Where to start with mega backdoor Roth IRA?

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knightrider
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Where to start with mega backdoor Roth IRA?

Post by knightrider » Mon Jun 29, 2020 1:38 pm

My megacorp offers ability to do mega backdoor ROTH and they allow in-service withdrawals. I've read through the bogleheads wiki but am still confused on where to start. Here's what I see when I login to my company's 401k portal ( through Fidelity ):

I am confused on what is the difference among ROTH, After TAX and Default After-tax? I assume I should be only doing "After Tax", but where will that money go?

Image

sailaway
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Re: Where to start with mega backdoor Roth IRA?

Post by sailaway » Mon Jun 29, 2020 2:02 pm

Roth is Roth - no taxes on gains. In this case, it is an alternative to traditional and the combined traditional + Roth contributions cannot exceed $19500

After tax means that it can be moved to Roth, but you will pay taxes on any gains made prior to that move. The limit is $57- contributions - company match.

I believe that the difference between after tax and default after tax is that the second one only comes into play after you have met your annual contribution limit of $19500.

Fidelity is usually pretty good about this, I would suggest you call and ask. This is especially true if you work for a company big enough to have dedicated representatives at Fidelity.

jason2459
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Re: Where to start with mega backdoor Roth IRA?

Post by jason2459 » Mon Jun 29, 2020 2:30 pm

That's a high percentage already being taken out and great job to you for saving so much. If that is maxing out your 401k limit your company's policy may already be redirecting all overages to after tax which can be used for the mega backdoor. Another thing to look out for in the fine print.

MrJedi
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Re: Where to start with mega backdoor Roth IRA?

Post by MrJedi » Mon Jun 29, 2020 2:44 pm

I have a MBR compatible plan through Fidelity and allows for pretax, Roth, and after tax. The MBR goes into After Tax for me. My plan does not have default after tax... Not sure what that is.

sailaway
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Re: Where to start with mega backdoor Roth IRA?

Post by sailaway » Mon Jun 29, 2020 2:46 pm

Check on the details of your company match. In some plans, they match a % per paycheck, so you may not want to frontload your traditional contributions.

Topic Author
knightrider
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Re: Where to start with mega backdoor Roth IRA?

Post by knightrider » Mon Jun 29, 2020 3:05 pm

sailaway wrote:
Mon Jun 29, 2020 2:46 pm
Check on the details of your company match. In some plans, they match a % per paycheck, so you may not want to frontload your traditional contributions.
They actually do a year-end "true-up". So this way I can front-load it up :-)

Topic Author
knightrider
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Re: Where to start with mega backdoor Roth IRA?

Post by knightrider » Mon Jun 29, 2020 3:07 pm

sailaway wrote:
Mon Jun 29, 2020 2:02 pm
Roth is Roth - no taxes on gains. In this case, it is an alternative to traditional and the combined traditional + Roth contributions cannot exceed $19500
Cool, thanks! Under what circumstances would I want to consider this option? I assume when you say "traditional", you are referring to traditional 401k, not IRA?

NewMoneyMustBeSmart
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Location: Midwest

Re: Where to start with mega backdoor Roth IRA?

Post by NewMoneyMustBeSmart » Mon Jun 29, 2020 8:54 pm

knightrider wrote:
Mon Jun 29, 2020 1:38 pm

I am confused on what is the difference among ROTH, After TAX and Default After-tax? I assume I should be only doing "After Tax", but where will that money go?
Your options look different than mine:

Image

I put money into "PRE-TAX" until I hit the limit then I put money into AFTER-TAX. I don't know what ROTH is, I assume it's for folks that can do pre-tax ROTH who are under certain income limits.

