Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

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okwriter
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

An illustration of the MBR process has been added. And the capitalization is now consistent ("mega-backdoor Roth").
nolesrule wrote: Sun Jun 13, 2021 9:16 am there are a few articles that use "mega backdoor Roth" midsentence but it is rare
The top 3 hits on Google do this (Nerdwallet, Forbes, US News), so I don't know that it's rare.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

Nothing says that charts and figures have to be complicated. That simple block diagram made a huge difference in being able to understand the process.

I formatted the figure. Note that figures should have the title capitalized. If anyone thinks it's incorrect, please say so.

Also, tables and figures should always be referenced in the text, which I've done.

See: User:LadyGeek/Mega-backdoor Roth

With these changes, are we ready to go "live"?
================

okwriter - Can you do a similar block diagram for Backdoor Roth? The forum discussion is here: Wiki page UPGRADE: Backdoor Roth
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

I'm fine with going live. There are a couple of other editors (fyre4ce and Soon2BXProgrammer), I don't know if they have any edits planned.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

Thanks! We're now live:

-Mega-backdoor Roth
- After-tax 401(k)

Also:
- Changed the link in Backdoor Roth to point to the Mega-backdoor Roth page

This doesn't mean that we're done. It only means that the page is "good enough" that investors can trust the content. Further improvements are always welcome.

For the wiki editors:

- Added Mega-backdoor Roth to the navigation menu, Template:Retirement accounts
- Added Mega-backdoor Roth to 2021 - 2022 new pages (visible from the wiki home page as "Returning visitors may be interested in our new pages.")
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

I am planning on doing another scrub through my Solo 401k section, adding links, cleaning up the “mega-backdoor Roth” references, etc. Will try to finish up tonight.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by dafioram »

I saw that the After-tax 401k page says that the 19500 limit is for traditional + Roth contributions to 401k. That got me wondering I currently do Traditional then mega backdoor for the rest, but can the process be reversed? I.e., could I do megabackdoor for the first 38500 (including employer contributions) at the beginning of the year then switch to traditional at the end of the year (for the remaining 19500)? In affect doing the "employee contribution" last. I suppose if you are doing no traditional at all, i.e., Roth + Megabackdoor Roth 401k then you could just do after-tax (including convert to Roth) the whole year and not "use" any of your 19500 limit?
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

dafioram wrote: Sun Jun 13, 2021 9:17 pm I saw that the After-tax 401k page says that the 19500 limit is for traditional + Roth contributions to 401k. That got me wondering I currently do Traditional then mega backdoor for the rest, but can the process be reversed? I.e., could I do megabackdoor for the first 38500 (including employer contributions) at the beginning of the year then switch to traditional at the end of the year (for the remaining 19500)? In affect doing the "employee contribution" last. I suppose if you are doing no traditional at all, i.e., Roth + Megabackdoor Roth 401k then you could just do after-tax (including convert to Roth) the whole year and not "use" any of your 19500 limit?
this depends on the plan and its plan documents.

Some plans only allow "aftertax" as a spill over after traditional/Roth.. some plans allow direct aftertax contributions.

I did only aftertax at a megacorp 401k, so i could use the 19500 in my solo401k (as they are not related entities, i had multiple 56k limits (or whatever the number is))
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

dafioram wrote: Sun Jun 13, 2021 9:17 pm I suppose if you are doing no traditional at all, i.e., Roth + Megabackdoor Roth 401k then you could just do after-tax (including convert to Roth) the whole year and not "use" any of your 19500 limit?
This assumes the employer will match after-tax contributions, but they may not. (Mine doesn't; they only match traditional/Roth.)
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by OhioGozaimas »

Christine Benz of Morningstar has a brand-new article (June 11) that seems to treat the subject area at some depth. This mention is just to bring the article to everyone’s attention, in case it might be helpful.

The Time Is Right for Aftertax 401(k) Contributions

“The prospect of higher taxes and the uptake of in-plan conversions make this maneuver a no-brainer for heavy savers who have access to it.”

https://www.morningstar.com/articles/10 ... tributions


I’m just an interested bystander. YMMV. Thanks to all above for your efforts on the wiki.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by retiredjg »

OhioGozaimas wrote: Mon Jun 14, 2021 5:17 am Christine Benz of Morningstar has a brand-new article (June 11) that seems to treat the subject area at some depth. This mention is just to bring the article to everyone’s attention, in case it might be helpful.

