The Mega Backdoor Roth IRA

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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

tecmage wrote:
Except for any post-tax contributions you may have made before 1987, the IRS does not permit you to only withdraw your post-tax (which are non-taxable) contributions.
- You can not withdraw the just the after tax contributions unless your contribution was before 1987. (IRS has made that clear before, not shocking.)
You will always have to withdraw some taxable investment earnings as well-which may be subject to tax withholding and penalties.
- When you withdraw you will have to withdraw after tax gains along with the after tax contributions. These gains (earnings) will then be subject to tax and any penalties. (implied: unless rolled over to a TIRA where taxes and penalties would not apply, or a Roth IRA where penalties wouldn't apply but taxes would.)
This was my first impression too.

However, after several readings, I thought the plan means what the poster thinks it means. That is because of the word "penalties" which would not apply if the money is rolled to IRA/Roth IRA. But a penalty might apply if the money is just withdrawn, not rolled over.

So I'm back to my original thought that the plan is just referring to the law's requirement to take the earnings from the post-tax contributions when you take the post-tax contributions. But that will probably change if I read it a few more times. :happy

I think it might be worthwhile to talk to the HR people and get a clarification. If nothing else, you might be able to lobby for getting a rule change.
placeholder
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Re: The Mega Backdoor Roth IRA

Post by placeholder »

thedeadlybishop wrote:"When you take a plan withdrawal, you may not specify the source of the funds. Except for any post-tax contributions you may have made before 1987, the IRS does not permit you to only withdraw your post-tax (which are non-taxable) contributions. You will always have to withdraw some taxable investment earnings as well-which may be subject to tax withholding and penalties."

Now I think this is just the company being overly cautious, since everything else I have read seems to paint this as a grey area and not nearly as definitive as the above. Too bad for me that they do not allow it - would have been great to grow the Roth so much.
They have it correct because the tax laws specify that any distribution of after tax contributions brings a share of taxable earnings with it which is why there have been a number of threads on separating basis from earnings but that is typically a small amount if you do the rollovers soon after contribution and note that this has nothing to do with pro rating the other contributions just a share of the growth that is applicable to the after tax contributions.
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

placeholder wrote:
thedeadlybishop wrote:"When you take a plan withdrawal, you may not specify the source of the funds. Except for any post-tax contributions you may have made before 1987, the IRS does not permit you to only withdraw your post-tax (which are non-taxable) contributions. You will always have to withdraw some taxable investment earnings as well-which may be subject to tax withholding and penalties."

Now I think this is just the company being overly cautious, since everything else I have read seems to paint this as a grey area and not nearly as definitive as the above. Too bad for me that they do not allow it - would have been great to grow the Roth so much.
They have it correct because the tax laws specify that any distribution of after tax contributions brings a share of taxable earnings with it which is why there have been a number of threads on separating basis from earnings but that is typically a small amount if you do the rollovers soon after contribution and note that this has nothing to do with pro rating the other contributions just a share of the growth that is applicable to the after tax contributions.
What you are saying is correct, but the first sentence says "...you may not specify the source of the funds." In fact you can and should specify the source of your funds from a plan with sub-accounts. By source, I mean sub-account.

It is hard to say if this part of the plan is just poorly written or just plain wrong. I'd have to vote for poorly written since a passel of lawyers have probably had a look-see at some point. I hope thedeadlybishop can let us know what s/he finds out.
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zaboomafoozarg
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Re: The Mega Backdoor Roth IRA

Post by zaboomafoozarg »

Alan S. wrote:Not a problem. You can just write a replacement check and roll it into your Roth IRA. Since the amount is small enough to be confused with a regular Roth IRA contribution, be sure the Roth custodian codes it as a rollover contribution.

This will be very easy to report on your tax return. Without the rollover you would enter the 2k on line 16a only. With the rollover you would enter "rollover" on the line next to 16b as well. Either way, no tax or penalty.

As a rollover to the Roth IRA, distributions still come out under the ordering rules. Your regular contributions come out first, then you conversions or rollovers such as this from an employer plan with the oldest years first. Just keep track of your amounts and years of Roth IRA contributions and you will be able to report distributions easily. This is true for anyone who has a Roth IRA.
Awesome, thanks! I just called Vanguard and verified how to do this - they just requested a check and a letter explaining that it's a rollover from after-tax 401k to Roth IRA.

