Mega Backdoor Roth Mechanics

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halldr177
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Mega Backdoor Roth Mechanics

Post by halldr177 » Sun Feb 25, 2018 9:57 pm

Hi everyone!

I've been reading up on in preparation for doing my first Mega Backdoor Roth later this year. My employer plan is through Fidelity and my employer allows after-tax contributions. After speaking with a Fidelity rep and doing some research, it seems like I will have the ability to roll over the after tax contributions portion to a Roth IRA and the earnings on the after tax contributions to a Traditional IRA (which I can keep or roll to Roth later).

However, when I'm reading on the IRS website (https://www.irs.gov/retirement-plans/ro ... ment-plans), it says that rolling over just the after-tax amounts is not allowed:

Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?

No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account.

Does this mean some of my contributions to the traditional 401k account (i.e. pretax) need to be pulled out as well, or are they simply referring to earnings on after-tax contributions as "pretax" and not meaning traditional 401k balances?

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tfb
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Re: Mega Backdoor Roth Mechanics

Post by tfb » Sun Feb 25, 2018 10:25 pm

halldr177 wrote:
Sun Feb 25, 2018 9:57 pm
However, when I'm reading on the IRS website (https://www.irs.gov/retirement-plans/ro ... ment-plans), it says that rolling over just the after-tax amounts is not allowed
It says rolling over just the after-tax amounts without the associated earnings is not allowed. It's OK if you roll over the after-tax amounts together with the associated earnings.
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investor997
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Re: Mega Backdoor Roth Mechanics

Post by investor997 » Mon Feb 26, 2018 12:13 am

Although it isn't intuitively obvious, Fidelity maintains a separate "account" in your 401k for just the after-tax contributions. For example, suppose you have $100K in your 401k which is made up of pretax contributions and their earnings. You recently started after-tax contributions and let them build up for a bit. For argument's sake, suppose you now have $1K of after-tax contributions and because the market moved up, $50 in pre-tax earnings on the $1K after-tax contributions. The total value of the 401k is $101,050, but for Mega rollover purposes, the $1,050 is treated separately by Fidelity. When you do the Mega Back Door rollover, you will convert all $1,050 at once. The pre-existing $100K can be left untouched.

The $1,000 in after tax contributions go into your Roth IRA. For the remaining $50 in pretax earnings you have two choices:
1) Roll it into a traditional Rollover IRA - pay no taxes
2) Roll (convert) it into your Roth IRA. You'll pay taxes on the $50.

I do this all the time with Fidelity - usually once a month. I like to get the after-tax $$ out of the 401k as quickly as possible before it earns anything. I always choose option 2). If done frequently enough, at year's end the total taxable amount will be pretty small. This depends on your particular 401k, however. Mine lets me do in-service rollovers as often as I want. Not all plans will let you do this.

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Earl Lemongrab
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Re: Mega Backdoor Roth Mechanics

Post by Earl Lemongrab » Mon Feb 26, 2018 12:08 pm

It's not even legal to distribute your pretax contributions unless you're 59-1/2 or other qualifying event.

If what you asked was really a thing, then Mega Backdoor wouldn't even exist. As noted, the separate accounting is what opens this back door.
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scalpel
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Re: Mega Backdoor Roth Mechanics

Post by scalpel » Wed Sep 12, 2018 7:57 pm

investor997 wrote:
Mon Feb 26, 2018 12:13 am
Although it isn't intuitively obvious, Fidelity maintains a separate "account" in your 401k for just the after-tax contributions. For example, suppose you have $100K in your 401k which is made up of pretax contributions and their earnings. You recently started after-tax contributions and let them build up for a bit. For argument's sake, suppose you now have $1K of after-tax contributions and because the market moved up, $50 in pre-tax earnings on the $1K after-tax contributions. The total value of the 401k is $101,050, but for Mega rollover purposes, the $1,050 is treated separately by Fidelity. When you do the Mega Back Door rollover, you will convert all $1,050 at once. The pre-existing $100K can be left untouched.

The $1,000 in after tax contributions go into your Roth IRA. For the remaining $50 in pretax earnings you have two choices:
1) Roll it into a traditional Rollover IRA - pay no taxes
2) Roll (convert) it into your Roth IRA. You'll pay taxes on the $50.

I do this all the time with Fidelity - usually once a month. I like to get the after-tax $$ out of the 401k as quickly as possible before it earns anything. I always choose option 2). If done frequently enough, at year's end the total taxable amount will be pretty small. This depends on your particular 401k, however. Mine lets me do in-service rollovers as often as I want. Not all plans will let you do this.
Question on this process - I have already maxed my roth IRA contributions this year with 5500. I then did my first megaroth rollover later and rolled the small amount of earnings my after tax contributions had made into a traditional IRA. However, having already maxed my roth IRA contributions, will the additional contribution to a traditional IRA put me over the IRA contribution limit for this year?