The Time Is Right for Aftertax 401(k) Contributions

“The prospect of higher taxes and the uptake of in-plan conversions make this maneuver a no-brainer for heavy savers who have access to it.”

https://www.morningstar.com/articles/10 ... tributions


I’m just an interested bystander. YMMV. Thanks to all above for your efforts on the wiki.
Thanks for posting this.

A good article, but unless I'm reading it incorrectly, she apparently does not realize that after-tax contributions are eligible (in many plans) for an in-service distribution to Roth IRA.

I was going to suggest linking the article to our page, but readers might find that confusing.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by retiredjg »

fyre4ce wrote: Sun Jun 13, 2021 7:15 pm I am planning on doing another scrub through my Solo 401k section, adding links, cleaning up the “mega-backdoor Roth” references, etc. Will try to finish up tonight.
Oh good. :happy

I have not thought of a good substitute for "requires". Here's one thing I thought of but I think you might be able to improve on it.

Current: The mega-backdoor Roth strategy with a Solo 401k requires a qualified Third Party Administrator (TPA) to ensure legal and compliance requirements are met.

Suggestion: In almost all cases, the mega-backdoor Roth strategy with a Solo 401k should be administered by a qualified Third Party Administrator (TPA) to ensure legal and compliance requirements are met.

PS. As I mention in an earlier post, it seems prudent not to mention any provider's names. I think mentioning Employee Fiduciary and not the others could cause some discontent.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by dafioram »

okwriter wrote: Mon Jun 14, 2021 3:50 am
dafioram wrote: Sun Jun 13, 2021 9:17 pm I suppose if you are doing no traditional at all, i.e., Roth + Megabackdoor Roth 401k then you could just do after-tax (including convert to Roth) the whole year and not "use" any of your 19500 limit?
This assumes the employer will match after-tax contributions, but they may not. (Mine doesn't; they only match traditional/Roth.)
Should we include this as another potential disadvantage on mega backdoor wiki?
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

retiredjg wrote: Mon Jun 14, 2021 6:09 am PS. As I mention in an earlier post, it seems prudent not to mention any provider's names. I think mentioning Employee Fiduciary and not the others could cause some discontent.
Good point. I removed mention of Employee Fiduciary and made it a generic statement.
dafioram wrote: Mon Jun 14, 2021 6:27 am
okwriter wrote: Mon Jun 14, 2021 3:50 am
dafioram wrote: Sun Jun 13, 2021 9:17 pm I suppose if you are doing no traditional at all, i.e., Roth + Megabackdoor Roth 401k then you could just do after-tax (including convert to Roth) the whole year and not "use" any of your 19500 limit?
This assumes the employer will match after-tax contributions, but they may not. (Mine doesn't; they only match traditional/Roth.)
Should we include this as another potential disadvantage on mega backdoor wiki?
I'm not sure if it's a potential disadvantage, but I think that fact should definitely be mentioned in the After-tax 401(k) page. This is the first time I've heard of this. A google search shows that it's done - check with your employer.

I'll defer to the experts for the appropriate wording.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

LadyGeek wrote: Mon Jun 14, 2021 6:50 am
retiredjg wrote: Mon Jun 14, 2021 6:09 am PS. As I mention in an earlier post, it seems prudent not to mention any provider's names. I think mentioning Employee Fiduciary and not the others could cause some discontent.
Good point. I removed mention of Employee Fiduciary and made it a generic statement.
dafioram wrote: Mon Jun 14, 2021 6:27 am
okwriter wrote: Mon Jun 14, 2021 3:50 am
dafioram wrote: Sun Jun 13, 2021 9:17 pm I suppose if you are doing no traditional at all, i.e., Roth + Megabackdoor Roth 401k then you could just do after-tax (including convert to Roth) the whole year and not "use" any of your 19500 limit?
This assumes the employer will match after-tax contributions, but they may not. (Mine doesn't; they only match traditional/Roth.)
Should we include this as another potential disadvantage on mega backdoor wiki?
I'm not sure if it's a potential disadvantage, but I think that fact should definitely be mentioned in the After-tax 401(k) page. This is the first time I've heard of this. A google search shows that it's done - check with your employer.