The IRS clarification that was just released was helpful.
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Re: The Mega Backdoor Roth IRA

Post by placeholder »

retiredjg wrote:What you are saying is correct, but the first sentence says "...you may not specify the source of the funds." In fact you can and should specify the source of your funds from a plan with sub-accounts. By source, I mean sub-account.
The passage doesn't say that choosing the source is against the law just that the plan doesn't allow it which I think is an allowable restriction.
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

placeholder wrote:
retiredjg wrote:What you are saying is correct, but the first sentence says "...you may not specify the source of the funds." In fact you can and should specify the source of your funds from a plan with sub-accounts. By source, I mean sub-account.
The passage doesn't say that choosing the source is against the law just that the plan doesn't allow it which I think is an allowable restriction.
Agree with all you are saying.

But if the plan won't allow you to specify the source of the funds, then this poster can't do the mega backdoor. Well, it could be done but it would be a very bad idea because it would cause a withdrawal of money from the elective deferrals which would trigger both tax and penalty.

I don't not think the taxable part that is brought along is just the earnings from the after-tax sub-account in this particular plan. In fact, I wonder if this is one of the plans that has chosen NOT to use separate accounts.

But what we have seen is written so awkwardly, I wonder if we got an edited version.
m2go
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Re: The Mega Backdoor Roth IRA

Post by m2go »

One item to remember for the Mega Backdoor Roth IRA is the max cap of $52,000, which is a cap on pre-tax, after-tax and employer contribution.

This is particularly important in companies where the company match occurs on Dec 31. One would really HATE to hear that the employer match could not be made (or was limited) because the total cap came into force.

As a corollary to this, I was looking to find whether the catchup contribution falls under the 52,000 cap, or not (i.e., whether there's a combined cap of 57,500). The discussion of catchup seems like a separate contribution, and catchup is not listed under the limits, but I want to make sure. (I would really hate for a close relative to lose their company match based on my advice of the Mega Backdoor Roth, and replace their employer's contribution to the 401k with their own..)
Choy
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Re: The Mega Backdoor Roth IRA

Post by Choy »

m2go wrote:As a corollary to this, I was looking to find whether the catchup contribution falls under the 52,000 cap, or not (i.e., whether there's a combined cap of 57,500). The discussion of catchup seems like a separate contribution, and catchup is not listed under the limits, but I want to make sure. (I would really hate for a close relative to lose their company match based on my advice of the Mega Backdoor Roth, and replace their employer's contribution to the 401k with their own..)
Catch-up contributions are in addition to the current $52,000 max.

From the IRS website:
total employee and employer contributions plus forfeitures - the lesser of 100% of an employee’s compensation or $52,000, plus $5,500 catch-up contributions if age 50 or older (IRC section 415(c))
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

m2go wrote:One item to remember for the Mega Backdoor Roth IRA is the max cap of $52,000, which is a cap on pre-tax, after-tax and employer contribution.
And forfeitures.

I don't even know what forfeitures are. I'm just parroting what Alan S says because it sounds like you (your relative) is intending to take this right up to the maximum.
soccerdad12
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Re: The Mega Backdoor Roth IRA

Post by soccerdad12 »

Thanks VERY MUCH for this thread. I just had our company 401k changed to allow after-tax contributions for 2015! This is going to be awesome!
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

soccerdad12 wrote:Thanks VERY MUCH for this thread. I just had our company 401k changed to allow after-tax contributions for 2015! This is going to be awesome!
Good for you! Be sure it is set up as separate accounts.
soccerdad12
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Re: The Mega Backdoor Roth IRA

Post by soccerdad12 »

what do you mean by separate accounts?
soccerdad12
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Re: The Mega Backdoor Roth IRA

Post by soccerdad12 »

Dulocracy wrote:
coolguy954 wrote::oops: :oops:

Just read my guidelines for my job 401k plan. Since I am a "highly compensated employee" I can't contribute to the after tax portion of my 401k. I am going to call HR tomorrow about this, doesn't make sense. :annoyed
They probably do not have what is known as a "safe harbor" 401k, which protects highly compensated employees.
Even if you have a safe harbor 401k, the after-tax portion will still be tested even though the "normal" 17.5k portion won't be.
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

soccerdad12 wrote:what do you mean by separate accounts?
If they handle the 401k all as one account, this mega back door will not work for you because all of the buckets (pre-tax, Roth contributions, and after-tax contributions) will be prorated. This is not what you want to do.

In order for this to work, your after-tax contributions must be set up as a separate account and you must be able to do the rollover on that account without affecting your other money.

I feel like this must have been discussed above, but have not looked. Maybe if you go back through the thread with that in mind you might find something.