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Earl Lemongrab
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Re: Mega Backdoor Roth Mechanics

Post by Earl Lemongrab » Thu Sep 13, 2018 12:06 am

scalpel wrote:
Wed Sep 12, 2018 7:57 pm
Question on this process - I have already maxed my roth IRA contributions this year with 5500. I then did my first megaroth rollover later and rolled the small amount of earnings my after tax contributions had made into a traditional IRA. However, having already maxed my roth IRA contributions, will the additional contribution to a traditional IRA put me over the IRA contribution limit for this year?
Rollovers or conversions are not contributions.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

ATLCPA
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Joined: Tue Oct 04, 2016 8:07 am

Re: Mega Backdoor Roth Mechanics

Post by ATLCPA » Thu Sep 13, 2018 11:08 pm

investor997 wrote:
Mon Feb 26, 2018 12:13 am
Although it isn't intuitively obvious, Fidelity maintains a separate "account" in your 401k for just the after-tax contributions. For example, suppose you have $100K in your 401k which is made up of pretax contributions and their earnings. You recently started after-tax contributions and let them build up for a bit. For argument's sake, suppose you now have $1K of after-tax contributions and because the market moved up, $50 in pre-tax earnings on the $1K after-tax contributions. The total value of the 401k is $101,050, but for Mega rollover purposes, the $1,050 is treated separately by Fidelity. When you do the Mega Back Door rollover, you will convert all $1,050 at once. The pre-existing $100K can be left untouched.

The $1,000 in after tax contributions go into your Roth IRA. For the remaining $50 in pretax earnings you have two choices:
1) Roll it into a traditional Rollover IRA - pay no taxes
2) Roll (convert) it into your Roth IRA. You'll pay taxes on the $50.

I do this all the time with Fidelity - usually once a month. I like to get the after-tax $$ out of the 401k as quickly as possible before it earns anything. I always choose option 2). If done frequently enough, at year's end the total taxable amount will be pretty small. This depends on your particular 401k, however. Mine lets me do in-service rollovers as often as I want. Not all plans will let you do this.
Do you have to call to initiate this once at month with Fidelity or can you initiate online?

Kind Regards,

investor997
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Joined: Tue Feb 07, 2017 3:23 pm

Re: Mega Backdoor Roth Mechanics

Post by investor997 » Thu Sep 13, 2018 11:15 pm

ATLCPA wrote:
Thu Sep 13, 2018 11:08 pm
investor997 wrote:
Mon Feb 26, 2018 12:13 am
Although it isn't intuitively obvious, Fidelity maintains a separate "account" in your 401k for just the after-tax contributions. For example, suppose you have $100K in your 401k which is made up of pretax contributions and their earnings. You recently started after-tax contributions and let them build up for a bit. For argument's sake, suppose you now have $1K of after-tax contributions and because the market moved up, $50 in pre-tax earnings on the $1K after-tax contributions. The total value of the 401k is $101,050, but for Mega rollover purposes, the $1,050 is treated separately by Fidelity. When you do the Mega Back Door rollover, you will convert all $1,050 at once. The pre-existing $100K can be left untouched.

The $1,000 in after tax contributions go into your Roth IRA. For the remaining $50 in pretax earnings you have two choices:
1) Roll it into a traditional Rollover IRA - pay no taxes
2) Roll (convert) it into your Roth IRA. You'll pay taxes on the $50.

I do this all the time with Fidelity - usually once a month. I like to get the after-tax $$ out of the 401k as quickly as possible before it earns anything. I always choose option 2). If done frequently enough, at year's end the total taxable amount will be pretty small. This depends on your particular 401k, however. Mine lets me do in-service rollovers as often as I want. Not all plans will let you do this.
Do you have to call to initiate this once at month with Fidelity or can you initiate online?

Kind Regards,
I have to call. There's no way to do it online. Their system blocks the transaction if you attempt to do it online from their Netbenefits site. I once asked a rep why this was the case and I got a somewhat vague answer about the tax implications of Roth IRA conversions.

ATLCPA
Posts: 13
Joined: Tue Oct 04, 2016 8:07 am

Re: Mega Backdoor Roth Mechanics

Post by ATLCPA » Sat Sep 15, 2018 7:04 am

investor997 wrote:
Thu Sep 13, 2018 11:15 pm
ATLCPA wrote:
Thu Sep 13, 2018 11:08 pm
investor997 wrote:
Mon Feb 26, 2018 12:13 am
Although it isn't intuitively obvious, Fidelity maintains a separate "account" in your 401k for just the after-tax contributions. For example, suppose you have $100K in your 401k which is made up of pretax contributions and their earnings. You recently started after-tax contributions and let them build up for a bit. For argument's sake, suppose you now have $1K of after-tax contributions and because the market moved up, $50 in pre-tax earnings on the $1K after-tax contributions. The total value of the 401k is $101,050, but for Mega rollover purposes, the $1,050 is treated separately by Fidelity. When you do the Mega Back Door rollover, you will convert all $1,050 at once. The pre-existing $100K can be left untouched.

The $1,000 in after tax contributions go into your Roth IRA. For the remaining $50 in pretax earnings you have two choices:
1) Roll it into a traditional Rollover IRA - pay no taxes
2) Roll (convert) it into your Roth IRA. You'll pay taxes on the $50.

I do this all the time with Fidelity - usually once a month. I like to get the after-tax $$ out of the 401k as quickly as possible before it earns anything. I always choose option 2). If done frequently enough, at year's end the total taxable amount will be pretty small. This depends on your particular 401k, however. Mine lets me do in-service rollovers as often as I want. Not all plans will let you do this.
Do you have to call to initiate this once at month with Fidelity or can you initiate online?

Kind Regards,
I have to call. There's no way to do it online. Their system blocks the transaction if you attempt to do it online from their Netbenefits site. I once asked a rep why this was the case and I got a somewhat vague answer about the tax implications of Roth IRA conversions.
Perfect, thanks. Just wanted to see if the process was the same/similar at Fidelity.

Kind Regards,

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