Megabackdoor Roth Waiting Period?

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sf2sv
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Megabackdoor Roth Waiting Period?

Post by sf2sv » Thu Oct 05, 2017 9:55 pm

Hi,

I wasn’t able to find a clear answer to this question online. I have been making after tax contributions to my 401k and then rolling that into a Roth IRA I have. Is there any waiting period for me to withdraw my contributions (I know there are penalties for gains) or could I do it at any time for any reason?

Thanks

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

Re: Megabackdoor Roth Waiting Period?

Post by Spirit Rider » Thu Oct 05, 2017 11:11 pm

The duration and frequency restrictions are purely a function your 401k plan rules. You should check with them. Generally you should do it as quickly and as often as practical.

You can rollover after-tax employee contributions and earnings to a Roth IRA. The after-tax contribution rolls over tax free and the earnings are subject to ordinary income tax. You can also rollover after-tax employee contributions to a Roth IRA and earnings to a traditional IRA. In this case both rollovers are tax-free.

Roth IRA distributions are subject to specialized rules that I will let others get into.

learning_head
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Re: Megabackdoor Roth Waiting Period?

Post by learning_head » Thu Oct 05, 2017 11:18 pm

Spirit Rider wrote:
Thu Oct 05, 2017 11:11 pm
You can also rollover after-tax employee contributions to a Roth IRA and earnings to a traditional IRA. In this case both rollovers are tax-free.
... but having traditional IRA complicate "regular" backdoor Roth, so it's simpler to pay a bit of tax instead and convert all to Roth IRA.

sf2sv
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Re: Megabackdoor Roth Waiting Period?

Post by sf2sv » Fri Oct 06, 2017 6:50 am

Spirit Rider wrote:
Thu Oct 05, 2017 11:11 pm
The duration and frequency restrictions are purely a function your 401k plan rules. You should check with them. Generally you should do it as quickly and as often as practical.

You can rollover after-tax employee contributions and earnings to a Roth IRA. The after-tax contribution rolls over tax free and the earnings are subject to ordinary income tax. You can also rollover after-tax employee contributions to a Roth IRA and earnings to a traditional IRA. In this case both rollovers are tax-free.

Roth IRA distributions are subject to specialized rules that I will let others get into.

Sorry, maybe I wasn’t totally clear, I know I’m able to rollover the Pretax money from the 401(k) four times a year to the Roth IRA, the question is are there any restrictions on me withdrawing the money from the Roth IRA once it’s been moved?

Thanks!

sf2sv
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Joined: Sat Aug 19, 2017 10:27 am

Re: Megabackdoor Roth Waiting Period?

Post by sf2sv » Fri Oct 06, 2017 7:01 am

sf2sv wrote:
Fri Oct 06, 2017 6:50 am
Spirit Rider wrote:
Thu Oct 05, 2017 11:11 pm
The duration and frequency restrictions are purely a function your 401k plan rules. You should check with them. Generally you should do it as quickly and as often as practical.

You can rollover after-tax employee contributions and earnings to a Roth IRA. The after-tax contribution rolls over tax free and the earnings are subject to ordinary income tax. You can also rollover after-tax employee contributions to a Roth IRA and earnings to a traditional IRA. In this case both rollovers are tax-free.

Roth IRA distributions are subject to specialized rules that I will let others get into.

Sorry, maybe I wasn’t totally clear, I know I’m able to rollover the Pretax money from the 401(k) four times a year to the Roth IRA, the question is are there any restrictions on me withdrawing the money from the Roth IRA once it’s been moved?

Thanks!
It’s clearly too early, that should say *post tax money from the 401k four times per year.

Spirit Rider
Posts: 6233
Joined: Fri Mar 02, 2007 2:39 pm

Re: Megabackdoor Roth Waiting Period?

