Mega Backdoor Roth conditions

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CaptainKoloth
Posts: 2
Joined: Fri Jun 15, 2018 6:40 pm

Mega Backdoor Roth conditions

Post by CaptainKoloth » Fri Jun 15, 2018 6:47 pm

Hello everyone,

I'm above the limit for contributing directly to a Roth so I've put my $5,500 into a traditional IRA and converted that to a backdoor Roth. In trying to understand if there's any other money I can put into the Roth as for reasons beyond the scope of this question I think my taxes now are as low as they'll ever be, I've come upon the "mega" backdoor Roth. However, embarrassingly enough I'm having some trouble understanding exactly how that works.

Some questions:
1. Do I have to actually max out the after-tax contributions to the 401(k) before I can convert it to a mega backdoor Roth? The way I read it, it's either maxed out or I can't do it at all?
2. I'm trying to understand if my 401(k) allows in-service non-hardship withdrawals which I understand are the other required condition, but there are so many conditions in my plan relating to withdrawal that I have been unable to figure out if I can actually do this or not. Is there specific language I can look for that will tell me definitively whether or not my plan allows this?
3. Are there any other avenues I can use to put additional money into the Roth this year? I only have money in the Roth and the 401(k), and I've already converted the $5,500 that I had put in the traditional IRA.

Thanks!

retiredjg
Posts: 34385
Joined: Thu Jan 10, 2008 12:56 pm

Re: Mega Backdoor Roth conditions

Post by retiredjg » Fri Jun 15, 2018 7:47 pm

CaptainKoloth wrote:
Fri Jun 15, 2018 6:47 pm
1. Do I have to actually max out the after-tax contributions to the 401(k) before I can convert it to a mega backdoor Roth? The way I read it, it's either maxed out or I can't do it at all?
No. You can contribute as little or as much as you want to the after-tax employee contribution account.

I suppose it is possible your individual plan has some odd requirement, but I don't think we have heard of anything like that before.

2. I'm trying to understand if my 401(k) allows in-service non-hardship withdrawals which I understand are the other required condition, but there are so many conditions in my plan relating to withdrawal that I have been unable to figure out if I can actually do this or not. Is there specific language I can look for that will tell me definitively whether or not my plan allows this?
Eligible rollover or eligible distribution?

It is also possible to use the mega back door by doing an "in plan Roth Rollover" or IRR. In that case, you would not roll your after-tax account out to roth IRA. You would roll it to Roth 401k instead.

You may have to just ask.

3. Are there any other avenues I can use to put additional money into the Roth this year? I only have money in the Roth and the 401(k), and I've already converted the $5,500 that I had put in the traditional IRA.
I can't think of anything, but putting money into an ordinary taxable account is a good choice if you can't get more into Roth status.

Spirit Rider
Posts: 9168
Joined: Fri Mar 02, 2007 2:39 pm

Re: Mega Backdoor Roth conditions

Post by Spirit Rider » Fri Jun 15, 2018 8:25 pm

retiredjg wrote:
Fri Jun 15, 2018 7:47 pm
CaptainKoloth wrote:
Fri Jun 15, 2018 6:47 pm
1. Do I have to actually max out the after-tax contributions to the 401(k) before I can convert it to a mega backdoor Roth? The way I read it, it's either maxed out or I can't do it at all?
No. You can contribute as little or as much as you want to the after-tax employee contribution account.

I suppose it is possible your individual plan has some odd requirement, but I don't think we have heard of anything like that before.
Actually, there are many plans, especially those legacy plans that allowed after-tax contribution for many years. Where after-tax contributions can only occur after you have reached the maximum employee elective contribution limit. The beauty of this was that it happened automatically.

Actually, it is only over the last decade or so, that many plans started offering a direct contribution percentage for after-tax contributions.

You really have to investigate what your plan allows and doesn't allow and the specific rules.

THeads
Posts: 3
Joined: Sat Jun 16, 2018 6:35 am

Re: Mega Backdoor Roth conditions

Post by THeads » Sat Jun 16, 2018 6:45 am

retiredjg wrote:
Fri Jun 15, 2018 7:47 pm
CaptainKoloth wrote:
Fri Jun 15, 2018 6:47 pm
1. Do I have to actually max out the after-tax contributions to the 401(k) before I can convert it to a mega backdoor Roth? The way I read it, it's either maxed out or I can't do it at all?
No. You can contribute as little or as much as you want to the after-tax employee contribution account.
There is a limit of $55,000 for ALL 401k contributions for 2018. So, the after-tax contribution will be 55,000 - (contribution to pre-tax 401k) - (employer match) - (6,000 catch-up contribution, if contributed).

