Backdoor roth /Rollover IRA Mess

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Ridge15
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Joined: Tue Apr 21, 2015 4:26 pm

Backdoor roth /Rollover IRA Mess

Post by Ridge15 » Wed Oct 10, 2018 9:52 pm

hi,

I made a mistake with my Mega backdoor roth for this year and seeking advice on how to fix the situation. Details:
  • Joined a new company earlier this year and moved my previous employers 401K to a rollover IRA with vanguard (from fidelity)
      Portion of the previous employers 401K was in Roth 401K which was moved to a New Roth IRA in vanguard'
        For 2018, had contributions ~47K (including pre tax 401K+employer match+ post tax). Post tax was converted to roth IRA in fidelity via backdoor
          At new company, contributed ~8K to reach the 55K limit which was converted to Vanguard Roth IRA (backdoor roth)
        Because of the rollover IRA, Am i going to be get hit on the income taxes due to pro rata rule?
        Couple of questions:
        1. Will the pro rata only apply to the 8K or the full post tax converted to Roth IRA this year?
        2. Seems i can do a reverse rollover and move the rollover IRA to new companies 401K plan within vangaurd? Will doing so, undo the tax implications?
        3. What is the best move to deal with this situation?
        thanks.

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        Earl Lemongrab
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        Re: Backdoor roth /Rollover IRA Mess

        Post by Earl Lemongrab » Thu Oct 11, 2018 1:13 am

        If you rolled the entire traditional part to a TIRA then converted the after-tax part, then yes you'll have a pro-rata mess. Roll all pretax amounts to the new 401(k) before 12/31.

        Next time, ask before doing anything complicated with rollovers.
        This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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        luminous
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        Re: Backdoor roth /Rollover IRA Mess

        Post by luminous » Thu Oct 11, 2018 4:06 am

        Earl Lemongrab wrote:
        Thu Oct 11, 2018 1:13 am
        If you rolled the entire traditional part to a TIRA then converted the after-tax part, then yes you'll have a pro-rata mess.
        Agreed. It hinges on what you mean by “Post tax was converted to roth IRA in fidelity via backdoor.” That’s an odd phrasing and I can’t quite tell what you did.

        By the way, this isn’t a Backdoor Roth but instead a Mega Backdoor Roth: “At new company, contributed ~8K to reach the 55K limit which was converted to Vanguard Roth IRA (backdoor roth)”

        https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
        vs
        https://www.bogleheads.org/wiki/After-tax_401(k)
        50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2026.

        retiredjg
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        Re: Backdoor roth /Rollover IRA Mess

        Post by retiredjg » Thu Oct 11, 2018 7:53 am

        deleted
        Last edited by retiredjg on Thu Oct 11, 2018 7:55 am, edited 1 time in total.

        retiredjg
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        Re: Backdoor roth /Rollover IRA Mess

        Post by retiredjg » Thu Oct 11, 2018 7:55 am

        Money that goes directly from an after-tax account in a 401k to Roth IRA is not pro-rated with a tIRA. That is most likely what you did. I am not talking about Roth 401k - an after-tax account is something different.

        If somehow the after-tax money went into tIRA and then got converted to Roth IRA, it would be pro-rated. It seems unlikely you did that.

        For 2018, had contributions ~47K (including pre tax 401K+employer match+ post tax). Post tax was converted to roth IRA in fidelity via backdoor
        At new company, contributed ~8K to reach the 55K limit which was converted to Vanguard Roth IRA (backdoor roth)
        This part of your post is confusing. Is the $47k at the first employer only and the $8k at the second employer only?

        If yes, what kind of account did the $8k go into?

        Ridge15
        Posts: 12
        Joined: Tue Apr 21, 2015 4:26 pm

        Re: Backdoor roth /Rollover IRA Mess

        Post by Ridge15 » Thu Oct 11, 2018 10:13 pm

        thanks all, Let me clarify. maybe my backdoor and megabackdoor understanding is not clear.

        First employer: Added 18.5k pre tax+ 9K employer match+19.5K (after tax 401k). After tax 401K was converted to out of plan Roth IRA

        At second employer: 8 K in after tax 401k which was converted to out of plan Roth IRA

        What i am gather is that after tax 401K conversion to Roth IRA is not pro rated?

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        Earl Lemongrab
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        Re: Backdoor roth /Rollover IRA Mess

        Post by Earl Lemongrab » Thu Oct 11, 2018 11:19 pm

        The after-tax will bring a proportional share of earnings with it. If the contributions haven't been in the plan long, that's usually not that significant.
        This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

        retiredjg
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        Re: Backdoor roth /Rollover IRA Mess

        Post by retiredjg » Fri Oct 12, 2018 7:35 am

        Ridge15 wrote:
        Thu Oct 11, 2018 10:13 pm
        What i am gather is that after tax 401K conversion to Roth IRA is not pro rated?
        If the money was transferred directly to Roth IRA, it is NOT pro-rated with the Rollover IRA that you have sitting on the side. This is how it is usually done and you have no mess to fix.


        If for some reason the money went from your 401k into IRA and then converted to Roth, it WOULD be pro-rated with that IRA you have sitting on the side. That would be a mess but it can be worked with.

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        FiveK
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        Re: Backdoor roth /Rollover IRA Mess

        Post by FiveK » Fri Oct 12, 2018 4:04 pm

        Ridge15 wrote:
        Thu Oct 11, 2018 10:13 pm
        What i am gather is that after tax 401K conversion to Roth IRA is not pro rated?
        It is not pro-rated with any existing pre-tax IRAs.

        Despite the name similarity, the Backdoor Roth IRA and Mega Backdoor Roth IRA processes work on completely separate contribution and conversion funds, even though the ultimate destination of the funds may be a Roth IRA.

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