Also it doesn't work right if you can't do in-service rollovers pretty often - at least once or twice a year. Check that when you talk to your HR people.
soccerdad12
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Re: The Mega Backdoor Roth IRA

Post by soccerdad12 »

I am the one that sets the plan parameters directly with TRowe for my company, so this is great advice. I did request from them to have a post-tax portion be separated from the safe harbor portion, but didn't stipulate a separate account. I will check with them on that. I will also ask for no restriction on how often it can be done.

Thanks!
JustinR
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Re: The Mega Backdoor Roth IRA

Post by JustinR »

What is this feature called, so that I can ask my 401k plan administrator about it?

After-tax contributions?
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MossySF
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Re: The Mega Backdoor Roth IRA

Post by MossySF »

EnjoyIt wrote:I am in the 39.6% bracket. Why would I want to pay that tax now on money that I was able to invest pretax up to 52K in a solo401K instead. I assume when I retire I will be in a much lower bracket. I really must be missing something.
The rest of us poor suckers don't have access to a Solo 401K and hence can only defer 17.5K in taxes.
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

JustinR wrote:What is this feature called, so that I can ask my 401k plan administrator about it?

After-tax contributions?
The official name is "employee contributions". I know that sounds like the $17,500 you contribute, but the official name for that is "elective deferrals" and technically the elective deferralals are considered a contribution by the employer.

If after-tax contributions are allowed, it will be mentioned in the plan documents as "employee contributions" even if the HR people are not aware of it. We have heard of a couple of cases where HR people didn't have any idea the employees could do this.

Good luck!
Lynette
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Re: The Mega Backdoor Roth IRA

Post by Lynette »

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Last edited by Lynette on Sat Jan 12, 2019 4:07 am, edited 1 time in total.
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

Lynette wrote:By contrast, I made some Roth contributions to my 401K. It is not there when I try to configure it for Roll over. The reason is that I need to have it there for 5 years before I can roll it over.
That may not be the reason. Your Roth 401k is part of your "elective deferrals". You can't roll that money out of your 401k (without penalty) until you separate from that employment. The exception is that some plans allow rollover of elective deferrals (while still working) after you reach 59.5.

Edit: this is only half right. Check out the link posted below.
Last edited by retiredjg on Mon Oct 20, 2014 11:00 am, edited 1 time in total.
Lynette
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Re: The Mega Backdoor Roth IRA

Post by Lynette »

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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

spefactor
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Re: The Mega Backdoor Roth IRA

Post by spefactor »

Can this be done in addition to the normal "Backdoor Roth IRA"?
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

spefactor wrote:Can this be done in addition to the normal "Backdoor Roth IRA"?
Yes. You can do both.

The mechanics are a little different. Back Door contributions to Roth IRA must go through tIRA so you have to make sure your tIRA balances are $0 by the end of the year to avoid pro-rating.

This thing called Mega Back Door does not have to go through tIRA - you can go straight from after-tax sub-account to Roth IRA, bypassing tIRA . So for this maneuver, you don't have to have a $0 balance in tIRA at the end of the year.

If you choose to split up the distribution of the after-tax account (after-tax money goes to Roth and the earnings which are still pre-tax go to tIRA), that in itself will mess up your regular back door contribution to Roth IRA. So if you do both, plan carefully.
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thedeadlybishop
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Re: The Mega Backdoor Roth IRA

Post by thedeadlybishop »

retiredjg wrote:
placeholder wrote:
thedeadlybishop wrote:"When you take a plan withdrawal, you may not specify the source of the funds. Except for any post-tax contributions you may have made before 1987, the IRS does not permit you to only withdraw your post-tax (which are non-taxable) contributions. You will always have to withdraw some taxable investment earnings as well-which may be subject to tax withholding and penalties."

Now I think this is just the company being overly cautious, since everything else I have read seems to paint this as a grey area and not nearly as definitive as the above. Too bad for me that they do not allow it - would have been great to grow the Roth so much.
They have it correct because the tax laws specify that any distribution of after tax contributions brings a share of taxable earnings with it which is why there have been a number of threads on separating basis from earnings but that is typically a small amount if you do the rollovers soon after contribution and note that this has nothing to do with pro rating the other contributions just a share of the growth that is applicable to the after tax contributions.
What you are saying is correct, but the first sentence says "...you may not specify the source of the funds." In fact you can and should specify the source of your funds from a plan with sub-accounts. By source, I mean sub-account.