I'll defer to the experts for the appropriate wording.
I added "An investor should reference their Summary Plan Description to confirm all plan features such as availability, limits, and matching contributions." to the aftertax page... aftertax accounts really plan dependent on a bunch of things. We talk about the higher limit, but some plans have lower limits, because its possible for aftertax contributions to make plans fail compliance testing, etc. So sometimes they have lower limits since they might limit total contributiosn to all subaccount to some % of income.. They also are YMMV on how matching works.. its YMMV if one has to do deferral before aftertax.. etc.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

Separately, I should mention that both of those pages belong to a "hidden" (administrative) category that only wiki editors care about - Pages requiring annual tax updates.

Hopefully, someone will keep an eye on these pages when the IRS updates the tax rates for 2022. (Assistance with any page in this category will be much appreciated.)
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

Question for the group: I thought that the IRS doesn't allow an employee to contribute more into their 401k (Solo if applicable) as [elective deferral + after-tax] than their salary minus the employee portion of payroll tax, plus any other payroll deductions like health insurance, HSA, etc. But TFB's spreadsheet doesn't seem to make this adjustment. Does anyone know the true story on this?
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

fyre4ce wrote: Mon Jun 14, 2021 9:48 am Question for the group: I thought that the IRS doesn't allow an employee to contribute more into their 401k (Solo if applicable) as [elective deferral + after-tax] than their salary minus the employee portion of payroll tax, plus any other payroll deductions like health insurance, HSA, etc. But TFB's spreadsheet doesn't seem to make this adjustment. Does anyone know the true story on this?
can you take a screen shot of a scenario and post it highlighted that you think is wrong? i'm not tracking.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

Reading through the rest of the article more closely, and I'm noticing a few things that might need some clean-up:
  • It might be better flow, and more consistent with the structure of other pages, to have a "Description" section before "Advantages" that goes into some more detail about the process before discussing the pros and cons. Maybe pull some content out of the header section, which is supposed to be a high-level summary. I'd have to play with it to see how it works, but jumping right into "Advantages" seems abrupt.
  • The small table in Advantage #1 is misleading, as it seems to imply that the "up to $58,000" limit applies to the total of Roth IRA and Roth 401(k) contributions, because the cell is merged across the two columns. I suggest eliminating the table and replacing that bullet with something like this:
    For those whose plans allow it, this strategy allows for large contributions to Roth accounts (theoretically up to $58,000, but more typically $38,500 minus any employer match) that are in addition to direct contribution limits to a Roth IRA, and to a 401(k) through elective salary deferrals. Tax-free growth on this money adds up to a large tax savings over an investor's lifetime.
  • I'm seeing some wordsmithing and grammar issues in several places. Will try to clean those up when I have time.
  • I think we should add a disadvantage that placing such a large amount inside an illiquid account may be a strain on some investor's budgets. A single investor earning $100,000 (a good income by most measures) could contribute $64,000 combined to their 401(k) and IRA with this strategy, and only $19,500 can be pre-tax so they will have a big tax bill. There would be hardly anything left to live on. We should encourage readers to prioritize saving in general and saving in tax-advantaged accounts specifically, but not so much that they're living in poverty. Maybe something like this:
    Saving such a large amount of money inside an illiquid account may be too big a strain on some investors's budgets. While a Roth account provides great tax savings, asset protection, and estate planning benefits, investors should consider this strategy as part of their overall financial plan, fitting any contributions within their budget, and considering both immediate and future financial goals. Investors not able to comfortably make a full mega-backdoor Roth contribution should consider a partial contribution instead.
That's all the big stuff I see for now.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

Soon2BXProgrammer wrote: Mon Jun 14, 2021 9:52 am
fyre4ce wrote: Mon Jun 14, 2021 9:48 am Question for the group: I thought that the IRS doesn't allow an employee to contribute more into their 401k (Solo if applicable) as [elective deferral + after-tax] than their salary minus the employee portion of payroll tax, plus any other payroll deductions like health insurance, HSA, etc. But TFB's spreadsheet doesn't seem to make this adjustment. Does anyone know the true story on this?
can you take a screen shot of a scenario and post it highlighted that you think is wrong? i'm not tracking.
https://drive.google.com/file/d/1R9KZ7_ ... sp=sharing

