No Roth 401k - Workaround?

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totalnoobie
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No Roth 401k - Workaround?

Post by totalnoobie » Mon Jun 11, 2018 3:47 pm

Asking for a friend who just got a new job with a 401k, but no roth option.

Can he do in-service rollovers to IRA and then convert to Roth as a work around? Any potential issues with this route?

1) Contribute maximum to traditional 401k
2) Do an in-service roll over (prior to the end of the year) to traditional IRA
3) Convert traditional IRA to Roth IRA (prior to end of the year)

Any insights, comments, suggestions appreciated

bloom2708
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Re: No Roth 401k - Workaround?

Post by bloom2708 » Mon Jun 11, 2018 3:53 pm

1. Max pre-tax savings to $18,500
2. Use the tax savings + additional money to fund the Roth IRA to $5,500

Do not pay tax now with a 30-40 year window.
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retiredjg
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Re: No Roth 401k - Workaround?

Post by retiredjg » Mon Jun 11, 2018 3:59 pm

Not having a Roth Option is not much of an issue. Most people actually need the tax-deferred version, not Roth. But Roth can be handy for some.

No, the money cannot be rolled to IRA or Roth IRA until he leaves employment. Even then, rolling to Roth is not necessarily the best choice.

I also suggest putting money into the traditional 401k and putting money into Roth IRA. How much goes into which can vary depending on the situation such as how good is the 401k? How much is being saved? etc.

soccerrules
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Re: No Roth 401k - Workaround?

Post by soccerrules » Mon Jun 11, 2018 4:13 pm

not sure I understand the "in-service rollover".

If his/her company does not have a Roth 401K --then he/she should contribute to 401K

If he/she wants to do a Roth IRA - Then just use after tax money (savings account/brokerage) to contribute to Roth IRA directly. If he/she is not eligible for direct Roth IRA contribution (due to IRS limits) then they will need to use the Backdoor method.
Backdoor Roth consisting of making a regular non-deductible Traditional IRA contribution into a Trad IRA account. Then creating a separate Roth IRA account and moving the money over to the Roth IRA account. At tax time filling out Form 8606.
* note - Be aware of the pro rata rule if he/she currently already has a Trad IRA account.
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MrPotatoHead
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Re: No Roth 401k - Workaround?

Post by MrPotatoHead » Mon Jun 11, 2018 8:40 pm

Your friend might want to write up a paper and give it to their manager and HR suggesting change to the 401K plan. I have found employers malleable on the topic.

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David Jay
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Re: No Roth 401k - Workaround?

Post by David Jay » Mon Jun 11, 2018 10:08 pm

While I have not seen the regulation, others on this forum have stated that in-service rollovers from a classic 401K are forbidden by law until age 59.5, and even then only if the plan description allows it (mine does, I rolled everything out with an in-service distribution at age 59.51).
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Spirit Rider
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Re: No Roth 401k - Workaround?

Post by Spirit Rider » Mon Jun 11, 2018 10:47 pm

The IRS relevant regulation section/subsection is 26 CFR 1.401(k)-1 - Certain cash or deferred arrangements, (d) Distribution limitation.

This regulation prohibits the non-hardship in-service withdrawal/rollover of employee elective contributions prior to age 59 1/2.

So the bottom line answer for the OP is; "no can do".

Alan S.
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Re: No Roth 401k - Workaround?

Post by Alan S. » Tue Jun 12, 2018 12:28 pm

totalnoobie wrote:
Mon Jun 11, 2018 3:47 pm
Asking for a friend who just got a new job with a 401k, but no roth option.

Can he do in-service rollovers to IRA and then convert to Roth as a work around? Any potential issues with this route?

1) Contribute maximum to traditional 401k
2) Do an in-service roll over (prior to the end of the year) to traditional IRA
3) Convert traditional IRA to Roth IRA (prior to end of the year)

Any insights, comments, suggestions appreciated

The fact that the plan does not offer a designated Roth does not mean that it does not allow after tax (aka employee) contributions to a separate sub account. While most such plans likely have also adopted the Roth option, some may not have. Therefore, it is worth checking to see if this plan allows after tax contributions, just in case.

The after tax contributions can be distributed separately in most cases, some very frequently. This opportunity to contribute large amounts (subject to the Sec 415(c) limit) and then roll the balance to your Roth IRA is often referred to as a "mega back door Roth", but the technical IRS verbiage is a "qualified rollover contribution."

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Earl Lemongrab
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Re: No Roth 401k - Workaround?

Post by Earl Lemongrab » Wed Jun 13, 2018 11:59 am

Alan S. wrote:
Tue Jun 12, 2018 12:28 pm
The fact that the plan does not offer a designated Roth does not mean that it does not allow after tax (aka employee) contributions to a separate sub account. While most such plans likely have also adopted the Roth option, some may not have.
It does happen sometimes. Megacorp had after-tax for a long time, at least since 2007 when I looked, but I'm sure much longer. They didn't add Roth (and in-plan Roth rollovers) until a few years ago when they changed custodians.
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samsoes
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Re: No Roth 401k - Workaround?

Post by samsoes » Wed Jun 13, 2018 12:30 pm

totalnoobie wrote:
Mon Jun 11, 2018 3:47 pm
Asking for a friend who just got a new job with a 401k, but no roth option.

Can he do in-service rollovers to IRA and then convert to Roth as a work around? Any potential issues with this route?

1) Contribute maximum to traditional 401k
2) Do an in-service roll over (prior to the end of the year) to traditional IRA
3) Convert traditional IRA to Roth IRA (prior to end of the year)

Any insights, comments, suggestions appreciated
If he has a pre-existing rollover Traditional IRA from prior employers, he can contribute to the pre-tax 401k of the current employer and perform a Roth conversion on the existing TIRA for the same amount of the 401k contribution. He should also pay estimated income tax for the difference between the tax withheld from his paycheck before and after the 401k contribution, or increase his withholding by the same amount.
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