streamline mega backdoor roth conversions?

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cadk
Posts: 12
Joined: Wed Dec 20, 2017 5:43 pm

streamline mega backdoor roth conversions?

Post by cadk » Tue Feb 13, 2018 3:04 pm

Hi All,

I completed my first megaback door roth conversion today. The megacorp I work for supports after-tax 401k contributions and in-service distributions. Based on what I had read here, and on other sites, I was planning on doing conversions after every pay check or every month to minimize taxes on any gains. I had hoped that given both megacorp's 401K and my Roth IRA was with Vanguard that the process would be more turnkey.

For my part I had to make 2 phone calls; one to request the forms (not available online in my account) and one to provide additional info request (turned out to not be required). For some reason Vanguard were also not able to buy the requested fund (VTSAX) and dumped the money into my settlement fund so I also had to make the purchase myself online. The time elapsed was actually longer than my next pay period and given the various phone calls with Vanguard I distinctly got the impression that having two or more conversions in-flight would be an additional headache.

The first time I actually attempted this I screwed up and did an IRR (in-plan roth) conversion by accident. On the plus side my megacorp's 401K is pretty good and the IRR was really painless. At this point in time I am actually debating either just doing IRR each pay-check or just doing the conversion once every 3 months.

I was curious for other folks doing this regularly (where both accounts are with Vanguard):

1. Are the required forms available for download in your Vanguard account?
2. Are you able to do an in-service distribution and rollover online?
3. Can I just send a signed letter with all the pertinent details to initiate both the withdrawal and rollover?
The associate said I need to request the kit every time, but that is a 5 - 7 days delay + a 10 min phone call that I would prefer to skip.

I am curious if #1 & #2 are just issues related to my megacorp's plan and Vanguard actually supports this.

Thanks

Spirit Rider
Posts: 8345
Joined: Fri Mar 02, 2007 2:39 pm

Re: streamline mega backdoor roth conversions?

Post by Spirit Rider » Tue Feb 13, 2018 10:53 pm

You might have another option. Is the IRR online or easier. Also, if your plan allows IRRs and in-service rollovers, it quite likely allows in-service rollovers of IRRs from after-tax accounts.

If so, the option might be to do IRRs each pay period and then do a rollover periodically. If you are an HCE, it might make sense to wait to rollover the previous year's after-tax contribution IRRs until after ACP testing results (3/15).

cadk
Posts: 12
Joined: Wed Dec 20, 2017 5:43 pm

Re: streamline mega backdoor roth conversions?

Post by cadk » Wed Feb 14, 2018 1:06 am

If so, the option might be to do IRRs each pay period and then do a rollover periodically. If you are an HCE, it might make sense to wait to rollover the previous year's after-tax contribution IRRs until after ACP testing results (3/15).
That's a great idea. From reading the plan's description it doesn't seem like I can do a rollover from the IRR, but I will ask. I completely forgot about the HCE requirement. Based on the thresholds it's probably prudent I wait until after 3/15 before rolling more than 5% out of the plan.

Thanks!

shess
Posts: 25
Joined: Wed May 17, 2017 12:02 am

Re: streamline mega backdoor roth conversions?

Post by shess » Wed Feb 14, 2018 2:29 am

cadk wrote:
Tue Feb 13, 2018 3:04 pm
I was curious for other folks doing this regularly (where both accounts are with Vanguard):

1. Are the required forms available for download in your Vanguard account?
2. Are you able to do an in-service distribution and rollover online?
3. Can I just send a signed letter with all the pertinent details to initiate both the withdrawal and rollover?
The associate said I need to request the kit every time, but that is a 5 - 7 days delay + a 10 min phone call that I would prefer to skip.

I am curious if #1 & #2 are just issues related to my megacorp's plan and Vanguard actually supports this.
Over the years, my (ex-)employer gradually made things better and better. Initially, it was an annoying back-and-forth with forms and stuff, then it got to where it was talking to a Vanguard rep who had to read a long scary tax-related document, and eventually it got to be a full-online thing. This was over the course of like 5 years or something, so it felt like they were really having to work hard to make it happen, and my impression was that it wasn't so much whether Vanguard could do it as a technical question, it was more about who was taking liability for various legal issues, and working that down to where everyone was happy about it.

I don't properly recall the progression of things, but I do recall that in some years, the after-tax-to-Roth-401k path and the after-tax-to-Roth-IRA paths were different in terms of convenience. But for the last year or two I was there, I'm pretty sure it was something I could do entirely online. I still only did it as two transactions, because I'm lazy and I never found arguments for per-paycheck transactions to be compelling enough to warrant that amount of work.

bada bing
Posts: 54
Joined: Fri Sep 09, 2016 10:45 am

Re: streamline mega backdoor roth conversions?

Post by bada bing » Wed Feb 14, 2018 9:26 am

My employer's 401K is with Fidelity. It is just one call, no paperwork.

One thing that I do that could be useful in cutting down the number of
conversions. I pay the deductible contributions first until reaching the limit,
and then the contributions roll into after tax. My employer pays match on any
contributions - deductible or after tax - but does not true up. I reach the deductible
contribution cap in July and then switch to after tax for the rest of the year. I only
need to deal with after tax accumulation for 1/2 the year.

That contribution schedule is handy for me because I reach the FICA tax cap in Sept,
so the tax withholding balances out. I get the 401K deduction until July and then get
no FICA tax after Sept which somewhat balances paycheck size through the year.

Pigeye Brewster
Posts: 183
Joined: Thu Oct 05, 2017 7:33 pm

Re: streamline mega backdoor roth conversions?

Post by Pigeye Brewster » Wed Feb 14, 2018 10:05 am

cadk wrote:
Wed Feb 14, 2018 1:06 am
If so, the option might be to do IRRs each pay period and then do a rollover periodically. If you are an HCE, it might make sense to wait to rollover the previous year's after-tax contribution IRRs until after ACP testing results (3/15).
That's a great idea. From reading the plan's description it doesn't seem like I can do a rollover from the IRR, but I will ask. I completely forgot about the HCE requirement. Based on the thresholds it's probably prudent I wait until after 3/15 before rolling more than 5% out of the plan.
2017 was my first year for mega backdoor Roth and I went the IRR route because of the ACP testing. I concluded dealing with a testing problem would be easier if the funds were still in the plan.

cadk
Posts: 12
Joined: Wed Dec 20, 2017 5:43 pm

Re: streamline mega backdoor roth conversions?

Post by cadk » Fri Feb 23, 2018 12:24 pm

Thanks for the responses. In the end I decided to just go the IRR route each pay check for convenience and concerns over the ACP testing.

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