Post by Spirit Rider » Fri Oct 06, 2017 10:48 am

learning_head wrote:
Thu Oct 05, 2017 11:18 pm
... but having traditional IRA complicate "regular" backdoor Roth, so it's simpler to pay a bit of tax instead and convert all to Roth IRA.
... but many people do not exceed the Roth contribution income limits and need to do a Backdoor Roth. Many of those that do, if a plan allows in-service rollovers, it very often allows pre-tax inbound rollovers. The bottom line is that more people than not would probably benefit from rolling the earnings to a traditional IRA.

learning_head
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Joined: Sat Apr 10, 2010 6:02 pm

Re: Megabackdoor Roth Waiting Period?

Post by learning_head » Fri Oct 06, 2017 11:42 am

Spirit Rider wrote:
Fri Oct 06, 2017 10:48 am
learning_head wrote:
Thu Oct 05, 2017 11:18 pm
... but having traditional IRA complicate "regular" backdoor Roth, so it's simpler to pay a bit of tax instead and convert all to Roth IRA.
... but many people do not exceed the Roth contribution income limits and need to do a Backdoor Roth. Many of those that do, if a plan allows in-service rollovers, it very often allows pre-tax inbound rollovers. The bottom line is that more people than not would probably benefit from rolling the earnings to a traditional IRA.
If someone can do regular Roth instead of backdoor Roth, would you advise they do traditional IRA instead of roth IRA?

On a side note, I thought normally people that do megabackdoor Roth would be exceeding limits needed for regular Roth. I could be wrong though.

ved
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Re: Megabackdoor Roth Waiting Period?

Post by ved » Fri Oct 06, 2017 11:57 am

sf2sv wrote:
Fri Oct 06, 2017 7:01 am
sf2sv wrote:
Fri Oct 06, 2017 6:50 am
Spirit Rider wrote:
Thu Oct 05, 2017 11:11 pm
The duration and frequency restrictions are purely a function your 401k plan rules. You should check with them. Generally you should do it as quickly and as often as practical.

You can rollover after-tax employee contributions and earnings to a Roth IRA. The after-tax contribution rolls over tax free and the earnings are subject to ordinary income tax. You can also rollover after-tax employee contributions to a Roth IRA and earnings to a traditional IRA. In this case both rollovers are tax-free.

Roth IRA distributions are subject to specialized rules that I will let others get into.

Sorry, maybe I wasn’t totally clear, I know I’m able to rollover the Pretax money from the 401(k) four times a year to the Roth IRA, the question is are there any restrictions on me withdrawing the money from the Roth IRA once it’s been moved?

Thanks!
It’s clearly too early, that should say *post tax money from the 401k four times per year.
Let me understand this:
You want to contribute to after-tax within your 401k. Then, use the in-service withdrawal to roll it into Roth IRA (and pay taxes on any earnings).
Then, you want to withdraw the contributions from the Roth IRA.
Is this correct?
If so, what is the reason of going through all these steps? Just don't contribute to the after-tax in your 401k in the first place. You will have your money with you.

CppCoder
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Re: Megabackdoor Roth Waiting Period?

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

ved wrote:
Fri Oct 06, 2017 11:57 am
Let me understand this:
You want to contribute to after-tax within your 401k. Then, use the in-service withdrawal to roll it into Roth IRA (and pay taxes on any earnings).
Then, you want to withdraw the contributions from the Roth IRA.
Is this correct?
If so, what is the reason of going through all these steps? Just don't contribute to the after-tax in your 401k in the first place. You will have your money with you.
My guess would be that OP wants to do a mega backdoor Roth in the base case but wants to know what the holding period is in case an emergency comes up and he needs to withdraw the money unexpectedly. It might influence his decision to do the mega backdoor Roth or not depending on his emergency, penalty free access to the contributions.

banx
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Re: Megabackdoor Roth Waiting Period?