It seems to be saying that with a $50,000 salary you can contribute $19,500 elective deferral and $30,500 to after-tax. This does not include a subtraction for employee payroll taxes. Maybe I'm not using the tool correctly.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

fyre4ce wrote: Mon Jun 14, 2021 10:38 am
Soon2BXProgrammer wrote: Mon Jun 14, 2021 9:52 am
fyre4ce wrote: Mon Jun 14, 2021 9:48 am Question for the group: I thought that the IRS doesn't allow an employee to contribute more into their 401k (Solo if applicable) as [elective deferral + after-tax] than their salary minus the employee portion of payroll tax, plus any other payroll deductions like health insurance, HSA, etc. But TFB's spreadsheet doesn't seem to make this adjustment. Does anyone know the true story on this?
can you take a screen shot of a scenario and post it highlighted that you think is wrong? i'm not tracking.
It seems to be saying that with a $50,000 salary you can contribute $19,500 elective deferral and $30,500 to after-tax. This does not include a subtraction for employee payroll taxes. Maybe I'm not using the tool correctly.
ahh.. you are on the "incorporated" tab... which has different behavior... technically, as an employee you can contribute 100% of compensation. (is my understanding). however, most employers limit it maybe to 90% or slightly lower to simplify payroll.

I recieved a bill from my employer when i contributed so much out of bonus compensation, that my deferral was larger then what should be available after payroll taxes, hsa, federal tax withholding, medical, etc. lets just say it was a nightmare.

I have never relaly used the incorporated tab, because that tool is most usedful for calculating how much your contributions can be to your side business, and all the side businesses i've look at are unincorporated.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

fyre4ce wrote: Mon Jun 14, 2021 10:28 am I think we should add a disadvantage that placing such a large amount inside an illiquid account may be a strain on some investor's budgets. A single investor earning $100,000 (a good income by most measures) could contribute $64,000 combined to their 401(k) and IRA with this strategy, and only $19,500 can be pre-tax so they will have a big tax bill. There would be hardly anything left to live on. We should encourage readers to prioritize saving in general and saving in tax-advantaged accounts specifically, but not so much that they're living in poverty. Maybe something like this:
Saving such a large amount of money inside an illiquid account may be too big a strain on some investors's budgets. While a Roth account provides great tax savings, asset protection, and estate planning benefits, investors should consider this strategy as part of their overall financial plan, fitting any contributions within their budget, and considering both immediate and future financial goals. Investors not able to comfortably make a full mega-backdoor Roth contribution should consider a partial contribution instead.
It’s not illiquid if the Roth IRA conversion is done, since contributions can be withdrawn at any time without penalty. This point is made in the Roth IRA vs 401(k) table, but it should probably be moved up. (A linked Finance Buff article goes into details on this.)

But I guess the above point applies to Roth 401k conversions.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

fyre4ce wrote: Mon Jun 14, 2021 10:28 am The small table in Advantage #1 is misleading, as it seems to imply that the "up to $58,000" limit applies to the total of Roth IRA and Roth 401(k) contributions, because the cell is merged across the two columns.
Isn’t that true? Each row is a separate way of contributing, and the limit in the second row does apply to the total of Roth IRA and Roth 401(k) conversions.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

Soon2BXProgrammer wrote: Mon Jun 14, 2021 8:00 am We talk about the higher limit, but some plans have lower limits, because its possible for aftertax contributions to make plans fail compliance testing, etc. So sometimes they have lower limits since they might limit total contributiosn to all subaccount to some % of income..
This is a good point. For example, this link talks about a megacorp limiting after-tax contribs to 10% of income.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

okwriter wrote: Mon Jun 14, 2021 11:28 am
fyre4ce wrote: Mon Jun 14, 2021 10:28 am I think we should add a disadvantage that placing such a large amount inside an illiquid account may be a strain on some investor's budgets. A single investor earning $100,000 (a good income by most measures) could contribute $64,000 combined to their 401(k) and IRA with this strategy, and only $19,500 can be pre-tax so they will have a big tax bill. There would be hardly anything left to live on. We should encourage readers to prioritize saving in general and saving in tax-advantaged accounts specifically, but not so much that they're living in poverty. Maybe something like this:
Saving such a large amount of money inside an illiquid account may be too big a strain on some investors's budgets. While a Roth account provides great tax savings, asset protection, and estate planning benefits, investors should consider this strategy as part of their overall financial plan, fitting any contributions within their budget, and considering both immediate and future financial goals. Investors not able to comfortably make a full mega-backdoor Roth contribution should consider a partial contribution instead.
It’s not illiquid if the Roth IRA conversion is done, since contributions can be withdrawn at any time without penalty. This point is made in the Roth IRA vs 401(k) table, but it should probably be moved up. (A linked Finance Buff article goes into details on this.)

