Mega Backdoor ROTH Clarification

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Topic Author
sapper1371
Posts: 76
Joined: Tue Jul 10, 2018 7:21 pm

Mega Backdoor ROTH Clarification

Post by sapper1371 » Fri Jan 11, 2019 2:34 pm

So last year I contributed about $200 to my 401k over the $18.5k limit so my plan automatically added the excess as an “after tax” contribution. I figured this might be the perfect time to see if I can do a MBR so I asked them if I was allowed to roll that excess into a ROTH IRA that I had with another provider.

They said that they can do this but it will be in the form of a check to TD Ameritrade (my ROTH provider) in the name of my account that I will need to pass on to TDA. They said they cannot do a direct transfer or send the check directly to TDA

Any issues with this or does this mean that I am eligible to do a MBR?

Alan S.
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Location: Prescott, AZ

Re: Mega Backdoor ROTH Clarification

Post by Alan S. » Fri Jan 11, 2019 3:19 pm

Not a problem.
This is the standard direct rollover process. You will get a 1099R showing the taxable amount (a few bucks of earnings) in Box 2a.

What your W-2 shows is another issue. I think the plan must record 18.7 of elective deferrals and treat the excess as distributed to you and recontributed by you to the after tax sub account, even though you never received the funds. If that is the case, you will be adding the 200 to your W-2 wages for 2018, and will also get a 1099R for the distribution of the excess.


Of course, it would be easier if they could consider the excess as intercepted and contributed as after tax before it triggers an excess deferral. In a couple weeks post back and tell us what your W-2 reports and if you got a 1099R. Again, this is about how the excess deferral got into the after tax account, not your MBR, which will be reported in 2019.

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cockersx3
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Re: Mega Backdoor ROTH Clarification

Post by cockersx3 » Fri Jan 11, 2019 8:58 pm

Alan S. wrote:
Fri Jan 11, 2019 3:19 pm
Not a problem.
This is the standard direct rollover process. You will get a 1099R showing the taxable amount (a few bucks of earnings) in Box 2a.

What your W-2 shows is another issue. I think the plan must record 18.7 of elective deferrals and treat the excess as distributed to you and recontributed by you to the after tax sub account, even though you never received the funds. If that is the case, you will be adding the 200 to your W-2 wages for 2018, and will also get a 1099R for the distribution of the excess.


Of course, it would be easier if they could consider the excess as intercepted and contributed as after tax before it triggers an excess deferral. In a couple weeks post back and tell us what your W-2 reports and if you got a 1099R. Again, this is about how the excess deferral got into the after tax account, not your MBR, which will be reported in 2019.
I routinely do mega backdoor Roth conversions, and just got my company W-2 this week. It shows a elective deferral of $18500 (code D) in one of the line 12 blocks. The amount I contributed above this didn't show up on my W-2, presumably because it is after tax and has no impact on anything shown in the W-2. I would think it would be the same for the OP - ie there should be no need to adjust whatever the OP's W-2 lists as income.

As an alternative - if the OP's 401(k) provider offers Roth IRA's and the fees are reasonable, the OP could just start a new Roth IRA with them. That's what I do with my 401K provider, which is Fidelity. This would eliminate the need to deal with paper checks and moving the amounts between brokerages. I actually just did my MBR for last year this evening, and the funds will be in my Roth IRA account at close of business Monday.

My taxable brokerage account is with Vanguard, but I decided to keep my Roth IRA there at Fidelity to make things easier. I figure that when I retire, I can simply roll everything back over to Vanguard if I feel the need to keep everything in one spot.

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Earl Lemongrab
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Re: Mega Backdoor ROTH Clarification

Post by Earl Lemongrab » Sat Jan 12, 2019 3:09 pm

Yeah, I did Mega Backdoor at my company for years. It's just part of the plan rules that when you reach the deferral limit the contributions automatically change to after-tax. Nothing on the W2 about excess deferrals.

You could have a specific contribution percentage to AT if you wanted at Megacorp, but I never did that. I preferred the AT to backload in the year to reduce earnings before rollover, plus it's the easy way to do it. No calcutions needed.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Topic Author
sapper1371
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Re: Mega Backdoor ROTH Clarification

Post by sapper1371 » Fri Jan 18, 2019 2:53 pm

OK I tried to roll the excess from the after tax contribution into my ROTH but the plan administrator said that I cannot just pull from the after tax portion alone. She said that if I make a request it will pull from all of my accounts. I thought this seemed odd but I looked through my Summary plan description in the "in-service withdraws" section and it does have a statement that says:
Withdrawal requests are made against the total assets available in all four accounts (Pre-Tax, After-Tax, Employer Match, and Rollover).
Has anyone seen something similar? Does this mean that I cannot do a MBR?

bradpevans
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Re: Mega Backdoor ROTH Clarification

Post by bradpevans » Fri Jan 18, 2019 4:15 pm

sapper1371 wrote:
Fri Jan 18, 2019 2:53 pm
OK I tried to roll the excess from the after tax contribution into my ROTH but the plan administrator said that I cannot just pull from the after tax portion alone. She said that if I make a request it will pull from all of my accounts. I thought this seemed odd but I looked through my Summary plan description in the "in-service withdraws" section and it does have a statement that says:
Withdrawal requests are made against the total assets available in all four accounts (Pre-Tax, After-Tax, Employer Match, and Rollover).
Has anyone seen something similar? Does this mean that I cannot do a MBR?
Can you call again (and get a different representative)?
That language may be generic and your specific case would only come from the after tax bucket.
For instance, my plan allows the "employer match" funds to be sold off and moved to IRA - which massively increases
the number of investment choices as compared to 'new money from my paycheck'

And it definitely allows After Tax 401K --> Roth 401K (in service rollover / in service withdraw )

Topic Author
sapper1371
Posts: 76
Joined: Tue Jul 10, 2018 7:21 pm

Re: Mega Backdoor ROTH Clarification

Post by sapper1371 » Fri Jan 18, 2019 6:33 pm

I can try calling again but I asked the rep on the phone to double check and she seemed confident. That plus the wording in the plan description has me thinking I’m not going to be able to do it.

What I don’t get though is why they would combine everything for an in-service withdraw/rollover given that some portions of the account have been taxed and others have not.

retiredjg
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Re: Mega Backdoor ROTH Clarification

Post by retiredjg » Fri Jan 18, 2019 7:27 pm

sapper1371 wrote:
Fri Jan 18, 2019 2:53 pm
OK I tried to roll the excess from the after tax contribution into my ROTH but the plan administrator said that I cannot just pull from the after tax portion alone. She said that if I make a request it will pull from all of my accounts. I thought this seemed odd but I looked through my Summary plan description in the "in-service withdraws" section and it does have a statement that says:
Withdrawal requests are made against the total assets available in all four accounts (Pre-Tax, After-Tax, Employer Match, and Rollover).
Has anyone seen something similar? Does this mean that I cannot do a MBR?
We have not seen a plan like this for awhile. Most plans seem to have "separate accounts" and you are allowed to withdraw from some of them without affecting the others. It seems your plan is not using the "separate account" method.

I think this makes you ineligible to use the Mega back door unless there is some misunderstanding going on.

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