "IRS Notice 2014-54 opened the door to the mega backdoor Roth 401(k) strategy, because it allowed for funds to be distributed from a 401(k) plan separately." but that's MBR not BR
MrCheapo
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Joined: Tue Dec 22, 2020 3:43 pm

Question for the Group

Post by MrCheapo »

I already contribute my max pre-tax IRA amounts and do $58K a year after tax to a Roth. I also have $300K sitting in tIRA accounts for companies I have already left.

If the MBR goes away when (if at all) should I roll those over into a Roth?
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