It is hard to say if this part of the plan is just poorly written or just plain wrong. I'd have to vote for poorly written since a passel of lawyers have probably had a look-see at some point. I hope thedeadlybishop can let us know what s/he finds out.
Finally got around to calling HR (I am on a secondment in Asia so hitting their office hours is a pain). Although the policy is worded to confuse, my first assumption was correct. My firm's policy does not allow me to specify which funds to move so I cannot only move after-tax dollars. :annoyed
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

If you cannot move only money from the after-tax sub account, you probably do not want to get involved with this rollover thing. If untaxed money has to be pro-rated, this is not a particularly beneficial idea in my opinion.
tioga
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Re: The Mega Backdoor Roth IRA

Post by tioga »

I posted largely the same material on a different thread - reposting it here because this thread is more active.
Alan S. wrote:You can see from the Kitces blog that the IRS has not really clarified this issue, particularly with respect to Sec 402(c)(2). Personally, I agree with the Kaye Thomas strategies at Fairmark.

But lets be pragmatic here. Ever since the IRS released Notice 2009-68 and these questions arose, employees have been successfully isolating their basis and putting their after tax contributions in Roth IRAs without any challenge from the IRS. That's 4 years and counting. Some plan administrators will do "tandem direct rollovers" and issue their 1099R forms accordingly with no taxable amount showing in Box 2a. Until these plans receive a directive from the IRS to report differently on Form 1099R, nothing will happen. I have not heard of one case where the IRS has challenged even the more risky isolation of basis strategies.

For that reason, for taxpayers who remain gun shy, they should wait and do their rollovers late in the year after which it is too late for plan administrators to re program their 1099R procedures and the IRS will issue directives earlier in the year if they plan to require changes such as pro rating these distributions.

Because of multiple letters from the American Benefits council virtually begging the IRS to clarify this and related issues, and lack of response from the IRS, this suggests that the IRS has backed themselves into a corner. Historically, the IRS has not dealt efficiently with Sec 72 and the exploding portability options starting in 2001. It's a web that is very difficult for them to unwind. Meanwhile, examiners are just looking for taxpayers to reflect the 1099R on their returns.

As long as the door remains ajar, why not use it?

A different but closely related issue is that of Sec 72(d)(2), distributions from separate sub accounts. Isolation of basis is more clear with these accounts because the IRS already agrees they are accounted for separately. Therefore, if a taxpayer requests a distribution exclusively from the sub account, pro rating can only include the sub accounts basis and earnings on those after tax contributions. Kitces does not go into this matter at least with the posted blog, and the IRS does not get into it either with their 2009 Notices.
This thread has been enormously useful. There is one other document that Alan S. posted about that makes for really good reading. The treatment specifically addresses the problem discussed in this thread and the text/example from page 8 onwards are useful. In general, the author makes the same point made in this thread regarding separate sub accounts (although for reasons I do not yet understand, the author calls it the "separate contract exception"). Are "separate sub account" and "separate contract" one and the same?

Notwithstanding JW Nearly Retired's piece for sub-account doubters, I'd like to determine whether (and how) my plan divides up elective deferrals and employee contributions into contracts. My plan does provide different ledger accounts and allows for investment choices to be made independently in each category. But the pdf referenced above draws a distinction between ledger accounts maintained by the 401(k) administrator and the separate contracts (sub accounts?) it may have established as part of the plan (see page 10). My Summary Plan Description does NOT have this information. Where else would this be listed? Does it have to be filed with the IRS by the plan administrator?
tioga
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Re: The Mega Backdoor Roth IRA

Post by tioga »

soccerdad12 wrote:I am the one that sets the plan parameters directly with TRowe for my company, so this is great advice. I did request from them to have a post-tax portion be separated from the safe harbor portion, but didn't stipulate a separate account. I will check with them on that. I will also ask for no restriction on how often it can be done.

Thanks!
Can you comment on what you found out? How exactly is TRowe handling your request? Are they reflecting the use of a separate account for after-tax employee contributions in any filings with the IRS?
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Re: The Mega Backdoor Roth IRA

Post by placeholder »

It should be noted that Alan's post that's quoted above was from before the IRS clarification statement that came later in the year. http://www.bogleheads.org/forum/viewtop ... 2&t=150575
tioga
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Re: The Mega Backdoor Roth IRA

Post by tioga »

placeholder wrote:It should be noted that Alan's post that's quoted above was from before the IRS clarification statement that came later in the year. http://www.bogleheads.org/forum/viewtop ... 2&t=150575
True, but the IRS clarification statement does not actually say anything about the tax implications of the move, right? It just explicitly states that the pre-tax and after-tax amounts can both be distributed and then rolled over into a tIRA and a Roth. I think Alan's points are still valid.
newbie001
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Re: The Mega Backdoor Roth IRA

Post by newbie001 »

tioga wrote:I posted largely the same material on a different thread - reposting it here because this thread is more active.
Alan S. wrote:You can see from the Kitces blog that the IRS has not really clarified this issue, particularly with respect to Sec 402(c)(2). Personally, I agree with the Kaye Thomas strategies at Fairmark.