But I guess the above point applies to Roth 401k conversions.
Fair point, and that's worth pointing out. It could come in handy in an emergency. But still, if you need the money to live off of that year, there's no point in contributing it just to withdraw it again. This hypothetical investor earning $100,000/year will contribute $64,000 to retirement accounts, pay $9,700 in federal income tax, another $7,650 in FICA, and have $18,650 left before they have bought health insurance, food, clothing, shelter, utilities, let alone anything else. That's below the poverty line. So as much as I love Roth accounts, I think no mega-backdoor Roth would be best for this person, $19,500 + $6,000 should be fine.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

okwriter wrote: Mon Jun 14, 2021 11:36 am
fyre4ce wrote: Mon Jun 14, 2021 10:28 am The small table in Advantage #1 is misleading, as it seems to imply that the "up to $58,000" limit applies to the total of Roth IRA and Roth 401(k) contributions, because the cell is merged across the two columns.
Isn’t that true? Each row is a separate way of contributing, and the limit in the second row does apply to the total of Roth IRA and Roth 401(k) conversions.
I don't think the Roth IRA contribution limit (directly, or through the backdoor) has anything to do with the mega-backdoor limit. If you have a mega-backdoor Roth available, I believe you can contribute $58,000 to your 401k plus another $6,000 to the IRA. In general, Roth conversions (which is what happens when you roll the money out into a Roth IRA) do not impact IRA or 401k contribution limits. If you have a source that says otherwise, please share.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

fyre4ce wrote: Mon Jun 14, 2021 12:24 pm
okwriter wrote: Mon Jun 14, 2021 11:36 am
fyre4ce wrote: Mon Jun 14, 2021 10:28 am The small table in Advantage #1 is misleading, as it seems to imply that the "up to $58,000" limit applies to the total of Roth IRA and Roth 401(k) contributions, because the cell is merged across the two columns.
Isn’t that true? Each row is a separate way of contributing, and the limit in the second row does apply to the total of Roth IRA and Roth 401(k) conversions.
I don't think the Roth IRA contribution limit (directly, or through the backdoor) has anything to do with the mega-backdoor limit. If you have a mega-backdoor Roth available, I believe you can contribute $58,000 to your 401k plus another $6,000 to the IRA. In general, Roth conversions (which is what happens when you roll the money out into a Roth IRA) do not impact IRA or 401k contribution limits. If you have a source that says otherwise, please share.
This is what I was trying to say. Each row in the table is meant to be a separate, independent way of contributing.

But if it's too confusing, I'm fine with taking it out. Your proposed rewording below sounds good, but I'd also add Soon2BX's point about a potential X% of income limitation.
fyre4ce wrote: Mon Jun 14, 2021 10:28 am
For those whose plans allow it, this strategy allows for large contributions to Roth accounts (theoretically up to $58,000, but more typically $38,500 minus any employer match) that are in addition to direct contribution limits to a Roth IRA, and to a 401(k) through elective salary deferrals. Tax-free growth on this money adds up to a large tax savings over an investor's lifetime.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by Soon2BXProgrammer »

okwriter wrote: Mon Jun 14, 2021 12:30 pm
fyre4ce wrote: Mon Jun 14, 2021 12:24 pm
okwriter wrote: Mon Jun 14, 2021 11:36 am
fyre4ce wrote: Mon Jun 14, 2021 10:28 am The small table in Advantage #1 is misleading, as it seems to imply that the "up to $58,000" limit applies to the total of Roth IRA and Roth 401(k) contributions, because the cell is merged across the two columns.
Isn’t that true? Each row is a separate way of contributing, and the limit in the second row does apply to the total of Roth IRA and Roth 401(k) conversions.
I don't think the Roth IRA contribution limit (directly, or through the backdoor) has anything to do with the mega-backdoor limit. If you have a mega-backdoor Roth available, I believe you can contribute $58,000 to your 401k plus another $6,000 to the IRA. In general, Roth conversions (which is what happens when you roll the money out into a Roth IRA) do not impact IRA or 401k contribution limits. If you have a source that says otherwise, please share.
This is what I was trying to say. Each row in the table is meant to be a separate, independent way of contributing.

