In-Plan 401k After-Tax to Roth conversion with backdoor Roth

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PowderDay9
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In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by PowderDay9 » Wed Nov 06, 2019 5:35 pm

I have an old Schwab 401k account with a former employer. WIthin the account there are 3 sources (Traditional, Roth, After-Tax). The after-tax is only about 5k of which about 2k is contributions and 3k is earnings. The after-tax is a small portion of the whole 401k. I called into Schwab to try and roll over just the contribution amount to Roth so that there would be no tax impact. Unfortunately they can only roll over the entire after-tax portion to the roth portion within the 401k. I'm thinking of doing that to simplify things and also since 2k of it is already after tax. My tax liability would be roughly 1k and I'm fine paying that. My plan is to eventually roll this 401k into my current employer's 401k at Fidelity.

I also do backdoor roth IRAs each year. Will the above in-plan 401k rollover of after-tax to roth have any impact on my backdoor roth? Is it just as simple as receiving a 1099R from the 401k and paying the 1k in taxes?

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1789
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by 1789 » Wed Nov 06, 2019 5:57 pm

Backdoor roth is not the same thing as mega backdoor. From what i understand you are trying to get all after tax bucket money to your roth 401k bucket. Is this correct? Backdoor Roth is about rolling non deductible money (after tax money) in a traditional ira to roth ira and it has nothing to do with what is happening in your 401k.
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lakpr
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by lakpr » Wed Nov 06, 2019 6:01 pm

PowderDay9 wrote:
Wed Nov 06, 2019 5:35 pm
The after-tax is a small portion of the whole 401k. I called into Schwab to try and roll over just the contribution amount to Roth so that there would be no tax impact. Unfortunately they can only roll over the entire after-tax portion to the roth portion within the 401k.
Schwab is correct, IRS rules prohibit the after-tax contributions being separated from their earnings. When you are converting the after-tax contributions to Roth (via rollover to IN-Plan Roth 401k subaccount or to an external Roth-IRA), both contributions and earnings must exit together. Schwab does not have any discretion either.

Just saying, so it helps you rationalize the decision to roll the $5k into Roth.

Spirit Rider
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by Spirit Rider » Wed Nov 06, 2019 6:28 pm

If your current employer's 401k plan accepts IRA rollovers. You can rollover the previous employer's employee after-tax contributions to a Roth IRA and the associated pre-tax earnings to a traditional IRA. Then you can rollover the pre-tax IRA balance into the current employer's 401k plan. The Backdoor is still open for business and you didn't have to pay taxes on the pre-tax earnings.

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PowderDay9
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by PowderDay9 » Wed Nov 06, 2019 6:37 pm

Spirit Rider wrote:
Wed Nov 06, 2019 6:28 pm
If your current employer's 401k plan accepts IRA rollovers. You can rollover the previous employer's employee after-tax contributions to a Roth IRA and the associated pre-tax earnings to a traditional IRA. Then you can rollover the pre-tax IRA balance into the current employer's 401k plan. The Backdoor is still open for business and you didn't have to pay taxes on the pre-tax earnings.
That's a great idea but unfortunately my current 401k at fidelity doesn't accept IRAs into it. The fidelity rep told me to ask Schwab how they would send the checks for a 401k rollover. Ideally Schwab would send 2 checks. 1 for Roth and 1 for pre-tax. Hopefully they can put the after-tax contributions in the Roth check and the after-tax earnings in the pre-tax check. My worry is that they'll send 3 checks (Roth, pre-tax, after-tax). Once it gets to my current 401k, I can't do in plan conversations or distributions.

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ThePrune
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by ThePrune » Wed Nov 06, 2019 8:12 pm

The IRS has provided official guidance in Notice 2014-54 on how to divide a roll-over distributions containing both pre-tax and after-tax amounts among several receiving accounts:
If the pretax amount with respect to the aggregated disbursements that are treated as a single distribution is less than the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the entire pretax amount is assigned to the amount of the distribution that is directly rolled over. In such a case, if the direct rollover is to two or more plans, then the recipient can select how the pretax amount is allocated among these plans. To make this selection, the recipient must inform the plan administrator of the allocation prior to the time of the direct rollovers.
Schwab is under no obligation to perform what the IRA allows in this Notice. But I suspect that they will do so as long as you clearly cite this as being a IRS Notice 2014-54 distribution.