But lets be pragmatic here. Ever since the IRS released Notice 2009-68 and these questions arose, employees have been successfully isolating their basis and putting their after tax contributions in Roth IRAs without any challenge from the IRS. That's 4 years and counting. Some plan administrators will do "tandem direct rollovers" and issue their 1099R forms accordingly with no taxable amount showing in Box 2a. Until these plans receive a directive from the IRS to report differently on Form 1099R, nothing will happen. I have not heard of one case where the IRS has challenged even the more risky isolation of basis strategies.

For that reason, for taxpayers who remain gun shy, they should wait and do their rollovers late in the year after which it is too late for plan administrators to re program their 1099R procedures and the IRS will issue directives earlier in the year if they plan to require changes such as pro rating these distributions.

Because of multiple letters from the American Benefits council virtually begging the IRS to clarify this and related issues, and lack of response from the IRS, this suggests that the IRS has backed themselves into a corner. Historically, the IRS has not dealt efficiently with Sec 72 and the exploding portability options starting in 2001. It's a web that is very difficult for them to unwind. Meanwhile, examiners are just looking for taxpayers to reflect the 1099R on their returns.

As long as the door remains ajar, why not use it?

A different but closely related issue is that of Sec 72(d)(2), distributions from separate sub accounts. Isolation of basis is more clear with these accounts because the IRS already agrees they are accounted for separately. Therefore, if a taxpayer requests a distribution exclusively from the sub account, pro rating can only include the sub accounts basis and earnings on those after tax contributions. Kitces does not go into this matter at least with the posted blog, and the IRS does not get into it either with their 2009 Notices.
This thread has been enormously useful. There is one other document that Alan S. posted about that makes for really good reading. The treatment specifically addresses the problem discussed in this thread and the text/example from page 8 onwards are useful. In general, the author makes the same point made in this thread regarding separate sub accounts (although for reasons I do not yet understand, the author calls it the "separate contract exception"). Are "separate sub account" and "separate contract" one and the same?

Notwithstanding JW Nearly Retired's piece for sub-account doubters, I'd like to determine whether (and how) my plan divides up elective deferrals and employee contributions into contracts. My plan does provide different ledger accounts and allows for investment choices to be made independently in each category. But the pdf referenced above draws a distinction between ledger accounts maintained by the 401(k) administrator and the separate contracts (sub accounts?) it may have established as part of the plan (see page 10). My Summary Plan Description does NOT have this information. Where else would this be listed? Does it have to be filed with the IRS by the plan administrator?
I believe "separate sub account" and "Separate contract" are the same thing, but don't quote me on this! See http://fairmark.com/retirement/roth-acc ... treatment/ .

The primer from the tax section that Alan S posted is very helpful. FN 23 refers to Notice 87-13, Q&A 14. If you google "Notice 87-13" the first hit is a Word doc. The text of Q&A 14 and the Examples it contains (starts on page 9 of 19) seems to be the basis of the Mega Backdoor Roth idea because it permits withdrawal of exclusively after-tax amounts (and earnings thereon).

The whole "separate account" or "sub-account" idea judging from that Q&A seems to revolve around the after-contributions and earnings thereon being accounted for or calculated separately by the applicable Plan ("To the extent that a plan does not account for employee contributions (and earnings thereon) separately from the other contributions (and earnings thereon) on an acceptable basis, the employee contributions (and earnings thereon) may not be treated as held under a contract that is separate from the contract (or contracts) that comprises the remaining portion of the plan".) Seems like it's an easy enough change for Plan administrators to make assuming they are willing.

My head hurts from reading that Notice, so please let me know if I am way off base. I am very excited about this because my plan administrator has indicated that they are willing to amend the plan to allow withdrawals of after-tax contributions. My very limited understanding of employee benefits law is that highly compensated employees at a business can really throw a wrench in the Mega Backdoor Roth IRA strategy if they are accounting for a large percentage of a company's after-tax contributions. Still, there must be a lot of people out there who could make great use of this idea.

Thanks to everyone for contributing to one of the best BH threads of all time.
Morik
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Re: The Mega Backdoor Roth IRA

Post by Morik »

I also posted to the thread tioga did, and wanted to follow his lead and cross-post here.

