Distributions for mega-back door

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llessac15
Posts: 124
Joined: Thu Jan 23, 2014 9:13 pm

Distributions for mega-back door

Post by llessac15 » Sun Aug 12, 2018 7:38 am

I’m sure this has been covered on here repeatedly, but I wanted to make sure I understand how a mega-backdoor Roth works.


According to the IRS (https://www.irs.gov/retirement-plans/ro ... ment-plans), to accomplish a MBD Roth I have to rollover ALL of my pretax tax contributions along with the after-tax contribution each year?

Example: I have about $320,000 (all pre-tax) currently in a 401k. We have room to do $26,500 after-tax contributions since we currently contribute pre-tax $18,500 with a $10,000 employee match. Ignoring any growth this year to keep values simple, I would have to rollover $348,500 ($320,000+$18,500+$10,000) into a tIRA and the $26,500 into a Roth. Then, I would have to roll the $348,500 back to my 401k so that I can continue my regular backdoor Roth without have pro-rata issues. I would then repeat this pattern every year.

Is that correct?

Soon2BXProgrammer
Posts: 418
Joined: Mon Nov 24, 2014 11:30 pm

Re: Distributions for mega-back door

Post by Soon2BXProgrammer » Sun Aug 12, 2018 9:39 am

not exactly.

some 401k plans allow what is called a in service distribution of the aftertax sub account. The aftertax sub account must be prorata distrubted, both the basis and the gains.

every year i rollover my aftertax sub account. it might be 20k of basis and 500 dollars of gains. i just roll the gains into the roth ira as well and pay taxes on it because i'm lazy.

however you could split it and roll the basis to the roth ira and the gains to a normal IRA. You only have to move the IRA runs back to the 401k if you do a "back door roth ira" as well. (needing to have a 0 balance IRA at the end of the year)

the key is to find out how your plan handles your aftertax funds. is it a separately accounted for sub account? do they allow in service distributions? etc

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

Re: Distributions for mega-back door

Post by Spirit Rider » Sun Aug 12, 2018 10:37 am

llessac15 wrote:
Sun Aug 12, 2018 7:38 am
According to the IRS (https://www.irs.gov/retirement-plans/ro ... ment-plans), to accomplish a MBD Roth I have to rollover ALL of my pretax tax contributions along with the after-tax contribution each year? Is that correct?
No, this is a very misleading page. You need to pay very careful attention to the specific wording.

"Many savers have made after-tax contributions to a 401(k) or other defined contribution retirement plan. If your after-tax* account balance contains both pretax and after-tax amounts, any distribution will generally include a pro rata share of both."

"Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the after-tax* account."

The key word in both places is account. Almost all plans that offer after-tax contributions do so with separate accounting. You can rollover just these separately accounted for funds. Only the after-tax contributions and pre-tax earnings on them must be pro-rata. Balances in the pre-tax and Roth accounts are not included.

*Clarification mine.

HEDGEFUNDIE
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Re: Distributions for mega-back door

Post by HEDGEFUNDIE » Sun Aug 12, 2018 10:42 am

You’re only moving the $26,500 into a tIRA and then a Roth IRA.

The rest of your 401k money stays where it is.

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

Re: Distributions for mega-back door

Post by Spirit Rider » Sun Aug 12, 2018 11:00 am

HEDGEFUNDIE wrote:
Sun Aug 12, 2018 10:42 am
You’re only moving the $26,500 into a tIRA and then a Roth IRA.
There is no need for the after-tax contributions to go to a traditional IRA. The after-tax contributions and if you choose the pre-tax earnings can be rolled over directly to a Roth IRA. In this case the pre-tax earnings would be taxable. You can separately roll the pre-tax earnings to a traditional IRA with no tax liability.

HEDGEFUNDIE
Posts: 607
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Re: Distributions for mega-back door

Post by HEDGEFUNDIE » Sun Aug 12, 2018 11:03 am

Spirit Rider wrote:
Sun Aug 12, 2018 11:00 am
HEDGEFUNDIE wrote:
Sun Aug 12, 2018 10:42 am
You’re only moving the $26,500 into a tIRA and then a Roth IRA.
There is no need for the after-tax contributions to go to a traditional IRA. The after-tax contributions and if you choose the pre-tax earnings can be rolled over directly to a Roth IRA. In this case the pre-tax earnings would be taxable. You can separately roll the pre-tax earnings to a traditional IRA with no tax liability.
Yup I misspoke, after-tax contributions should be going directly to Roth (which only holds after-tax monies).

llessac15
Posts: 124
Joined: Thu Jan 23, 2014 9:13 pm

Re: Distributions for mega-back door

Post by llessac15 » Sun Aug 12, 2018 12:50 pm

Thanks for the replies. That helps clear things up. I plan to call our 401k provider next week to discuss this.

llessac15
Posts: 124
Joined: Thu Jan 23, 2014 9:13 pm

Re: Distributions for mega-back door

Post by llessac15 » Thu Aug 16, 2018 2:03 am

One more question.

Our accountants make our 401k contributions all at one time each year due to the way our clinic is run. So my after-tax contribution would be made the same way. If I then immediately roll it to a Roth, I should have very little gains to worry about.

Is there anything (I.e. IRS rules) preventing this from happening?

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