Mega Backdoor Roth IRA - what to do with gains?

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CCD
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Mega Backdoor Roth IRA - what to do with gains?

Post by CCD » Wed Aug 09, 2017 11:51 am

Hello all,

In the process of completing my first Mega Backdoor Roth IRA: I got 2 checks from Fidelity, #1 with my after-tax contributions and #2 with the gains for those contributions, in the #2 check Memo section says T IRA. My questions are: :?:
1- What should I do with check #2: put it in a traditional IRA then move to Roth IRA? (will this count towards the $5500 limit of my Backdoor IRA?), or
2- Can I send it directly to my Roth IRA?
The IRAs are with Vanguard. I know I will have to pay taxes on the gains if I move them to a Roth and I'm OK with it.


Thanks for your input,
CC

CppCoder
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by CppCoder » Wed Aug 09, 2017 12:06 pm

I would send it to the tIRA and convert. This will not interfere with your $5500 limit as the limit is for contributions and the tIRA check is from a rollover.

SRenaeP
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by SRenaeP » Wed Aug 09, 2017 1:11 pm

I like kicking the tax can down the road. I would put it in your trad IRA then roll the trad IRA back into your pre-tax 401k.

-steph

Alan S.
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by Alan S. » Wed Aug 09, 2017 2:27 pm

CCD wrote:Hello all,

In the process of completing my first Mega Backdoor Roth IRA: I got 2 checks from Fidelity, #1 with my after-tax contributions and #2 with the gains for those contributions, in the #2 check Memo section says T IRA. My questions are: :?:
1- What should I do with check #2: put it in a traditional IRA then move to Roth IRA? (will this count towards the $5500 limit of my Backdoor IRA?), or
2- Can I send it directly to my Roth IRA?
The IRAs are with Vanguard. I know I will have to pay taxes on the gains if I move them to a Roth and I'm OK with it.


Thanks for your input,
CC
If these are direct rollover checks made out to your Roth and TIRA custodians FBO you, you have no choice but to forward them to your IRA custodian for deposit into the respective IRAs. Does the after tax check indicate the payee as your Roth IRA?

Note that these are rollovers and do not affect your regular IRA contribution limit of 5500. However, check 2 going into your TIRA will result in your back door Roth conversion (5500 plus the check 2 amount) to be partially taxable. If the gains are modest, and they usually are, when you convert the 5500 plus the gains, the gain amount will be taxable as you know. They would also have been taxable had you just requested the entire amount in the after tax sub account to be rolled to your Roth IRA, so the tax result is the same either way. There IS a minor difference on reporting this on your tax return.

CCD
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by CCD » Wed Aug 09, 2017 2:51 pm

If these are direct rollover checks made out to your Roth and TIRA custodians FBO you, you have no choice but to forward them to your IRA custodian for deposit into the respective IRAs. Does the after tax check indicate the payee as your Roth IRA?
The after-tax check states FBO me and indicates Roth IRA. The gains check states FBO me and indicates TIRA or IRA (don't have them with me right now). So like you said I should deposit them to the corresponding account and then for the TIRA I can convert to Roth.

Thanks

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Thrifty Femme
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by Thrifty Femme » Wed Aug 09, 2017 3:40 pm

CCD wrote:
If these are direct rollover checks made out to your Roth and TIRA custodians FBO you, you have no choice but to forward them to your IRA custodian for deposit into the respective IRAs. Does the after tax check indicate the payee as your Roth IRA?
The after-tax check states FBO me and indicates Roth IRA. The gains check states FBO me and indicates TIRA or IRA (don't have them with me right now). So like you said I should deposit them to the corresponding account and then for the TIRA I can convert to Roth.

Thanks
You send the FBO you Roth IRA check to a Roth IRA account and the FBO you TIRA check to a TIRA account. Do you have any TIRA accounts with money in them? Does your current 401k plan accept rollovers into the plan?

jbird_bogey
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by jbird_bogey » Wed Aug 16, 2017 10:45 pm

SRenaeP wrote:
Wed Aug 09, 2017 1:11 pm
I like kicking the tax can down the road. I would put it in your trad IRA then roll the trad IRA back into your pre-tax 401k.

-steph
I'm just trying to follow what you're saying:

since the gains from your after tax contributions are "pre-tax" you say roll them into a tIRA then roll them back into the 401k? Why bother putting them back in the 401k? Aren't IRAs considered a better option?

SRenaeP
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by SRenaeP » Thu Aug 17, 2017 7:33 am

jbird_bogey wrote:
Wed Aug 16, 2017 10:45 pm
SRenaeP wrote:
Wed Aug 09, 2017 1:11 pm
I like kicking the tax can down the road. I would put it in your trad IRA then roll the trad IRA back into your pre-tax 401k.