DISCLAIMER: I am not a lawyer, tax person, or otherwise qualified to give any sort of tax advice. I was directed to this thread because I was asking about in-plan Roth conversion tax consequences (for converting after-tax contributions to Roth). I did some digging after reading this thread.

From that above mentioned IRS notice (IRS Notice 2010-84), page 5.
If the distributee rolls over the payment to a designated Roth account in
the plan, the amount of the payment rolled over (reduced by any after-tax
amounts directly rolled over) will be taxed.


From IRS Pub 575, emphasis mine.
In-plan Roth rollovers. If you are a participant in a
401(k), 403(b), or 457(b) plan, your plan may permit you
to roll over any vested amounts from those plans to a designated
Roth account within the same plan. The in-plan
Roth rollover must be an eligible rollover distribution (defined
earlier under Eligible rollover distribution). Any untaxed
amounts included in the in-plan Roth rollover must
be included in income in the year you receive the distribution.
You can make the in-plan Roth rollover by direct transfer
of the amount from the non-Roth account to your designated
Roth account within the same plan. The 20%
mandatory withholding does not apply to in-plan Roth rollovers
made by direct rollover. You can also effect the
in-plan Roth rollover by receiving an eligible rollover distribution
from your 401(k), 403(b), or 457(b) plan and within
60 days deposit it into a designated Roth account in the
same plan.
Your plan must provide a written explanation of the
consequences of making an in-plan Roth rollover. In-plan
Roth rollovers cannot be undone. Unlike rollovers to Roth
IRAs, you cannot later recharacterize an in-plan Roth rollover.
If you received employer securities as a part of
your in-plan Roth rollover distribution the rollover
is treated as a distribution for the purpose of net
unrealized appreciation (NUA). See Distributions of employer
securities, earlier.
20% Mandatory withholding. A payor must normally
withhold 20% when a rollover distribution is paid to you.
However, some part of your distribution may not be subject
to the mandatory 20% withholding. Otherwise nondistributable
amounts are not subject to the mandatory 20%
withholding. An example of otherwise nondistributable
amounts are employer matching contributions in a 401(k)
plan. See Payment to you option, earlier.
You cannot roll over amounts from your Traditional
TSP to your Roth TSP. See Publication 721
for more details.
How to report. Enter the total amount of the distribution
before income tax or deductions were withheld on
Form 1040, line 16a; Form 1040A, line 12a; or Form
1040NR, line 17a. This amount should be shown in box 1
of Form 1099-R. From this amount, subtract any contributions
(usually shown in box 5 of Form 1099-R) that were
taxable to you when made. Enter the remaining amount,
even if zero, on Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR, line 17b.


In other words, you DO NOT have to account for traditional 401k balances in a pro-rata fashion when determining taxes owed on an in-plan Roth conversion (called an in-plan roth rollover in this publication). You only have to account for any earnings/value increase.

My plan allows unlimited in-plan conversions per year, and tracks each years conversions separately.
It also tracks after-tax contributions (and their earnings) separately.
So if I make 26 in-plan conversions in 2014 (one per paycheck, to minimize earnings on the after-tax amount I'm converting), all of them show up aggregated as one source: "2014 Roth In-Plan Conversion" in Vanguard.


Personally, I prefer to move this money to my Roth 401k instead of a Roth IRA. This is because I have access to Institutional Plus shares in my 401k plan, of the exact same indices I use in my Roth IRA. The fees are around 2/3rd to 1/2 what the admiral share class charges (I essentially implement the 3-fund portfolio).

I have no intention (at all) of withdrawing this money before it becomes penalty free. I do plan to roll this over to a Roth IRA before retirement so I don't have RMDs, but in the meantime I'll take the lower expense ratios.
mcnugget
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Re: The Mega Backdoor Roth IRA

Post by mcnugget »

Morik wrote:In other words, you DO NOT have to account for traditional 401k balances in a pro-rata fashion when determining taxes owed on an in-plan Roth conversion (called an in-plan roth rollover in this publication). You only have to account for any earnings/value increase.

My plan allows unlimited in-plan conversions per year, and tracks each years conversions separately.
It also tracks after-tax contributions (and their earnings) separately.
So if I make 26 in-plan conversions in 2014 (one per paycheck, to minimize earnings on the after-tax amount I'm converting), all of them show up aggregated as one source: "2014 Roth In-Plan Conversion" in Vanguard.