Post by banx » Fri Oct 06, 2017 12:20 pm

Short answer: No

Longer answer:

So you have:
(a) The contributions you made to the after-tax 401(k)
(b) The earnings that occurred in the 401(k), prior to the conversion, on which you paid tax when you converted
(c) Earnings that occurred in the roth IRA

You have to withdraw these in the order (b), (a), (c). For (b), you have to pay a 10% penalty if you withdraw without waiting 5-ish (details below) years. For (a) there is no tax and no penalty. For (c), there is tax and penalty if you're under 59.5.

There's no waiting period for the after-tax contribution amounts (a), but if you withdraw without waiting 5ish years (see details below) then you'll pay a 10% penalty on the earnings you had in the after-tax 401(k) (b), which you already paid tax on when you converted to the roth, and which you have to take out first.

from https://obliviousinvestor.com/roth-ira- ... wal-rules/:
Any distributions of converted amounts (assuming they were taxable at the date of the conversion) will be subject to the 10% penalty (though they’ll be free from ordinary income taxes) if the distribution occurs less than 5 years after the first day of the year in which the conversion occurred. If, however, the distribution was for a “qualifying reason” or you meet one of the “other exceptions” above, the distribution will be free from penalty.

If the conversion included amounts that were not taxable (because they came from a nondeductible IRA), those amounts will not be subject to the 10% penalty even if they are withdrawn from the Roth prior to the first day of the fifth year after the date of the conversion.

sf2sv
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Joined: Sat Aug 19, 2017 10:27 am

Re: Megabackdoor Roth Waiting Period?

Post by sf2sv » Fri Oct 06, 2017 3:33 pm

ved wrote:
Fri Oct 06, 2017 11:57 am
sf2sv wrote:
Fri Oct 06, 2017 7:01 am
sf2sv wrote:
Fri Oct 06, 2017 6:50 am
Spirit Rider wrote:
Thu Oct 05, 2017 11:11 pm
The duration and frequency restrictions are purely a function your 401k plan rules. You should check with them. Generally you should do it as quickly and as often as practical.

You can rollover after-tax employee contributions and earnings to a Roth IRA. The after-tax contribution rolls over tax free and the earnings are subject to ordinary income tax. You can also rollover after-tax employee contributions to a Roth IRA and earnings to a traditional IRA. In this case both rollovers are tax-free.

Roth IRA distributions are subject to specialized rules that I will let others get into.

Sorry, maybe I wasn’t totally clear, I know I’m able to rollover the Pretax money from the 401(k) four times a year to the Roth IRA, the question is are there any restrictions on me withdrawing the money from the Roth IRA once it’s been moved?

Thanks!
It’s clearly too early, that should say *post tax money from the 401k four times per year.
Let me understand this:
You want to contribute to after-tax within your 401k. Then, use the in-service withdrawal to roll it into Roth IRA (and pay taxes on any earnings).
Then, you want to withdraw the contributions from the Roth IRA.
Is this correct?
If so, what is the reason of going through all these steps? Just don't contribute to the after-tax in your 401k in the first place. You will have your money with you.
My plan would be to not touch the money and let it grow tax free, but it would weight in my decision how much to contribute if I knew I could access it in an emergency

sf2sv
Posts: 15
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Re: Megabackdoor Roth Waiting Period?

Post by sf2sv » Fri Oct 06, 2017 3:34 pm

CppCoder wrote:
Fri Oct 06, 2017 12:06 pm
ved wrote:
Fri Oct 06, 2017 11:57 am
Let me understand this:
You want to contribute to after-tax within your 401k. Then, use the in-service withdrawal to roll it into Roth IRA (and pay taxes on any earnings).
Then, you want to withdraw the contributions from the Roth IRA.
Is this correct?
If so, what is the reason of going through all these steps? Just don't contribute to the after-tax in your 401k in the first place. You will have your money with you.
My guess would be that OP wants to do a mega backdoor Roth in the base case but wants to know what the holding period is in case an emergency comes up and he needs to withdraw the money unexpectedly. It might influence his decision to do the mega backdoor Roth or not depending on his emergency, penalty free access to the contributions.
Yes, this is spot on

sf2sv
Posts: 15
Joined: Sat Aug 19, 2017 10:27 am

Re: Megabackdoor Roth Waiting Period?

