Mega Backdoor Roth questions and is it worth it?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
nolesrule
Posts: 328
Joined: Thu Feb 26, 2015 10:59 am

Mega Backdoor Roth questions and is it worth it?

Post by nolesrule » Fri Oct 06, 2017 11:44 am

To set the parameters, my wife is considered an HCE, and thus is limited in the percentage that she can contribute to her 401k. Let's say that based on that percentage, she would end up with about $1500 in after-tax contributions. All of these after-tax contributions would occur toward the end of the calendar year, because they have an option to automatically switch from pre-tax/Roth to after-tax when the IRS limit has been reached. This does not affect the employer match.

So question #1, it appears that there is either a fee of $20 or $40 to do the rollover. Is it worth the fee on such a small amount of after-tax contributions?

And question #2, since she does not have the option to roll the earnings back into the 401k and we do the backdoor Roth, the earnings would also go into the Roth IRA. How is that accounted for on a 1040?

barnaclebob
Posts: 2293
Joined: Thu Aug 09, 2012 10:54 am

Re: Mega Backdoor Roth questions and is it worth it?

Post by barnaclebob » Fri Oct 06, 2017 11:50 am

One option is to just do the after tax withdrawal every few years. You'll pay a little more in taxes because there will theoretically be more gains but it would reduce the fees.

CppCoder
Posts: 556
Joined: Sat Jan 23, 2016 9:16 pm

Re: Mega Backdoor Roth questions and is it worth it?

Post by CppCoder » Fri Oct 06, 2017 12:15 pm

nolesrule wrote:
Fri Oct 06, 2017 11:44 am
To set the parameters, my wife is considered an HCE, and thus is limited in the percentage that she can contribute to her 401k. Let's say that based on that percentage, she would end up with about $1500 in after-tax contributions. All of these after-tax contributions would occur toward the end of the calendar year, because they have an option to automatically switch from pre-tax/Roth to after-tax when the IRS limit has been reached. This does not affect the employer match.

So question #1, it appears that there is either a fee of $20 or $40 to do the rollover. Is it worth the fee on such a small amount of after-tax contributions?

And question #2, since she does not have the option to roll the earnings back into the 401k and we do the backdoor Roth, the earnings would also go into the Roth IRA. How is that accounted for on a 1040?
Question 2: You'll receive a 1099-R, and the gains will essentially show up as income on which you'll pay taxes.

User avatar
mhc
Posts: 3501
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: Mega Backdoor Roth questions and is it worth it?

Post by mhc » Fri Oct 06, 2017 12:24 pm

If it is just a matter of getting an extra $1500/yr into a Roth or not while you are saving $100K+/yr, then who cares. Don't sweat it.

Regardless, that small amount going to a Roth or to a tax efficient index fund in a taxable account, makes little to no difference.

nolesrule
Posts: 328
Joined: Thu Feb 26, 2015 10:59 am

Re: Mega Backdoor Roth questions and is it worth it?

Post by nolesrule » Fri Oct 06, 2017 12:33 pm

More like $63k excluding HSA and company matches, but I see your point.

ThriftyPhD
Posts: 175
Joined: Mon Jul 31, 2017 10:43 am

Re: Mega Backdoor Roth questions and is it worth it?

Post by ThriftyPhD » Fri Oct 06, 2017 12:37 pm

nolesrule wrote:
Fri Oct 06, 2017 11:44 am
she would end up with about $1500 in after-tax contributions.
mhc wrote:
Fri Oct 06, 2017 12:24 pm
If it is just a matter of getting an extra $1500/yr into a Roth or not while you are saving $100K+/yr, then who cares. Don't sweat it.

Regardless, that small amount going to a Roth or to a tax efficient index fund in a taxable account, makes little to no difference.
nolesrule wrote:
Fri Oct 06, 2017 12:33 pm
More like $63k excluding HSA and company matches, but I see your point.
OP sounded like $1500/year, where does the $63k come from?

nolesrule
Posts: 328
Joined: Thu Feb 26, 2015 10:59 am

Re: Mega Backdoor Roth questions and is it worth it?

Post by nolesrule » Fri Oct 06, 2017 12:54 pm

ThriftyPhD wrote:
Fri Oct 06, 2017 12:37 pm
nolesrule wrote:
Fri Oct 06, 2017 11:44 am
she would end up with about $1500 in after-tax contributions.
mhc wrote:
Fri Oct 06, 2017 12:24 pm
If it is just a matter of getting an extra $1500/yr into a Roth or not while you are saving $100K+/yr, then who cares. Don't sweat it.

Regardless, that small amount going to a Roth or to a tax efficient index fund in a taxable account, makes little to no difference.
nolesrule wrote:
Fri Oct 06, 2017 12:33 pm
More like $63k excluding HSA and company matches, but I see your point.
OP sounded like $1500/year, where does the $63k come from?

I am the OP.... but I was responding to the "saving $100K+/year". My point was we're saving closer to $63k/year, not $100k.

ThriftyPhD
Posts: 175
Joined: Mon Jul 31, 2017 10:43 am

Re: Mega Backdoor Roth questions and is it worth it?

Post by ThriftyPhD » Fri Oct 06, 2017 1:16 pm

Ah, I misinterpreted, sorry for the confusion.

Pigeye Brewster
Posts: 47
Joined: Thu Oct 05, 2017 7:33 pm

Re: Mega Backdoor Roth questions and is it worth it?

Post by Pigeye Brewster » Fri Oct 06, 2017 3:39 pm

Since she's an HCE, her after-tax contributions will be subject to ACP testing.

nolesrule
Posts: 328
Joined: Thu Feb 26, 2015 10:59 am

Re: Mega Backdoor Roth questions and is it worth it?

Post by nolesrule » Fri Oct 06, 2017 4:39 pm

Pigeye Brewster wrote:
Fri Oct 06, 2017 3:39 pm
Since she's an HCE, her after-tax contributions will be subject to ACP testing.

Hmmm, I wonder what the odds are that her after-tax contributions would move the needle on ACP testing? She's on the low end of the HCE scale in a megacorp. Given the max contribution percentage limit, the after-tax percentage will be low.

But it's definitely something to think about. If we do this, it's not going to be till 2018 anyway.

Post Reply