Recommend consider calling Fidelity and ask them to do a "RIPC" - Roth In Plan Conversion. This takes your after-tax 401k contributions and puts them in a Roth immediately after each paycheck as I understand it.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein

SnowBog
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Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Tue Jun 30, 2020 2:50 pm

knightrider wrote:
Mon Jun 29, 2020 3:07 pm
sailaway wrote:
Mon Jun 29, 2020 2:02 pm
Roth is Roth - no taxes on gains. In this case, it is an alternative to traditional and the combined traditional + Roth contributions cannot exceed $19500
Cool, thanks! Under what circumstances would I want to consider this option? I assume when you say "traditional", you are referring to traditional 401k, not IRA?
Generally speaking of your taxes are higher now than you expect during retirement (when you'd be taking money from your 401k) - pre-tax is recommended. The tax savings now + compound tax-free growth is hard to beat.

But if you're taxes are low right now, and you expect to pay higher taxes in retirement (when drawing from 401k) - then Roth may be better.

But neither has any impact on Mega Backdoor Roth (they are completely separate from each other).

SnowBog
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Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Tue Jun 30, 2020 3:02 pm

NewMoneyMustBeSmart wrote:
Mon Jun 29, 2020 8:54 pm
Recommend consider calling Fidelity and ask them to do a "RIPC" - Roth In Plan Conversion. This takes your after-tax 401k contributions and puts them in a Roth immediately after each paycheck as I understand it.
This may not be your best option... You'll need to understand what your plan allows, and what you want to achieve.

In my plan, I have an option to automatically convert after-tax into Roth, which is awesome.

I don't use it. If I do, it co-mingles my [now Roth] and pre-tax funds in my BrokerageLink account (which is what I use for my 401k holdings to better options than those in my plan). I have no ability to invest Roth in high growth while investing pre-tax in things like bonds. (Granted if I didn't use BrokerageLink, and stuck with my limited "in plan" options, this wouldn't be an issue.)

Instead, I occasionally call Fidelity (no online way to do this that I've found for my plan) and do a manual roll-over of my after-tax balance into a separate Roth IRA. This let's me manage my Roth funds separately, and in theory is easier to withdraw from the Roth should I need to. But if I had to pay a fee for this, I'd probably just do the in-plan conversion. Luckily in my plan, no fee...

MrJedi
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Re: Where to start with mega backdoor Roth IRA?

Post by MrJedi » Fri Jul 03, 2020 1:12 pm

NewMoneyMustBeSmart wrote:
Mon Jun 29, 2020 8:54 pm
knightrider wrote:
Mon Jun 29, 2020 1:38 pm

I am confused on what is the difference among ROTH, After TAX and Default After-tax? I assume I should be only doing "After Tax", but where will that money go?
Your options look different than mine:

Image

I put money into "PRE-TAX" until I hit the limit then I put money into AFTER-TAX. I don't know what ROTH is, I assume it's for folks that can do pre-tax ROTH who are under certain income limits.

Recommend consider calling Fidelity and ask them to do a "RIPC" - Roth In Plan Conversion. This takes your after-tax 401k contributions and puts them in a Roth immediately after each paycheck as I understand it.
The Roth box is probably a Roth deferral. This would considered a deferral counted toward the $19.5k limit like the pre tax. This is different than mega backdoor Roth which is the after tax contribution and then converted to Roth, not subject to the $19.5k limit but subject to $56k limit including employer contributions and also ACP testing.

Topic Author
knightrider
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Re: Where to start with mega backdoor Roth IRA?

Post by knightrider » Fri Jul 03, 2020 4:30 pm

Thanks for all the replies. I know I need to call Fidelity, but want to understand everything before doing so.

Let's say I change the "After-tax contribution" to 50%. Where will that money go? Do I need to first open a ROTH to put it into? Or can I use an existing ROTH I already have opened many years ago but no longer contribute to due to income ineligibility?

sailaway
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Re: Where to start with mega backdoor Roth IRA?

Post by sailaway » Fri Jul 03, 2020 4:35 pm

knightrider wrote:
Fri Jul 03, 2020 4:30 pm
Thanks for all the replies. I know I need to call Fidelity, but want to understand everything before doing so.