Personally, I prefer to move this money to my Roth 401k instead of a Roth IRA. This is because I have access to Institutional Plus shares in my 401k plan, of the exact same indices I use in my Roth IRA. The fees are around 2/3rd to 1/2 what the admiral share class charges (I essentially implement the 3-fund portfolio).

I have no intention (at all) of withdrawing this money before it becomes penalty free. I do plan to roll this over to a Roth IRA before retirement so I don't have RMDs, but in the meantime I'll take the lower expense ratios.
I'm on board with this too, and have read all of the fairmark reasoning. I still feel though that all of these rationales are somewhat based on personal interpretation, and there will always be some room to argue.

some things that make me wonder... one, just because it is a separate "subaccount" where does it say that that gets you out of the pro rata? I mean, you can have multiple, separate "IRA" accounts, but if you convert any one of them to roth, they expect you to pro rata across the sum of all of your "separate" ira accounts....

also, my company does a pretty good job of the separate records, and appears to keep all of the post tax separate. heck you cant even get the deferred money into the same check when you ask to distribute "all of the post tax + gains", however, when you take it "all", there's still a disclaimer on the stub, saying that it' "does not qualify as a total distribution", making me think it's at least a flag, saying there's more in there to "pro rate"...

like I said, I'm on board and doing this this year, just saying that I feel there's still a bit of interpretation thrown in here, even with all of the legaleze quoted......
Morik
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Re: The Mega Backdoor Roth IRA

Post by Morik »

My impression (again, I'm not a tax attorney, lawyer, or in any way giving tax advice) is that they spelled out different rules for 401k than for IRA. Who knows why they did so, but it surely seems to me that they did, after reading all that legalese.
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Makaveli
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Re: The Mega Backdoor Roth IRA

Post by Makaveli »

Completed my first mega back door via a direct rollover. Fido rep needed to call his supervisor (not as familiar with such a transaction), but fortunately his boss knew exactly what needed to be done. Total phone call added up to 15 minutes. If I had called a more informed person, or now that the workflow is documented, I am assuming it'll take 1-2 minutes max. I lost a basis amount of $5, so no issue of tax on capital gains. Overall, a success in my opinion. You read all about it but never know how it'll actually go until you do it. Looking forward to the next one on Dec. 31st.

Who knows if the "2 in-service" rollovers are for the calendar year or tax time come April?
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

Makaveli1988 wrote:Who knows if the "2 in-service" rollovers are for the calendar year or tax time come April?
Only your plan knows. Every plan can make it's own rules on this.
szhman
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Re: The Mega Backdoor Roth IRA

Post by szhman »

Excellent thread. First time to mega back door. I understand for back door, I have to fill-in 8606 forms.

Do I need to fill-in in a separate tax form when I do mega backdoor. Please let me know and appreciate all your updates.
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

The back door requires a Form 8606.

The mega back door does not require Form 8606 when you do it and in fact, there is no place to put that information on the form when you do the rollover. However, as I understand it, when you start withdrawing from the Roth IRA that received the mega back door rollover contribution, you do have to enter that information somewhere on Form 8606. So keep that information available, for years if necessary.
Morik
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Re: The Mega Backdoor Roth IRA

Post by Morik »

Hmm, so how would this situation be handled:

I mega-backdoored a bunch of after-tax money. That Roth IRA is now about $30k?

I had a separate Roth IRA that was about $40k.

I combined them at a single brokerage.

When I start withdrawing from these in 30+ years, what info might I have to have about the mega-backdoored amount?
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retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

My recommendation (and I've not done any of this, just gathered information) is to keep a running record of everything that goes into your Roth IRA. The date and where the money came from. And If it was a rollover or a conversion, which money was taxed at the time the rollover or conversion occurred and which money was not taxed at the time the rollover or conversion occurred.

Specifically about your mega back door - the dates of each rollover and how much was taxed and how much was not taxed during that specific rollover.

But if you are 59.5 and have had a Roth IRA for the 5 year clock....none of this matters, but I'd have the information handy anyway until I knew for sure it would not be asked for.

See line 24 on Form 8606 - they want to know your rollovers from qualified plans (which is what the mega back door is). I'm not sure you even do this form if you are over 59.5 with a 5 year old Roth IRA.

I doubt it matters if the Roth IRAs are combined or not. I assume they are considered all one anyway.
Morik
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Re: The Mega Backdoor Roth IRA

Post by Morik »

I took a look--it seems that the qualified plan rollover to roth will be noted on one of the form 1040's, and the other basis can be taken from my 8606's.
I'll start a document where I track this stuff anyway though.