Post by sf2sv » Fri Oct 06, 2017 3:36 pm

banx wrote:
Fri Oct 06, 2017 12:20 pm
Short answer: No

Longer answer:

So you have:
(a) The contributions you made to the after-tax 401(k)
(b) The earnings that occurred in the 401(k), prior to the conversion, on which you paid tax when you converted
(c) Earnings that occurred in the roth IRA

You have to withdraw these in the order (b), (a), (c). For (b), you have to pay a 10% penalty if you withdraw without waiting 5-ish (details below) years. For (a) there is no tax and no penalty. For (c), there is tax and penalty if you're under 59.5.

There's no waiting period for the after-tax contribution amounts (a), but if you withdraw without waiting 5ish years (see details below) then you'll pay a 10% penalty on the earnings you had in the after-tax 401(k) (b), which you already paid tax on when you converted to the roth, and which you have to take out first.

from https://obliviousinvestor.com/roth-ira- ... wal-rules/:
Any distributions of converted amounts (assuming they were taxable at the date of the conversion) will be subject to the 10% penalty (though they’ll be free from ordinary income taxes) if the distribution occurs less than 5 years after the first day of the year in which the conversion occurred. If, however, the distribution was for a “qualifying reason” or you meet one of the “other exceptions” above, the distribution will be free from penalty.

If the conversion included amounts that were not taxable (because they came from a nondeductible IRA), those amounts will not be subject to the 10% penalty even if they are withdrawn from the Roth prior to the first day of the fifth year after the date of the conversion.
Thank you, the long answer is very helpful!

Alan S.
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Re: Megabackdoor Roth Waiting Period?

Post by Alan S. » Fri Oct 06, 2017 3:40 pm

The post by banx is correct assuming that your Roth IRA consists only of mega back door Roth rollovers.

However, if any of your Roth IRAs include regular contributions or conversions, the regular contributions will come out first, tax and penalty free. Then your oldest Roth conversions come out under the Roth IRA ordering rules and the mega back door rollovers are integrated into the structure of your Roth IRA in total.

All Roth IRA rollovers from either the pre tax portion or the designated Roth portion of a qualified plan must be integrated into the overall accounting structure of the Roth IRA to determine what portions are being distributed from the Roth IRA.

sf2sv
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Re: Megabackdoor Roth Waiting Period?

Post by sf2sv » Fri Oct 06, 2017 9:21 pm

Alan S. wrote:
Fri Oct 06, 2017 3:40 pm
The post by banx is correct assuming that your Roth IRA consists only of mega back door Roth rollovers.

However, if any of your Roth IRAs include regular contributions or conversions, the regular contributions will come out first, tax and penalty free. Then your oldest Roth conversions come out under the Roth IRA ordering rules and the mega back door rollovers are integrated into the structure of your Roth IRA in total.

All Roth IRA rollovers from either the pre tax portion or the designated Roth portion of a qualified plan must be integrated into the overall accounting structure of the Roth IRA to determine what portions are being distributed from the Roth IRA.
I see, mine does indeed consist of both normal contributions as well as these rollovers that I do a few times annually. So you just need to stipulate this correct order when withdrawing to avoid penalties?

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Thrifty Femme
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Re: Megabackdoor Roth Waiting Period?

Post by Thrifty Femme » Fri Oct 06, 2017 9:42 pm

learning_head wrote:
Fri Oct 06, 2017 11:42 am
On a side note, I thought normally people that do megabackdoor Roth would be exceeding limits needed for regular Roth. I could be wrong though.
My household does the mega backdoor roth without exceeding the limits for regular roth. We might not be normal though :wink:

FIREngineer
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Re: Megabackdoor Roth Waiting Period?

