(Mega) Backdoor Roth

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Topic Author
oinkyboinky
Posts: 116
Joined: Thu Apr 16, 2015 2:14 pm

(Mega) Backdoor Roth

Post by oinkyboinky » Tue Jan 08, 2019 9:07 pm

Currently, my traditional IRA at Vanguard has a balance of $58,629.

This amount is comprised of (employer) 401k rollovers and direct (deductible) contributions (that have already been deducted in previous tax years).

I have a few questions regarding this account:

1. If I make non-deducible contributions to this account (the only kind I can make, since I participate in a retirement account at work and make over the threshold for deductible contributions), can I simply convert those contributions only to a Roth IRA (thereby completing a backdoor contribution to the Roth IRA), or do I need to rollover the entire IRA balance to my work 401k first, to avoid unnecessary tax consequences? (e.g., roll over the $58,629 to the 401k, and then make a $5,500 non-deductible contribution to the IRA, then convert it to a Roth IRA?).

2. Is there any benefit to converting all $58,629 to a Roth IRA?

3. My 401k at work has less then desirable funds (ER about .6%). If I need to transfer the entire $58,629 balance back to the work 401k to pull off a mega backdoor roth contribution (assuming my 401k plan allows in-service distributions and post-tax contributions), would it be worth it since the $58k will now have a higher expense ratio?

Thank you for any help.

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Duckie
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Re: (Mega) Backdoor Roth

Post by Duckie » Tue Jan 08, 2019 11:09 pm

oinkyboinky wrote:If I make non-deducible contributions to this account (the only kind I can make, since I participate in a retirement account at work and make over the threshold for deductible contributions), can I simply convert those contributions only to a Roth IRA (thereby completing a backdoor contribution to the Roth IRA),
No. See pro-rata rule and IRS Form 8606 line 6.
or do I need to rollover the entire IRA balance to my work 401k first, to avoid unnecessary tax consequences? (e.g., roll over the $58,629 to the 401k, and then make a $5,500 non-deductible contribution to the IRA, then convert it to a Roth IRA?).
Yes.
Is there any benefit to converting all $58,629 to a Roth IRA?
Well, it gets it all into a Roth IRA which is good, but it costs a lot in taxes which is bad.
My 401k at work has less then desirable funds (ER about .6%). If I need to transfer the entire $58,629 balance back to the work 401k to pull off a mega backdoor roth contribution (assuming my 401k plan allows in-service distributions and post-tax contributions), would it be worth it since the $58k will now have a higher expense ratio?
To me 0.60% would be worth it.

sarabayo
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Re: (Mega) Backdoor Roth

Post by sarabayo » Tue Jan 08, 2019 11:19 pm

Could you potentially open a solo 401(k) with better fund choices and ERs and use that to shelter your traditional IRA instead of using your employer's 401(k)? You'd need to make some self-employed income outside your job before being able to open a solo 401(k), though.

Topic Author
oinkyboinky
Posts: 116
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Re: (Mega) Backdoor Roth

Post by oinkyboinky » Wed Jan 09, 2019 1:10 am

sarabayo wrote:
Tue Jan 08, 2019 11:19 pm
Could you potentially open a solo 401(k) with better fund choices and ERs and use that to shelter your traditional IRA instead of using your employer's 401(k)? You'd need to make some self-employed income outside your job before being able to open a solo 401(k), though.
I have rental income; could I possibly make that some sort of "business" by incorporating and do it that way?