-steph
I'm just trying to follow what you're saying:

since the gains from your after tax contributions are "pre-tax" you say roll them into a tIRA then roll them back into the 401k? Why bother putting them back in the 401k? Aren't IRAs considered a better option?
From your original post, it sounds like you do a backdoor Roth in addition to this mega backdoor. Therefore, there are two possible outcomes if you leave the gains in your tIRA. Either roll those over to your Roth along with your usual $5500 and incur taxes now OR leave them in the tIRA but roll the $5500 which will incur prorated taxes now.

In general, I prefer to pay taxes later (when I will presumably be in a lower tax bracket) rather than now. Hence, my suggestion to kick the can down the road by rolling them back into your 401k and paying taxes in the future when you start pulling from your 401k. Of course, YMMV.

-Steph

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neurosphere
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by neurosphere » Thu Aug 17, 2017 8:41 am

jbird_bogey wrote:
Wed Aug 16, 2017 10:45 pm
SRenaeP wrote:
Wed Aug 09, 2017 1:11 pm
I like kicking the tax can down the road. I would put it in your trad IRA then roll the trad IRA back into your pre-tax 401k.

-steph
I'm just trying to follow what you're saying:

since the gains from your after tax contributions are "pre-tax" you say roll them into a tIRA then roll them back into the 401k? Why bother putting them back in the 401k? Aren't IRAs considered a better option?
The gains in an after-tax account are not "pre-tax" in the sense of having been tax-deductible. But these gains have the possibility to remain "tax-deferred", without paying additional income tax (yet).

Let's use an example of $500 contributed to an after-tax 401k which now has $100 in gains for a total of $600. Option 1 is to rollover the entire amount to a Roth. The original $500 contribution was an after-tax contribution and can come out of the account at some point without being subject to income tax. This is "roth-like" in that regard, and so can go directly into a Roth (and out of a Roth) similar to a direct Roth contribution. But the $100 in gains is taxable when coming out of an after-tax 401k. Remember, the gains in an after-tax account are tax-deferred while IN the account, but taxed as income when taken out. So in order to get these dollars into the Roth, you essentially have to do a Roth conversion and pay income taxes on the gains.

The other option is to segregate the after-tax contribution from the gains. So $500 into the Roth and $100 into a regular IRA. The gains can go into the regular IRA because when they come out they will be taxed as income (which is the same tax-treatment when gains are taken out of an after-tax 401k account). But now that the $100 is in the regular/traditional IRA there is an additional set of options 1) leave it there and 2) roll it back into the 401k.

If left in the IRA, those gains would affect the ability to do a tax-free backdoor Roth in the future, in that they would essentially become taxed as a Roth conversion during the backdoor process. But rolling the traditional IRA back into the 401k, (and assuming no other such IRA dollars), the backdoor Roth process remains a tax-free process.

The way I handle a Mega-backdoor Roth is to invest the after-tax account in a low-earning investment like a stable value fund. The gains during the months it is invested are small, and I simply rollover/convert the entire amount to a Roth. I figure that had those funds been in a taxable account, I'd pay tax on the interest anyway. And I just don't want to put up with an additional rollover. But that's a completely subjective thing, because each person needs to decide for themselves the value of their time. :D
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

pkcrafter
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by pkcrafter » Thu Aug 17, 2017 9:18 am

CCD:
#2 with the gains for those contributions
neurosphere:
Let's use an example of $500 contributed to an after-tax 401k which now has $100 in gains for a total of $600. Option 1 is to rollover the entire amount to a Roth. The original $500 contribution was an after-tax contribution and can come out of the account at some point without being subject to income tax. This is "roth-like" in that regard, and so can go directly into a Roth (and out of a Roth) similar to a direct Roth contribution. But the $100 in gains is taxable when coming out of an after-tax 401k. Remember, the gains in an after-tax account are tax-deferred while IN the account, but taxed as income when taken out. So in order to get these dollars into the Roth, you essentially have to do a Roth conversion and pay income taxes on the gains.
Yes, and since the checks were made out to CCD, there may have been taxes withheld. Doesn't anything withheld need to be added back to complete the transfer?

Paul
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neurosphere
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by neurosphere » Thu Aug 17, 2017 1:31 pm

pkcrafter wrote:
Thu Aug 17, 2017 9:18 am
Yes, and since the checks were made out to CCD, there may have been taxes withheld. Doesn't anything withheld need to be added back to complete the transfer?
That's a good point. If any taxes have been withheld, those need to be added back so that they stay with the rollover. Otherwise the taxes withheld will count as an early withdrawal from a 401k, and be subject to a 10% penalty. Or at least, that's what I think. Don't quote me.

CCD
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by CCD » Thu Aug 17, 2017 3:24 pm

Taxes were not withheld. For the TIRA portion I just deposited the whole amount and will cover any taxes at tax filling time. I converted the TIRA to Roth.

Thanks all for your input on this

investor997
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by investor997 » Thu Aug 17, 2017 7:13 pm

I just had Fidelity (my 401k provider) perform a mega backdoor Roth for me.

My Roth IRA is at Scottrade. For the after-tax portion of the rollover, I had Fidelity issue a check payable to Scottrade FBO me.

