Mega Backdoor Roth tax question

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Topic Author
mprusin
Posts: 23
Joined: Mon Sep 01, 2014 7:54 am

Mega Backdoor Roth tax question

Post by mprusin » Tue Sep 10, 2019 12:44 pm

My company's Vanguard 401k plan allows us to contribute up to $17,200 in after tax dollars each year to our 401k. We can then also set it to automatically perform an in-plan conversion of those after-tax contributions to a Roth 401k each pay period.

My question is, if our Vanguard 401k plan provides this auto conversion function, does it matter if I have a traditional IRA account? I understand from my reading that when you take the in-service distribution to a regular Roth IRA, that you would be hit with pro rata rule taxes, but since it is an in-plan conversion to a Roth 401k, does it matter if I have the traditional IRA?

Thanks

Pigeye Brewster
Posts: 379
Joined: Thu Oct 05, 2017 7:33 pm

Re: Mega Backdoor Roth tax question

Post by Pigeye Brewster » Tue Sep 10, 2019 3:19 pm

mprusin wrote:
Tue Sep 10, 2019 12:44 pm
My company's Vanguard 401k plan allows us to contribute up to $17,200 in after tax dollars each year to our 401k. We can then also set it to automatically perform an in-plan conversion of those after-tax contributions to a Roth 401k each pay period.

My question is, if our Vanguard 401k plan provides this auto conversion function, does it matter if I have a traditional IRA account? I understand from my reading that when you take the in-service distribution to a regular Roth IRA, that you would be hit with pro rata rule taxes, but since it is an in-plan conversion to a Roth 401k, does it matter if I have the traditional IRA?

Thanks
It does not matter.

retiredjg
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Re: Mega Backdoor Roth tax question

Post by retiredjg » Tue Sep 10, 2019 4:27 pm

mprusin wrote:
Tue Sep 10, 2019 12:44 pm
My question is, if our Vanguard 401k plan provides this auto conversion function, does it matter if I have a traditional IRA account?
No. It does not affect your in plan Roth rollover.
I understand from my reading that when you take the in-service distribution to a regular Roth IRA, that you would be hit with pro rata rule taxes....
This is not correct. If the money goes from 401k after-tax account directly to Roth IRA, a tIRA does not affect this at all - no -pro-rating. But some people (mistakenly) think the money has to move from 401k to tIRA to Roth IRA and that would require pro-rating with the rest of the tIRA.

Clarice
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Location: Orlando FL

Re: Mega Backdoor Roth tax question

Post by Clarice » Tue Sep 10, 2019 6:39 pm

mprusin wrote:
Tue Sep 10, 2019 12:44 pm
My company's Vanguard 401k plan allows us to contribute up to $17,200 in after tax dollars each year to our 401k. We can then also set it to automatically perform an in-plan conversion of those after-tax contributions to a Roth 401k each pay period.

My question is, if our Vanguard 401k plan provides this auto conversion function, does it matter if I have a traditional IRA account? I understand from my reading that when you take the in-service distribution to a regular Roth IRA, that you would be hit with pro rata rule taxes, but since it is an in-plan conversion to a Roth 401k, does it matter if I have the traditional IRA?

Thanks
Odd that they allow in plan to Roth but not TIRA. If you want Roth then you’re set, IMO.

Alan S.
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Re: Mega Backdoor Roth tax question

Post by Alan S. » Tue Sep 10, 2019 8:14 pm

When a rollover from an after tax sub account is done to either the Roth 401k or the Roth IRA, the only pro rating done is within the after tax sub account itself.

If an automatic rollover plan is set up to do the rollover very soon after the contributions are made, the amount of earnings on the contribution is either going to be 0 or a miniscule amount.

As indicated, the existence of a TIRA account is immaterial in this calculation.

JediMisty
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Location: Central NJ

Re: Mega Backdoor Roth tax question

Post by JediMisty » Tue Sep 10, 2019 8:28 pm

Alan S. wrote:
Tue Sep 10, 2019 8:14 pm
When a rollover from an after tax sub account is done to either the Roth 401k or the Roth IRA, the only pro rating done is within the after tax sub account itself.

If an automatic rollover plan is set up to do the rollover very soon after the contributions are made, the amount of earnings on the contribution is either going to be 0 or a miniscule amount.

As indicated, the existence of a TIRA account is immaterial in this calculation.
+1. I've religiously converted my after-tax contributions in- plan to Roth the very next day after the contribution (well, once it was 2 days). For the entire approximately 30k in contributions, I expect to pay tax on $31.75 of earnings for the year (I've already maxed it out for 2019). My tIRA is immaterial to these conversions. I did this last year, too.

Topic Author
mprusin
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Joined: Mon Sep 01, 2014 7:54 am

Re: Mega Backdoor Roth tax question

Post by mprusin » Tue Sep 10, 2019 9:13 pm

Thanks everyone. I must have misread something that was talking about a regular backdoor Roth.

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