Let's say I change the "After-tax contribution" to 50%. Where will that money go? Do I need to first open a ROTH to put it into? Or can I use an existing ROTH I already have opened many years ago but no longer contribute to due to income ineligibility?
That money will sit in an after tax sub account in your 401k until you move it some place. You can move it to any Roth IRA, but it will be easiest to do so at Fidelity.

When you move the money, you will have to decide between moving the gains to a traditional IRA or moving them to the Roth IRA and owing taxes.

Topic Author
knightrider
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Re: Where to start with mega backdoor Roth IRA?

Post by knightrider » Fri Jul 03, 2020 4:48 pm

sailaway wrote:
Fri Jul 03, 2020 4:35 pm
That money will sit in an after tax sub account in your 401k until you move it some place. You can move it to any Roth IRA, but it will be easiest to do so at Fidelity.

When you move the money, you will have to decide between moving the gains to a traditional IRA or moving them to the Roth IRA and owing taxes.
Thanks. Can the money skip the sub-account and go directly into my ROTH ( which is already with Fidelity )? Is that what Roth in place conversion (RIPC) is? Just trying to understand what the point of this sub-account is.

NewMoneyMustBeSmart
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Location: Midwest

Re: Where to start with mega backdoor Roth IRA?

Post by NewMoneyMustBeSmart » Fri Jul 03, 2020 5:29 pm

knightrider wrote:
Fri Jul 03, 2020 4:48 pm

Thanks. Can the money skip the sub-account and go directly into my ROTH ( which is already with Fidelity )? Is that what Roth in place conversion (RIPC) is? Just trying to understand what the point of this sub-account is.
My understanding is yes, that is what the RIPC does. It prevents the risk of having non-roth amounts to consider for prorata. It does this by immediately putting the post-tax 401k into the Roth.

However, as another astute poster pointed out, this may not always be the best choice due to some loss of optionality with commingling, so think it through for pros/cons. If you do it manually, you may have the best of both worlds?
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein

sailaway
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Re: Where to start with mega backdoor Roth IRA?

Post by sailaway » Fri Jul 03, 2020 7:23 pm

knightrider wrote:
Fri Jul 03, 2020 4:48 pm
sailaway wrote:
Fri Jul 03, 2020 4:35 pm
That money will sit in an after tax sub account in your 401k until you move it some place. You can move it to any Roth IRA, but it will be easiest to do so at Fidelity.

When you move the money, you will have to decide between moving the gains to a traditional IRA or moving them to the Roth IRA and owing taxes.
Thanks. Can the money skip the sub-account and go directly into my ROTH ( which is already with Fidelity )? Is that what Roth in place conversion (RIPC) is? Just trying to understand what the point of this sub-account is.
It cannot skip the sub account. If your plan allows, you may be able to make an immediate conversion to the Roth subaccount of your 401k.

SnowBog
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Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Sat Jul 04, 2020 12:03 am

sailaway wrote:
Fri Jul 03, 2020 7:23 pm
knightrider wrote:
Fri Jul 03, 2020 4:48 pm
sailaway wrote:
Fri Jul 03, 2020 4:35 pm
That money will sit in an after tax sub account in your 401k until you move it some place. You can move it to any Roth IRA, but it will be easiest to do so at Fidelity.

When you move the money, you will have to decide between moving the gains to a traditional IRA or moving them to the Roth IRA and owing taxes.
Thanks. Can the money skip the sub-account and go directly into my ROTH ( which is already with Fidelity )? Is that what Roth in place conversion (RIPC) is? Just trying to understand what the point of this sub-account is.
It cannot skip the sub account. If your plan allows, you may be able to make an immediate conversion to the Roth subaccount of your 401k.
And depending on your plan - you may not even have a "sub-account" (I don't). In my plan (also at Fidelity), by default my "after-tax" money sits in the same place as my pre-tax funds. For my investment options, I can choose to use the "same" funds as my pre-tax, but personally I prefer to put "after-tax" into its own fund (typically a low risk short-term bond fund - so any "gains" are minimal until I can move my funds into the "mega roth" account and invest in a TSM fund like FZROX). If I chose the same fund, then I'll show $x dollars and NetBenefits breaks out what % is from what source.