Given your situation, you first need to know the dollar amounts of both the after-tax contributions and the earnings on those contributions (which are "pre-tax" dollars at this point in time). Then you need to have an existing Roth IRA account to receive the after-tax dollars and a traditional IRA or 401(k) account to receive the pre-tax dollars. Finally, direct Schwab to distribute all non-CODA funds (which is what your after-tax contributions were) as two direct rollovers, with the pre-tax dollar amount going to the traditional IRA / 401(k) and the after-tax dollar amount going to the Roth IRA.
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HomeStretch
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by HomeStretch » Wed Nov 06, 2019 8:25 pm

Spirit Rider wrote:
Wed Nov 06, 2019 6:28 pm
If your current employer's 401k plan accepts IRA rollovers. You can rollover the previous employer's employee after-tax contributions to a Roth IRA and the associated pre-tax earnings to a traditional IRA. Then you can rollover the pre-tax IRA balance into the current employer's 401k plan. The Backdoor is still open for business and you didn't have to pay taxes on the pre-tax earnings.
Is Schwab required to allow OP to rollover just the 401k after-tax (contributions and earnings) to rIRA/tIRA?

Some 401k plans don’t allow partial distributions so I wondered if this precluded a former participant from being able to only rollover the after-tax portion.

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ThePrune
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by ThePrune » Wed Nov 06, 2019 8:46 pm

HomeStretch wrote:
Wed Nov 06, 2019 8:25 pm
Some 401k plans don’t allow partial distributions so I wondered if this precluded a former participant from being able to only rollover the after-tax portion.
What you are alluding to is correct. The 401(k) plan is not obligated to offer every type of distribution that is allowed by statute, Treasury regulation or IRS Notice. The 401(k) plan document must always be examined to determine what is allowed / not allowed.
Investment skill is often just luck in sheep's clothing.

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PowderDay9
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by PowderDay9 » Thu Nov 07, 2019 12:03 am

ThePrune wrote:
Wed Nov 06, 2019 8:12 pm
The IRS has provided official guidance in Notice 2014-54 on how to divide a roll-over distributions containing both pre-tax and after-tax amounts among several receiving accounts:
If the pretax amount with respect to the aggregated disbursements that are treated as a single distribution is less than the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the entire pretax amount is assigned to the amount of the distribution that is directly rolled over. In such a case, if the direct rollover is to two or more plans, then the recipient can select how the pretax amount is allocated among these plans. To make this selection, the recipient must inform the plan administrator of the allocation prior to the time of the direct rollovers.
Schwab is under no obligation to perform what the IRA allows in this Notice. But I suspect that they will do so as long as you clearly cite this as being a IRS Notice 2014-54 distribution.

Given your situation, you first need to know the dollar amounts of both the after-tax contributions and the earnings on those contributions (which are "pre-tax" dollars at this point in time). Then you need to have an existing Roth IRA account to receive the after-tax dollars and a traditional IRA or 401(k) account to receive the pre-tax dollars. Finally, direct Schwab to distribute all non-CODA funds (which is what your after-tax contributions were) as two direct rollovers, with the pre-tax dollar amount going to the traditional IRA / 401(k) and the after-tax dollar amount going to the Roth IRA.
Yes this is what I'm trying to do. Schwab told me the dollar amounts of after-tax split by contributions and earnings. I have a Roth IRA at Schwab. My current employer 401k is at Fidelity. I'll call Schwab again and see if they can do a partial rollover of just the after-tax amount to rIRA and t401k. If not, then I'm fine rolling the whole amount into the Fidelity 401k. If they do that and can split the after-tax between contributions (to Roth) and earnings (to pre-tax), are you thinking that they have to go to rIRA and t401k or can they go r401k and t401k, respectively?

retiredjg
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by retiredjg » Thu Nov 07, 2019 8:45 am

I don't think you have told us if your current Fidelity 401k will accept a Roth 401k rollover.

If not, what about doing the in plan Roth rollover of the $5k in the Schwab 401k and then distributing the entire 401k? The pre-tax portion would go to your current Fidelity 401k and the Roth 401k portion would have to go to Roth IRA because the Fidelity 401k would not accept it.

Doing all this would not affect your ordinary back door contribution to Roth.

Topic Author
PowderDay9
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by PowderDay9 » Thu Nov 07, 2019 12:03 pm

Yes, my current Fidelity 401k accepts all contribution types from outside 401k rollovers, including Roth 401k.

retiredjg
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Re: In-Plan 401k After-Tax to Roth conversion with backdoor Roth

Post by retiredjg » Thu Nov 07, 2019 5:15 pm

It seems you should do an in-plan Roth rollover in the old 401k (paying the taxes) and then transfer the entire 401k (pre-tax and Roth) to the new plan (assuming it is a good plan with low costs).

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