THeads
Posts: 3
Joined: Sat Jun 16, 2018 6:35 am

Re: Mega Backdoor Roth conditions

Post by THeads » Sat Jun 16, 2018 6:56 am

CaptainKoloth wrote:
Fri Jun 15, 2018 6:47 pm
1. Do I have to actually max out the after-tax contributions to the 401(k) before I can convert it to a mega backdoor Roth? The way I read it, it's either maxed out or I can't do it at all?
No, you don't have to max out after-ax contribution. Just make sure your ALL 401k contributions (pre-tax 401k, Roth 401k, employer's match, catch-up contribution, and after-tax contribution) don't exceed $55,000 for 2018
CaptainKoloth wrote:
Fri Jun 15, 2018 6:47 pm
2. I'm trying to understand if my 401(k) allows in-service non-hardship withdrawals which I understand are the other required condition, but there are so many conditions in my plan relating to withdrawal that I have been unable to figure out if I can actually do this or not. Is there specific language I can look for that will tell me definitively whether or not my plan allows this?
You can either call your 401k provider or check plan documentation for "in-service" withdraw.

Spirit Rider
Posts: 9168
Joined: Fri Mar 02, 2007 2:39 pm

Re: Mega Backdoor Roth conditions

Post by Spirit Rider » Sat Jun 16, 2018 10:43 am

THeads wrote:
Sat Jun 16, 2018 6:56 am
CaptainKoloth wrote:
Fri Jun 15, 2018 6:47 pm
1. Do I have to actually max out the after-tax contributions to the 401(k) before I can convert it to a mega backdoor Roth? The way I read it, it's either maxed out or I can't do it at all?
No, you don't have to max out after-ax contribution. Just make sure your ALL 401k contributions (pre-tax 401k, Roth 401k, employer's match, catch-up contribution, and after-tax contribution) don't exceed $55,000 for 2018.
As I already pointed out, your first sentence is not necessarily true. It is entirely dependent on the 401k plan's rules.
Correction. Reading comprehension problem on this and my previous post. I misread/misinterpreted/epic failed on CaptainKoloth's post. Somehow my takeaway was, they were asking if you had to max out employee elective contributions before making after-tax contributions. Completely different than what was actually asked.

Also, the annual addition limit (2018 = $55K) does not include catch-up contributions, but may include other employer contributions; forfeitures, QNCs, etc...
Last edited by Spirit Rider on Sat Jun 16, 2018 4:17 pm, edited 1 time in total.

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Earl Lemongrab
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Re: Mega Backdoor Roth conditions

Post by Earl Lemongrab » Sat Jun 16, 2018 3:27 pm

While in theory the plan could be structured to only allow in-service distribution if the after-tax completed filled the 415(c) limit, it's not clear why a plan would do that. I've certainly never heard of such a rule.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

CaptainKoloth
Posts: 2
Joined: Fri Jun 15, 2018 6:40 pm

Re: Mega Backdoor Roth conditions

Post by CaptainKoloth » Sun Jun 17, 2018 8:44 am

Apologies for my slowness but I guess I'm still confused about how this would work. What specific questions would I want to ask the plan administrator?

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Mega Backdoor Roth conditions

Post by retiredjg » Sun Jun 17, 2018 8:52 am

Ask your administrator if you can make "after-tax employee contributions". Wording similar to this should also be in the documents (often called a "summary plan description") you have describing your plan.

I know this sounds like it would be Roth 401k, but it is not and make sure the administrator knows which you are asking about. What goes into Roth 410k would be your "elective deferrals" which is the $18.5k you can contribute to either traditional 401k or Roth 401k or a combination of the two. That is NOT what you are asking about.

If you are allowed to make the after-tax employee contributions, ask if you can roll that out to Roth IRA while still working. Or if you can do an In-Plan Roth Rollover (roll it into Roth 401k).

If your plan administrator is one of your HR employees, they may not know the answers. You can always call the rep at the actual plan. And do be sure to read the summary plan description.

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