But if it's too confusing, I'm fine with taking it out. Your proposed rewording below sounds good, but I'd also add Soon2BX's point about a potential X% of income limitation.
fyre4ce wrote: Mon Jun 14, 2021 10:28 am
For those whose plans allow it, this strategy allows for large contributions to Roth accounts (theoretically up to $58,000, but more typically $38,500 minus any employer match) that are in addition to direct contribution limits to a Roth IRA, and to a 401(k) through elective salary deferrals. Tax-free growth on this money adds up to a large tax savings over an investor's lifetime.
Just to clarify, the restrictions could be anything that the administrator needs to have as rules in the summary plan description. Some plans have all sorts of rules either% or flat dollar amounts or... they do this to make sure they pass plan testing. So in the after tax 401k article I put a blurb that one needs to reference the rules into their summary plan description
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

okwriter wrote: Mon Jun 14, 2021 12:30 pm This is what I was trying to say. Each row in the table is meant to be a separate, independent way of contributing.

But if it's too confusing, I'm fine with taking it out. Your proposed rewording below sounds good, but I'd also add Soon2BX's point about a potential X% of income limitation.
fyre4ce wrote: Mon Jun 14, 2021 10:28 am
For those whose plans allow it, this strategy allows for large contributions to Roth accounts (theoretically up to $58,000, but more typically $38,500 minus any employer match) that are in addition to direct contribution limits to a Roth IRA, and to a 401(k) through elective salary deferrals. Tax-free growth on this money adds up to a large tax savings over an investor's lifetime.
With the column span of 2, I was worried it could give that impression, yes. If we keep the table I'd suggest just two columns, one with {IRA, 401k, MBR} and the other {$6,000, $19,500, Up to $58,000}. But I don't think we need to give the contribution limits for the other two accounts, especially the IRA, just give the limit for this process and say it's in addition to the other two.

I would think the % income limitation best belongs on the After-Tax page, no?
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

fyre4ce wrote: Mon Jun 14, 2021 12:49 pm With the column span of 2, I was worried it could give that impression, yes. If we keep the table I'd suggest just two columns, one with {IRA, 401k, MBR} and the other {$6,000, $19,500, Up to $58,000}. But I don't think we need to give the contribution limits for the other two accounts, especially the IRA, just give the limit for this process and say it's in addition to the other two.

I would think the % income limitation best belongs on the After-Tax page, no?
I think {IRA, 401k, MBR} might look weird since it compares accounts to a process. Probably best to just replace it with the text.

And sure. I've also added it to the HCE bullet point in disadvantages.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

Completed a scrub through over my lunch break, hitting most of these points and cleaning up grammar. Hope the group is OK with the changes. I did not add a "Description" section; I still think this could be an improvement, I just don't have time to do this work now.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

Thanks. I'm glad the page doesn't say "Disadvantages: Death" anymore; that startled me the first time I read it.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by dafioram »

fyre4ce wrote: Mon Jun 14, 2021 2:51 pm Completed a scrub through over my lunch break, hitting most of these points and cleaning up grammar. Hope the group is OK with the changes. I did not add a "Description" section; I still think this could be an improvement, I just don't have time to do this work now.
i like the idea, but how about "Mechanics" instead of "description".
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

okwriter wrote: Mon Jun 14, 2021 5:27 pm Thanks. I'm glad the page doesn't say "Disadvantages: Death" anymore; that startled me the first time I read it.
LOL!!! I'm glad I wasn't the only one who thought that. Always bugged me, and while I was wordsmithing today I thought to myself, "FINALLY get a chance to fix this!"

“Advantage: Tax-free growth on more money during your lifetime and a 10-year tax-free stretch for your heirs. Disadvantage: Your heirs are gonna get that stretch right now because this strategy will KILL you!”
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by fyre4ce »

dafioram wrote: Mon Jun 14, 2021 5:37 pm
fyre4ce wrote: Mon Jun 14, 2021 2:51 pm Completed a scrub through over my lunch break, hitting most of these points and cleaning up grammar. Hope the group is OK with the changes. I did not add a "Description" section; I still think this could be an improvement, I just don't have time to do this work now.
i like the idea, but how about "Mechanics" instead of "description".
That could work, sure. The key would be separating the higher-level points from the lower-level details. It might also make sense to move the "Earnings on after-tax contributions" as a sub-section within that section. So, something like:

header
1. Mechanics
1.1 Earnings on after-tax contributions
2. Advantages
3. Disadvantages
4. Determining if your plan supports the mega-backdoor Roth
5. Comparison to Backdoor Roth IRA (I like this name a little better than "The backdoor and mega-backdoor Roths")
6. Mega-backdoor Roth with a Solo 401(k)