Post by FIREngineer » Sat Oct 07, 2017 9:13 am

Thrifty Femme wrote:
Fri Oct 06, 2017 9:42 pm
learning_head wrote:
Fri Oct 06, 2017 11:42 am
On a side note, I thought normally people that do megabackdoor Roth would be exceeding limits needed for regular Roth. I could be wrong though.
My household does the mega backdoor roth without exceeding the limits for regular roth. We might not be normal though :wink:
We're in that same "not normal" boat with you 8-) ... Mega Backdoor Roth and still significantly under the limits for regular Roth ... we do have a rather aggressive savings rate of 45%. Although, I could see that dropping to 35-40% soon as our kids are getting into some pricey extracurricular activities. Club fees for competitive swimming & gymnastics are outrageous! :shock: ... either that or, we'll have to give up being a 1 income household.

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Earl Lemongrab
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Re: Megabackdoor Roth Waiting Period?

Post by Earl Lemongrab » Sat Oct 07, 2017 12:02 pm

FIREngineer wrote:
Sat Oct 07, 2017 9:13 am
Thrifty Femme wrote:
Fri Oct 06, 2017 9:42 pm
learning_head wrote:
Fri Oct 06, 2017 11:42 am
On a side note, I thought normally people that do megabackdoor Roth would be exceeding limits needed for regular Roth. I could be wrong though.
My household does the mega backdoor roth without exceeding the limits for regular roth. We might not be normal though :wink:
We're in that same "not normal" boat with you 8-) ... Mega Backdoor Roth and still significantly under the limits for regular Roth ... we do have a rather aggressive savings rate of 45%. Although, I could see that dropping to 35-40% soon as our kids are getting into some pricey extracurricular activities. Club fees for competitive swimming & gymnastics are outrageous! :shock: ... either that or, we'll have to give up being a 1 income household.
I don't quite follow. Are you saying you do Mega Backdoor even though you don't make full Roth IRA contributions? Or that you do, but your additional contributions via MBR is lower than that number?
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

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Thrifty Femme
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Re: Megabackdoor Roth Waiting Period?

Post by Thrifty Femme » Sat Oct 07, 2017 6:19 pm

Earl Lemongrab wrote:
Sat Oct 07, 2017 12:02 pm
FIREngineer wrote:
Sat Oct 07, 2017 9:13 am
Thrifty Femme wrote:
Fri Oct 06, 2017 9:42 pm
learning_head wrote:
Fri Oct 06, 2017 11:42 am
On a side note, I thought normally people that do megabackdoor Roth would be exceeding limits needed for regular Roth. I could be wrong though.
My household does the mega backdoor roth without exceeding the limits for regular roth. We might not be normal though :wink:
We're in that same "not normal" boat with you 8-) ... Mega Backdoor Roth and still significantly under the limits for regular Roth ... we do have a rather aggressive savings rate of 45%. Although, I could see that dropping to 35-40% soon as our kids are getting into some pricey extracurricular activities. Club fees for competitive swimming & gymnastics are outrageous! :shock: ... either that or, we'll have to give up being a 1 income household.
I don't quite follow. Are you saying you do Mega Backdoor even though you don't make full Roth IRA contributions? Or that you do, but your additional contributions via MBR is lower than that number?
I won't speak for FIREngineer, but I interpreted learning_head's comment to mean that generally people that take advantage of the mega backdoor roth have an adjusted gross income above the limit for roth IRA contributions.

My household has two low six figure salaries. We max out two 401ks, 2 roth IRAs, and an HSA, which takes us about 20k below the MFJ roth IRA contribution limit. Next year we will add maxing out the mega backdoor roth to the mix; can't max it out this year because I changed employers too late in the year.

FIREngineer is probably doing something similar on a single salary.

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