Change mega backdoor Roth method?

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SRenaeP
Posts: 967
Joined: Tue Jan 19, 2010 9:05 pm

Change mega backdoor Roth method?

Post by SRenaeP » Wed Mar 25, 2020 1:54 pm

Like many here, I do the mega backdoor Roth. Roughly quarterly (to avoid too many gains), I roll my after-tax 401k out to my Roth IRA. Note that I can't convert in kind; the shares are sold then the cash is transferred to another institution.

Given the current market downturn, would it make more sense to do an *in plan* Roth conversion instead? My thought is this may be more advantageous. The shares would be converted in kind (therefore not selling at a loss) but I'm preserving basis that will offset future gains when I go back to rolling out to my Roth IRA.

To use some rough numbers, I currently have an after-tax basis of $6300 with a current value of $4700. That leaves $1600 basis for the after-tax sub account whenever I do the subsequent conversion.

Alan S.
Posts: 9283
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Change mega backdoor Roth method?

Post by Alan S. » Wed Mar 25, 2020 3:39 pm

SRenaeP wrote:
Wed Mar 25, 2020 1:54 pm
Like many here, I do the mega backdoor Roth. Roughly quarterly (to avoid too many gains), I roll my after-tax 401k out to my Roth IRA. Note that I can't convert in kind; the shares are sold then the cash is transferred to another institution.

Given the current market downturn, would it make more sense to do an *in plan* Roth conversion instead? My thought is this may be more advantageous. The shares would be converted in kind (therefore not selling at a loss) but I'm preserving basis that will offset future gains when I go back to rolling out to my Roth IRA.

To use some rough numbers, I currently have an after-tax basis of $6300 with a current value of $4700. That leaves $1600 basis for the after-tax sub account whenever I do the subsequent conversion.
These are two different issues. The in kind Roth rollover will keep you invested, while the cash rollover to your Roth IRA means you are out of the market for a time and with this volatility that could either cost you or reward you. It's luck of the draw.

The other issue relates to the plan accounting for your basis. If you keep a small amount in the after tax sub account at all times, it forces the plan to continue tracking your basis. If you do a 100% rollout from the after tax account, some plans may 0 out your basis since for a time the balance in the account will be 0. Doesn't matter which type of Roth account the funds are rolled to. It may be difficult to get an accurate answer how your plan deals with remaining basis. For example, you now have 6300 and should roll over 6250, leaving 50 in the after tax sub account as a minimum.

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