As I mentioned in my prior post, you'll want to check on your plan regarding the options for an "in-place Roth conversion." In my plan, the "in-place" option simply converts the investment from "after-tax" to "[Mega] Roth" - in the same funds it was invested in, which would include either the "in-plan" fund I picked or optionally rolling those $ into a BrokerageLink account. In my particular plan, and specific to any money's moved into a BrokerageLink account, they are co-mingled. For example, I can't say I want 100% of my [Mega] Roth in FZROX and 50% of my pre-tax in FXNAX. Instead I'd end up with 50% of all money's in my BrokerageLink (from any source) in FXNAX, including whatever % of that total is now my [Mega] Roth money. That's why I chose to do an "rollover" to an existing Roth account (also held at Fidelity for convenience). This is a manual process for me, requires a roughly 5 minute phone call every time I want to convert (which I do every 1-1.5 months). But since this gives me ful control over my [Mega] Roth, including a single account holding both my "Backdoor" Roth and "Mega" Roth monies, and because I can do so without any fee [your plan might not be so lucky], this works best for me...

But I was also informed by Fidelity that some plans allow for a "dual BrokerageLink" setup, where you could have a separate account (sub-account?) specific to your Roth dollars. If my plan had this option, that's probably what I'd use with the automatic in-plan conversion. (My only pause would be to confirm that I don't need access to the funds prior to age 59.5. I'm hoping for an early retirement, so the extra flexibility of having a separate Roth is still worth something to me...)

That said - I learned 80% of the above by "trying" it once. I couldn't find good documentation, and didn't feel like spending time talking to Fidelity. So when I learned about the Mega Roth (and realized what a opportunity I wasted for the prior several years), I started saving after-tax dollars, and let the initial monies do an "in-plan conversion" (at the time is was automated but only quarterly, so I had to wait several weeks to see the results). When I realized this wasn't what I expected (or ideally wanted), I started doing the manual rollover.

Morale of the story - don't take too long in "analysis/paralysis" mode. The benefits of the Mega Roth are worth moving forward. Give it a try, learn, adapt, and keep moving.

Spirit Rider
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Re: Where to start with mega backdoor Roth IRA?

Post by Spirit Rider » Sat Jul 04, 2020 12:59 am

SnowBog wrote:
Sat Jul 04, 2020 12:03 am
And depending on your plan - you may not even have a "sub-account" (I don't). In my plan (also at Fidelity), by default my "after-tax" money sits in the same place as my pre-tax funds.
It really doesn't matter as long as the plan "separately accounts" for the employee after-tax contributions and pre-tax earnings.

In most cases except for some small - medium business 401k plans, accounts and sub-accounts are virtual anyway. There really is only a single pooled account for all participants and contribution types. Whether the record keeper breaks those out for you or only separately accounts for them internally does not change the mechanics.

Shaka
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Re: Where to start with mega backdoor Roth IRA?

Post by Shaka » Sun Jul 05, 2020 6:05 pm

sailaway wrote:
Mon Jun 29, 2020 2:02 pm
After tax means that it can be moved to Roth, but you will pay taxes on any gains made prior to that move. The limit is $57- contributions - company match.
I'm new to Bogleheads and am just learning about tax-efficiency and the options in my company's Fidelity 401K plan. I've learned a lot from this thread and others like it. I'm naturally a big saver and am just now realizing I could have put a lot of that money into my Fidelity AFTER-TAX contributions and performing the Roth conversion.