I don't have time to do this right now, but maybe later this week.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by dafioram »

fyre4ce wrote: Mon Jun 14, 2021 6:18 pm
dafioram wrote: Mon Jun 14, 2021 5:37 pm
fyre4ce wrote: Mon Jun 14, 2021 2:51 pm Completed a scrub through over my lunch break, hitting most of these points and cleaning up grammar. Hope the group is OK with the changes. I did not add a "Description" section; I still think this could be an improvement, I just don't have time to do this work now.
i like the idea, but how about "Mechanics" instead of "description".
That could work, sure. The key would be separating the higher-level points from the lower-level details. It might also make sense to move the "Earnings on after-tax contributions" as a sub-section within that section. So, something like:

header
1. Mechanics
1.1 Earnings on after-tax contributions
2. Advantages
3. Disadvantages
4. Determining if your plan supports the mega-backdoor Roth
5. Comparison to Backdoor Roth IRA (I like this name a little better than "The backdoor and mega-backdoor Roths")
6. Mega-backdoor Roth with a Solo 401(k)

I don't have time to do this right now, but maybe later this week.
The page is pretty solid don't feel that you have to make changes.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

Someone added a bullet point about Roth IRA withdrawals and the 5-year rule. It's a good point, but it was a bit misleading, so I tried to clarify it - but I feel there's enough detail here to merit a separate section. So, here's the Distributions section.

Rather than list the rules, it's in the form of an example. Hopefully it's easy to follow.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by LadyGeek »

fyre4ce wrote: Mon Jun 14, 2021 6:18 pm That could work, sure. The key would be separating the higher-level points from the lower-level details. It might also make sense to move the "Earnings on after-tax contributions" as a sub-section within that section. So, something like:

header
1. Mechanics
1.1 Earnings on after-tax contributions
2. Advantages
3. Disadvantages
4. Determining if your plan supports the mega-backdoor Roth
5. Comparison to Backdoor Roth IRA (I like this name a little better than "The backdoor and mega-backdoor Roths")
6. Mega-backdoor Roth with a Solo 401(k)

I don't have time to do this right now, but maybe later this week.
dafioram wrote: Mon Jun 14, 2021 9:41 pm The page is pretty solid don't feel that you have to make changes.
^^^ I agree. With regards to further updates, please keep the target audience in mind. We want to ensure that investors who are unfamiliar with this topic to understand and learn from the article.

Of course, please fix anything that is misleading or incorrect.
okwriter wrote: Tue Jun 15, 2021 2:57 am Rather than list the rules, it's in the form of an example. Hopefully it's easy to follow.
Yes, simple pictures with simple worked-out examples is helpful.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by retiredjg »

okwriter wrote: Tue Jun 15, 2021 2:57 am Someone added a bullet point about Roth IRA withdrawals and the 5-year rule. It's a good point, but it was a bit misleading, so I tried to clarify it - but I feel there's enough detail here to merit a separate section. So, here's the Distributions section.

Rather than list the rules, it's in the form of an example. Hopefully it's easy to follow.
Well done. Two small suggestions.

1. As written: If the investor wishes to withdraw money from her Roth IRA, she must do so in this order.....

There is no time frame on this sentence and the 5 year rule conversion rule does not get mentioned for several sentences. I think this sentence needs to show withdrawing before the clock has finished running.

Possible wording: "If the investor now wishes to withdraw...." ("now" implies soon and is later explained when the 5 year conversion rule is mentioned)

Possible wording: "If the investor wishes to withdraw money from her Roth IRA before 5 tax years have passed since the conversion, she must do so in this order. (Long and wordy but gets the point across)


2. If we are going to talk about distributions from Roth IRA after the mega-backdoor...how about a sentence indicating the importance of keeping long term records of how money gets into the Roth IRA. It should probably be located after the two examples because by that point, the reason to keep the records is clear and people just need to hear the suggestion or they may not think to do it.
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Re: Wiki - "Mega backdoor Roth" vs. After-tax 401(k)

Post by okwriter »

retiredjg wrote: Tue Jun 15, 2021 6:42 am Well done. Two small suggestions.
Good points, have incorporated both.

That said, I don't think the 5-year rule is as important here as it is in the case of traditional-to-Roth conversions. The MBR process naturally incentivizes you to minimize earnings in between the two steps (to avoid taxes at the time of conversion). So there shouldn't be much of a withdrawal penalty to worry about.
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