Topic Author
oinkyboinky
Posts: 116
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Re: (Mega) Backdoor Roth

Post by oinkyboinky » Wed Jan 09, 2019 1:14 am

Duckie wrote:
Tue Jan 08, 2019 11:09 pm
oinkyboinky wrote:If I make non-deducible contributions to this account (the only kind I can make, since I participate in a retirement account at work and make over the threshold for deductible contributions), can I simply convert those contributions only to a Roth IRA (thereby completing a backdoor contribution to the Roth IRA),
No. See pro-rata rule and IRS Form 8606 line 6.
or do I need to rollover the entire IRA balance to my work 401k first, to avoid unnecessary tax consequences? (e.g., roll over the $58,629 to the 401k, and then make a $5,500 non-deductible contribution to the IRA, then convert it to a Roth IRA?).
Yes.
Is there any benefit to converting all $58,629 to a Roth IRA?
Well, it gets it all into a Roth IRA which is good, but it costs a lot in taxes which is bad.
My 401k at work has less then desirable funds (ER about .6%). If I need to transfer the entire $58,629 balance back to the work 401k to pull off a mega backdoor roth contribution (assuming my 401k plan allows in-service distributions and post-tax contributions), would it be worth it since the $58k will now have a higher expense ratio?
To me 0.60% would be worth it.
Thank you for the response.

What do you think the best way to go about this is?

For example, should I transfer the entire IRA balance to my work 401k, then periodically transfer a certain amount back to the IRA, convert it to Roth IRA, and then repeat the process? Do I need to figure out the different types of funds in my IRA to determine how much I can transfer back and convert without incurring taxes? What other limits should I take into account (if there are any)?

Any guidance on what you think the best method is would be appreciated :sharebeer

sarabayo
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Re: (Mega) Backdoor Roth

Post by sarabayo » Wed Jan 09, 2019 1:21 am

oinkyboinky wrote:
Wed Jan 09, 2019 1:10 am
sarabayo wrote:
Tue Jan 08, 2019 11:19 pm
Could you potentially open a solo 401(k) with better fund choices and ERs and use that to shelter your traditional IRA instead of using your employer's 401(k)? You'd need to make some self-employed income outside your job before being able to open a solo 401(k), though.
I have rental income; could I possibly make that some sort of "business" by incorporating and do it that way?
You don't even need to incorporate or anything, just have some self-employment income. (By default if you don't register an LLC or incorporate or whatever, you are already a Sole Proprietor business.) I think rental income counts as self-employment income, but I'm not an expert :)

needadvise1
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Re: (Mega) Backdoor Roth

Post by needadvise1 » Wed Jan 09, 2019 1:35 am

Check first if Passive income applies (most rentals). I am not a CPA.

sarabayo
Posts: 150
Joined: Fri Jun 29, 2018 6:59 pm

Re: (Mega) Backdoor Roth

Post by sarabayo » Wed Jan 09, 2019 1:40 am

Here is a thread on BiggerPockets about it. It looks like you probably can't use rental income to fund a solo 401(k) :(

Topic Author
oinkyboinky
Posts: 116
Joined: Thu Apr 16, 2015 2:14 pm

Re: (Mega) Backdoor Roth

Post by oinkyboinky » Wed Jan 09, 2019 5:04 pm

Thank you for the help everyone.

I’m still deciding the best way to go about the backdoor.

Should I simply move all IRA funds to work 401k, then transfer that entire balance back to the IRA, then convert? Or do I need to figure out how much hasn’t been deducted already?

Any help is appreciated!

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Duckie
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Re: (Mega) Backdoor Roth

Post by Duckie » Wed Jan 09, 2019 7:04 pm

oinkyboinky wrote:What do you think the best way to go about this is?

For example, should I transfer the entire IRA balance to my work 401k, then periodically transfer a certain amount back to the IRA, convert it to Roth IRA, and then repeat the process?
It's my understanding that IRA assets you roll to a 401k in most cases cannot be rolled out whenever you want, if at all. Usually they're stuck until you quit. If that is something you want/need to do, then check with your 401k plan first.