Yesterday I took the initial step of bumping up my Fidelity AFTER-TAX contribution to 1% just so I can see where the money goes and figure out how to do the account setup discussed in this thread.

My question is this: How does one determine how much to contribute to the AFTER-TAX account; specifically, are there any tax considerations? In general I assume it's best to max out total contributions to the $57K annual limit, assuming one has a salary/budget that allows this. From what I've gathered, the only time this may not be true is if one expects their retirement tax bracket to exceed their pre-retirement tax bracket, which is unlikely.

Would the total amount I can contribute to the AFTER-TAX account be:
$57K - $19,500 401K personal contribution - 401K Company contribution

Also, I've seen a lot of posts here on Bogleheads regarding talk about a $6,000 annual limit for Roth accounts (and many people making that contribution in the first few days of January). I'm confused how this is relates to the $57K limit. Is this $6,000 limit completely unrelated to the Fidelity AFTER-TAX Roth Conversion subject?

Finally, is the term "Mega Backdoor Roth" I see used on these forms quit often synonymous with the Fidelity AFTER-TAX Roth Conversion process discussed here? Trying to keep my terms straight.

Thanks all for your thoughts!

SnowBog
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Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Sun Jul 05, 2020 7:50 pm

Shaka wrote:
Sun Jul 05, 2020 6:05 pm
sailaway wrote:
Mon Jun 29, 2020 2:02 pm
After tax means that it can be moved to Roth, but you will pay taxes on any gains made prior to that move. The limit is $57- contributions - company match.
I'm new to Bogleheads and am just learning about tax-efficiency and the options in my company's Fidelity 401K plan. I've learned a lot from this thread and others like it. I'm naturally a big saver and am just now realizing I could have put a lot of that money into my Fidelity AFTER-TAX contributions and performing the Roth conversion.

Yesterday I took the initial step of bumping up my Fidelity AFTER-TAX contribution to 1% just so I can see where the money goes and figure out how to do the account setup discussed in this thread.
Welcome and congrats!
Shaka wrote:
Sun Jul 05, 2020 6:05 pm
My question is this: How does one determine how much to contribute to the AFTER-TAX account; specifically, are there any tax considerations? In general I assume it's best to max out total contributions to the $57K annual limit, assuming one has a salary/budget that allows this. From what I've gathered, the only time this may not be true is if one expects their retirement tax bracket to exceed their pre-retirement tax bracket, which is unlikely.
Recommend taking a look at the wiki on prioritizing investments: https://www.bogleheads.org/wiki/Priorit ... nvestments

But in general, its advisable to prioritize your tax-advantaged spaces (including an after-tax account) over taxable (given tax-advantaged accounts have annual limits).
Shaka wrote:
Sun Jul 05, 2020 6:05 pm
Would the total amount I can contribute to the AFTER-TAX account be:
$57K - $19,500 401K personal contribution - 401K Company contribution
Sounds about right. The actual amount may vary annually as the IRS adjusts it (just like the 401k contribution may adjust annually).
Shaka wrote:
Sun Jul 05, 2020 6:05 pm
Also, I've seen a lot of posts here on Bogleheads regarding talk about a $6,000 annual limit for Roth accounts (and many people making that contribution in the first few days of January). I'm confused how this is relates to the $57K limit. Is this $6,000 limit completely unrelated to the Fidelity AFTER-TAX Roth Conversion subject?
Correct - unrelated. If you make too much to directly contribute to a Roth IRA (completely separate from your 401k/after-tax [mega backdoor Roth]/etc.), you can make a non-deductible contribution to a traditional IRA (up to $6k for 2020) and then "convert/rollover" those funds to a Roth IRA. This is called a Backdoor Roth. https://www.bogleheads.org/wiki/Backdoor_Roth