Do you know which form I need to report the mega-backdoor on? (I had a basis of $27.75k, and mega-backdoored about $28.25k (due to growth). I believe I gotta pay taxes on the difference.
(I'm guessing I'll come across it when I start my 2014 tax return.)
Alan S.
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Re: The Mega Backdoor Roth IRA

Post by Alan S. »

Morik wrote:I took a look--it seems that the qualified plan rollover to roth will be noted on one of the form 1040's, and the other basis can be taken from my 8606's.
I'll start a document where I track this stuff anyway though.

Do you know which form I need to report the mega-backdoor on? (I had a basis of $27.75k, and mega-backdoored about $28.25k (due to growth). I believe I gotta pay taxes on the difference.
(I'm guessing I'll come across it when I start my 2014 tax return.)
There is no separate form to report the rollover - you would just enter 28.25k on line 16a of Form 1040, .5k on 16b and show "rollover" on line next to 16b. The taxable amount will be .5k. You do not use Form 8606 to report the rollover to the Roth IRA, as this is a qualified rollover contribution, not a conversion from a TIRA.

You would need an 8606 (Part III) to report non qualified distributions FROM the Roth IRA, but would not need it to report Roth IRA distributions after your Roth is qualified (5 years AND age 59.5).
szhman
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Re: The Mega Backdoor Roth IRA

Post by szhman »

retiredjg wrote:The back door requires a Form 8606.

The mega back door does not require Form 8606 when you do it and in fact, there is no place to put that information on the form when you do the rollover. However, as I understand it, when you start withdrawing from the Roth IRA that received the mega back door rollover contribution, you do have to enter that information somewhere on Form 8606. So keep that information available, for years if necessary.
Thanks very much.
richard37
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Mega Backdoor Roth IRA

Post by richard37 »

[Thread merged into here, see below (next page). --admin LadyGeek]

Not sure if this has been posted before but thought I would post for anyone who didn't read about it.

Looks like there is a way to put even more money into your Roth IRA every year where it can grow tax free. If your 401K allows after-tax contributions, you can sock away a good chunk of change ($53,000 - 18,000 - company match for 2015) and then send these after tax contributions to your Roth IRA with an in-service distribution (if your plan allows) or when you leave your employer.

I probably didn't explain that very well but the article is here.

http://www.madfientist.com/after-tax-contributions/

And the IRS Notice 2014-54 is here

http://www.irs.gov/pub/irs-drop/n-14-54.pdf

Cheers
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The529guy
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Re: Mega Backdoor Roth IRA

Post by The529guy »

Thanks, this maneuver is often discussed these days.

You can find more at White Coat Investor's original post here: viewtopic.php?f=2&t=137366
richard37
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Re: Mega Backdoor Roth IRA

Post by richard37 »

Thanks. Just read about it this week and was excited to share. Didn't realize it was a well known tool. Should have searched first before posting!!
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The529guy
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Re: Mega Backdoor Roth IRA

Post by The529guy »

No problem, the madfientist.com link has some great graphics that should be helpful to folks.

However, there's some important discussion in its first few comments - the post's final chart shows the after-tax growth rolled over to a Roth IRA, despite the IRS clarification:

Image
Image
Tamales
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Re: Mega Backdoor Roth IRA

Post by Tamales »

The529guy wrote:No problem, the madfientist.com link has some great graphics that should be helpful to folks.

However, there's some important discussion in its first few comments - the post's final chart shows the after-tax growth rolled over to a Roth IRA, despite the IRS clarification:
So is this assuming a same-day after-tax deposit to the 401k AND rollover to the Roth IRA? The gains of $8700 are only show on the Roth IRA side in the 2nd graphic, so apparently the gains happened after the base money was already there?
richard37
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Re: Mega Backdoor Roth IRA

Post by richard37 »

My wife's 401K allows after tax contributions and up to 2 in-service distributions per year so my plan was to put after tax money into her 401K rather than into a taxable account I have at Schwab and then move into her Roth IRA once or twice a year.
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The529guy
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Re: Mega Backdoor Roth IRA

Post by The529guy »

Tamales wrote:
The529guy wrote:No problem, the madfientist.com link has some great graphics that should be helpful to folks.

However, there's some important discussion in its first few comments - the post's final chart shows the after-tax growth rolled over to a Roth IRA, despite the IRS clarification:
So is this assuming a same-day after-tax deposit to the 401k AND rollover to the Roth IRA? The gains of $8700 are only show on the Roth IRA side in the 2nd graphic, so apparently the gains happened after the base money was already there?
The gains are pre-rollover. This is another weakness of that graphic.
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