The purpose of rolling the current IRA to the 401k is to "hide" the pre-tax assets to allow for the backdoor method with minimal taxes. If you intend to convert that $58K TIRA to a Roth IRA over a period of years you can just leave the money in the IRA, convert some each year, and pay the pro-rata share of taxes. You'd be paying in dribs and drabs instead of one lump-sum payment.
Do I need to figure out the different types of funds in my IRA to determine how much I can transfer back and convert without incurring taxes?
No. If you roll to the 401k plan you will be moving cash so what the IRA funds are doesn't matter; and pre-tax to pre-tax is not taxable. If you find you are allowed to roll some of the previously rolled assets back into an IRA, again you're moving cash. The conversion will be taxable.

retiredjg
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Re: (Mega) Backdoor Roth

Post by retiredjg » Wed Jan 09, 2019 7:32 pm

oinkyboinky wrote:
Tue Jan 08, 2019 9:07 pm
1. If I make non-deducible contributions to this account (the only kind I can make, since I participate in a retirement account at work and make over the threshold for deductible contributions), can I simply convert those contributions only to a Roth IRA (thereby completing a backdoor contribution to the Roth IRA)...
No. It does not work that way.

or do I need to rollover the entire IRA balance to my work 401k first, to avoid unnecessary tax consequences? (e.g., roll over the $58,629 to the 401k, and then make a $5,500 non-deductible contribution to the IRA, then convert it to a Roth IRA?).
Yes.

2. Is there any benefit to converting all $58,629 to a Roth IRA?
Only if you are in a very low tax bracket and have the money in savings to pay the taxes.


3. My 401k at work has less then desirable funds (ER about .6%). If I need to transfer the entire $58,629 balance back to the work 401k to pull off a mega backdoor roth contribution (assuming my 401k plan allows in-service distributions and post-tax contributions), would it be worth it since the $58k will now have a higher expense ratio?
If your goal is to use the mega back door, you can leave the IRA balance where it is.

If your goal is to use the ordinary back door, you need to roll the IRA into the 401k.

crazycatman
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Re: (Mega) Backdoor Roth

Post by crazycatman » Wed Jan 09, 2019 10:15 pm

sarabayo wrote:
Wed Jan 09, 2019 1:40 am
Here is a thread on BiggerPockets about it. It looks like you probably can't use rental income to fund a solo 401(k) :(

How about a self directed SEP? From what I understand, you can fund it, buy property with it, collect rent and pay expenses through it, and you never have to pay taxes on the gains, but you can’t touch any of the gains, they stay in the SEP.

crazycatman
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Re: (Mega) Backdoor Roth

Post by crazycatman » Wed Jan 09, 2019 10:17 pm

crazycatman wrote:
Wed Jan 09, 2019 10:15 pm
sarabayo wrote:
Wed Jan 09, 2019 1:40 am
Here is a thread on BiggerPockets about it. It looks like you probably can't use rental income to fund a solo 401(k) :(

How about a self directed SEP? From what I understand, you can fund it, buy property with it, collect rent and pay expenses through it, and you never have to pay taxes on the gains, but you can’t touch any of the gains, they stay in the SEP.
Also thought this was possible with a self directed 401k

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: (Mega) Backdoor Roth

Post by retiredjg » Thu Jan 10, 2019 7:00 am

oinkyboinky wrote:
Wed Jan 09, 2019 5:04 pm
Thank you for the help everyone.

I’m still deciding the best way to go about the backdoor.

Should I simply move all IRA funds to work 401k, then transfer that entire balance back to the IRA, then convert? Or do I need to figure out how much hasn’t been deducted already?

Any help is appreciated!
I think you may still be mis-understanding something.

The reason to move all your deductible IRA funds to the 401k is so that you can make non-deductible contributions to IRA which are then converted to Roth IRA.

The back door Roth DOES NOT include transferring a balance back to the IRA from the 401k.

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Earl Lemongrab
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Re: (Mega) Backdoor Roth

Post by Earl Lemongrab » Thu Jan 10, 2019 3:05 pm

Duckie wrote:
Wed Jan 09, 2019 7:04 pm
It's my understanding that IRA assets you roll to a 401k in most cases cannot be rolled out whenever you want, if at all. Usually they're stuck until you quit. If that is something you want/need to do, then check with your 401k plan first.
Rollover contribution are eligible for distribution. Megacorp allows that. I'm not sure where you got the data on what plans usually do, but I think "sometimes" or "often" would be more accurate.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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