For the pre-tax earnings, I instructed Fidelity to open a new Rollover IRA and deposit the funds there. This happened electronically and there were no checks issued. The funds became available in the Fidelity Rollover IRA the next day.

To re-open the "standard" back door, I then immediately began a reverse rollover from the new Fidelity Rollover IRA back to my 401k. This required filling out the incoming rollover form for my 401k plan provided by my employer. They required a check for this, so I had Fidelity (the brokerage side) issue a check to "FIIOC FBO me" to accompany the Fidelity 401k incoming rollover form.

TIme-frame wise, it took almost two weeks for the after-tax check (to Scottrade) to show up in my mailbox. There's a Scottrade branch here in town, so the funds were available in my Roth IRA the day after I handed them the check in person. It also took a little over a week for the pre-tax Rollover IRA check (headed back to the 401k) to show up in the mail, plus additional time to mail it again back to FIIOC (the 401k side of FIdelity).

In the future I'll probably skip the whole pre-tax Rollover IRA step, if anything because the earnings will likely be a lot less. I'll just pay the taxes. This time around I had a lot of pre-tax earnings so it was worth the hassle.

I'm also most likely going to move my Roth IRA from Scottrade to Fidelity because it will eliminate the need to have a check issued and mailed for the after-tax portion.

ef11
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by ef11 » Fri Aug 18, 2017 10:55 am

As the earnings are typically modest I plan to just pay the taxes. I just started the Mega backdoor this year and did my first rollover in June, I think the gains were like $100 so I just moved it all to the Roth and will pay tax on the $100 now.
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mega317
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by mega317 » Fri Aug 18, 2017 12:08 pm

investor997 wrote:
Thu Aug 17, 2017 7:13 pm
To re-open the "standard" back door, I then immediately began a reverse rollover from the new Fidelity Rollover IRA back to my 401k.
Could you also just convert the new Fidelity Rollover IRA into a Roth, paying taxes on the (likely minuscule) gains?

investor997
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by investor997 » Fri Aug 18, 2017 12:22 pm

mega317 wrote:
Fri Aug 18, 2017 12:08 pm
investor997 wrote:
Thu Aug 17, 2017 7:13 pm
To re-open the "standard" back door, I then immediately began a reverse rollover from the new Fidelity Rollover IRA back to my 401k.
Could you also just convert the new Fidelity Rollover IRA into a Roth, paying taxes on the (likely minuscule) gains?
Yep, and this is what I'll probably do in the future, but in my case, the pre-tax earnings were significant. I enabled after-tax contributions to my 401k several years ago so there was plenty of time for earnings to grow. I only recently discovered this whole Mega Back Door deal...

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Earl Lemongrab
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by Earl Lemongrab » Sat Aug 19, 2017 5:57 pm

mega317 wrote:
Fri Aug 18, 2017 12:08 pm
investor997 wrote:
Thu Aug 17, 2017 7:13 pm
To re-open the "standard" back door, I then immediately began a reverse rollover from the new Fidelity Rollover IRA back to my 401k.
Could you also just convert the new Fidelity Rollover IRA into a Roth, paying taxes on the (likely minuscule) gains?
That would be a needless complication. If that were the goal, then the earnings could be rolled into the Roth in the first place. Saves time and paperwork.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

mega317
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by mega317 » Sun Aug 20, 2017 12:20 am

Earl Lemongrab wrote:
Sat Aug 19, 2017 5:57 pm
mega317 wrote:
Fri Aug 18, 2017 12:08 pm
investor997 wrote:
Thu Aug 17, 2017 7:13 pm
To re-open the "standard" back door, I then immediately began a reverse rollover from the new Fidelity Rollover IRA back to my 401k.
Could you also just convert the new Fidelity Rollover IRA into a Roth, paying taxes on the (likely minuscule) gains?
That would be a needless complication. If that were the goal, then the earnings could be rolled into the Roth in the first place. Saves time and paperwork.
Indeed :oops:

artgerst
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by artgerst » Tue Nov 14, 2017 3:57 pm

I'm piggybacking off of this topic since it's very related.

I did my first Mega Backdoor Roth IRA this year (early 2017). Here are the details:
- Assume $20k in contributions to after-tax 401k and $1.00 in income from that contribution at the time of transfer
- Moved from TRP to Vanguard
- Had Vanguard initiate due to attempted issues the other way around.
- Ended up with $20k in my Roth IRA and $1 in my tIRA
- Note that I don't do a "regular" Backdoor Roth so I'm okay with having a tIRA.

Questions:
- Should I receive a tax form from either TRP or Vanguard?
- Do I need to file anything with my 2017 taxes?

artgerst
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Re: Mega Backdoor Roth IRA - what to do with gains?

Post by artgerst » Tue Nov 14, 2017 4:08 pm

Sorry, disregard last post. I must be getting old. I already asked this question:

viewtopic.php?f=2&t=211490&p=3250081#p3249900

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