mega backdoor help needed

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Topic Author
henry001
Posts: 104
Joined: Sun Sep 21, 2008 9:45 pm

mega backdoor help needed

Post by henry001 »

Hello,

I have a question regarding the mega backdoor roth and if I am correct in the process.
My work allows for an in service distribution to take place.

Currently I have contributed $20,000 of which $18,000 before tax and $2,000 after tax
The before tax will remain in my 401k correct?

Regarding the after tax I would request an in-service distribution. Regarding the gains of the after tax does one put that in a traditional IRA?
Currently I only have a Roth IRA setup. So in this case I would roll the contribution about over the $18000 to the Roth and put the gains into a traditional IRA correct?

My 401k provider would provide 2 checked - FBO (my name) Traditional IRA account number and FBO (my name) Roth IRA account number?

Why not just leave the gains in my after tax 401k account?
Also, is the above correct?

Thanks,

Henry
investor997
Posts: 684
Joined: Tue Feb 07, 2017 2:23 pm

Re: mega backdoor help needed

Post by investor997 »

henry001 wrote: Wed Dec 13, 2017 9:54 amCurrently I have contributed $20,000 of which $18,000 before tax and $2,000 after tax
The before tax will remain in my 401k correct?
Yep.
Regarding the after tax I would request an in-service distribution. Regarding the gains of the after tax does one put that in a traditional IRA?
Currently I only have a Roth IRA setup. So in this case I would roll the contribution about over the $18000 to the Roth and put the gains into a traditional IRA correct?
I think it depends on how large the pretax gains on the after tax portion are. If there are a lot of pretax gains, it might make sense to roll them into a separate Rollover IRA, but be aware that if you do this, it may complicate your ability to do a regular back door Roth IRA contribution in the future. The way around it is to subsequently reverse-roll it *back* into the 401k, assuming your 401k allows it. in your case, the after-tax account is only worth $2000 so the pretax gains might be only a few hundred dollars of that - you'll have to determine this value from your 401k account. You might decide it's easier to just roll everything into the Roth and pay the taxes on the gains.
My 401k provider would provide 2 checked - FBO (my name) Traditional IRA account number and FBO (my name) Roth IRA account number?
Yep. If your 401k is with Fidelity (or someone similar who offers IRAs) then you may be able to roll the money over electronically without having to wait for them to mail any checks. That's what I do.
Why not just leave the gains in my after tax 401k account?
Also, is the above correct?
Because the IRS won't let you. You have to roll over after-tax and pretax dollars in equal proportions.
Topic Author
henry001
Posts: 104
Joined: Sun Sep 21, 2008 9:45 pm

Re: mega backdoor help needed

Post by henry001 »

Hello,

Great information above- much thanks.

I checked with my 401k provider and my gains are about $2800 for the year. I am currently in the 25% tax bracket wouldn't it be better if I just pay the taxes on the gains right now instead of rolling over the gains into a T-IRA?

Any suggestions?
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Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: mega backdoor help needed

Post by Earl Lemongrab »

investor997 wrote: Wed Dec 13, 2017 10:14 am Because the IRS won't let you. You have to roll over after-tax and pretax dollars in equal proportions.
To clarify, I think you meant a proportionate share of the pretax earnings with the after-tax.
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Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: mega backdoor help needed

Post by Earl Lemongrab »

henry001 wrote: Thu Dec 14, 2017 9:57 am I checked with my 401k provider and my gains are about $2800 for the year. I am currently in the 25% tax bracket wouldn't it be better if I just pay the taxes on the gains right now instead of rolling over the gains into a T-IRA?
As I mentioned above, only the share of the earnings that are due to the after-tax contributions need to be distributed. I doubt the after-tax contributions have earnings of more than 100% unless that money has been in the 401(k) for a long time.
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cockersx3
Posts: 707
Joined: Sun Apr 17, 2016 3:55 pm

Re: mega backdoor help needed

Post by cockersx3 »

henry001 wrote: Thu Dec 14, 2017 9:57 am Hello,

Great information above- much thanks.

I checked with my 401k provider and my gains are about $2800 for the year. I am currently in the 25% tax bracket wouldn't it be better if I just pay the taxes on the gains right now instead of rolling over the gains into a T-IRA?

Any suggestions?
I assume that the $2800 gain is either for the entire 401k account, or is the total gain for 2017 - correct? If you roll over the after-tax contributions to the Roth, you'll only need to pay tax on the proportion of your 401k gains attributable to the after-tax portion you're rolling over. Provided that the after-tax amount you are rolling over has not been in your account for very long (ie less than a year), this shouldn't be much. For me this has never been more than a few hundred bucks at a time,if that, and I do rollovers about 2-3 times a year (my plan allows up to 4).

For very small amounts like this, its usually much easier to just pay the tax on the (usually tiny) amount of gains and roll everything into the Roth, rather than split off the after-tax portion to an IRA. This is what I typically do. I remember discussing this with my 401k provider during my first rollover, and he seemed to imply that rolling over the after-tax portion to an IRA would be atypical unless it's a very large amount - he pretty much assumed that I would pay tax on the gain attributable to my after-tax contributions.

Another question - I saw in one of your posts that you will be receiving a check for the rollover amount. Have you considered maintaining a Roth account at the same provider as the one that services your 401(k)? Depending on who your 401(k) provider is, it may be much easier to go that route. In my case, most of my money is invested with Vanguard but my 401k provider is Fidelity. While I'd prefer to keep my Roth with Vanguard, I elected t instead maintain my Roth at Fidelity to avoid the need for handing paper checks. This allows me to simply call Fidelity a few times a year and initiate the rollover over the phone, and the money shows up in the Roth within a few days with no paper checks or forms. Very easy. :beer
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: mega backdoor help needed

Post by retiredjg »

henry001 wrote: Thu Dec 14, 2017 9:57 am Hello,

Great information above- much thanks.

I checked with my 401k provider and my gains are about $2800 for the year. I am currently in the 25% tax bracket wouldn't it be better if I just pay the taxes on the gains right now instead of rolling over the gains into a T-IRA?

Any suggestions?
You apparently have deferred $18k on income into traditional 401k and have put $2k into the after-tax account. The after-tax account can be rolled out to IRA. Only the earnings on the $2k have to be rolled out with the $2k, not the entire $2.8k.

You can choose whether to pay tax on those earnings now or later. If the after-tax money and its earnings both go to Roth IRA, you pay tax now. If the earnings go to tIRA, you do not pay tax now. Some people do not want to do this because the tIRA is in the way of the ordinary back door which they are also using.

Whatever you do, keep detailed records on how every penny gets into Roth IRA and keep those records till your mid 60s. You will need that information if you ever need to take money from Roth IRA before age 59.5.
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AllMostThere
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Joined: Sat Dec 31, 2016 1:04 pm

Re: mega backdoor help needed

Post by AllMostThere »

The assumption is that you have $0 in a current or new tIRA (total of all tIRA balances). Another strategy that I use, is to use in service distribution of the 401K after tax contributions to the Roth IRA and the after tax gains to the tIRA. Then roll the tIRA back into the 401K. Rinse and repeat the process every year. No taxes will be due, just some more paperwork, etc. come tax time :happy
This also assumes that your 401K allows rolling of tIRA into it. If it allows in service distribution then high likelihood it also allows tIRA rollovers. Key for this strategy is to keep the tIRA balance at zero by 12/31. Very helpful and streamlined if your tIRA & Roth IRA is with same custodian as your 401K. Mine is with Fidelity and they are very educated on this process. Good luck.
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