Note - you can actually do this for the year prior - if done before taxes need to be filed. In a "normal" year, that means that prior to 4/15 you can do a Backdoor Roth for the proceeding year. I haven't been tracking tax date changes this year as I filled early, but you might have a window of opportunity left to do this for last year if you are interested... [Obviously you can do it at any time this year, including prior to tax filing next year for 2020.]
Shaka wrote:
Sun Jul 05, 2020 6:05 pm
Finally, is the term "Mega Backdoor Roth" I see used on these forms quit often synonymous with the Fidelity AFTER-TAX Roth Conversion process discussed here? Trying to keep my terms straight.
Yep - same thing! The "mega" comes from the fact the annual limit is much higher than a normal Roth account. I'm not sure where the "backdoor" comes from - other than as an extension of the concept from a normal Backdoor Roth - in that most people using a Mega Backdoor Roth and/or Backdoor Roth are likely over the contribution limit for a Roth, but arguably this is completely different. But its a name that many understand regardless... https://www.bogleheads.org/wiki/After-tax_401(k)

[Edited to add] One final piece to keep in mind, the "Mega Backdoor Roth" is typically also a two-step process. The first step is contributing after-tax dollars - which sounds like you enabled - so next paycheck your first contribution will be complete. But the second step is very important - you need to "convert" those after-tax dollars into Roth dollars. Some plans allow an "in-plan" conversion, some allow a "rollover" to a separate Roth IRA (FWIW this is what I do), some might allow an automated process. Once converted those - now Roth - dollars grow tax free - which is what you want!!!

But prior to conversion - any growth is taxable (your original amount [aka cost basis] isn't taxable - since it was already taxed before going into the account]). So if you contribute after-tax funds for years - but forget to convert them - you may have large gains that could be subject to taxes. This is not ideal... When you go to convert you can pay taxes on the gains (vs. if you had converted immediately, you wouldn't owe any taxes on those gains). Alternatively, you may be allowed to rollover the gains into a traditional IRA - but that can create issues with a Backdoor Roth (see proration). Bottom line - don't forget to "convert" your after-tax funds frequently.

Shaka
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Joined: Sat Jul 04, 2020 8:04 pm

Re: Where to start with mega backdoor Roth IRA?

Post by Shaka » Sun Jul 05, 2020 8:11 pm

SnowBog wrote:
Sun Jul 05, 2020 7:50 pm
[Edited to add] One final piece to keep in mind, the "Mega Backdoor Roth" is typically also a two-step process. The first step is contributing after-tax dollars - which sounds like you enabled - so next paycheck your first contribution will be complete. But the second step is very important - you need to "convert" those after-tax dollars into Roth dollars. Some plans allow an "in-plan" conversion, some allow a "rollover" to a separate Roth IRA (FWIW this is what I do). Once converted those - now Roth - dollars grow tax free - which is what you want!!!

But prior to conversion - any growth is taxable. So if you contribute after-tax funds for years - but forget to convert them - you may have large gains that could be subject to taxes. This is not ideal... When you go to convert you can pay taxes on the gains (vs. if you had converted immediately, you wouldn't owe any taxes on those gains). Alternatively, you may be allowed to rollover the gains into a traditional IRA - but that can create issues with a Backdoor Roth (see proration). Bottom line - don't forget to "convert" your after-tax funds frequently.
Thank you SnowBog for the reminder! This is why I'm starting with just a 1% AFTER-TAX contribution...to learn how to setup this conversion process with minimal chance for tax gains if it takes longer than expected.

My 401K plan has both BROKERAGELINK and BROKERAGELINK ROTH accounts connected to it (the ROTH balance being $0.00). I've e-mailed my company's Fidelity rep to ask where the AFTER-TAX contribution will show up initially, the process to convert it over, and whether using the BROKERAGELINK ROTH account or a separate ROTH account is the best approach. Based on this thread it appears some Fidelity plans mingle pre-tax and post-tax monies and keeping them separate may allow for more direct control over what the money can be invested in. We'll see how my particular plan works shortly.

Perhaps I'll post on my experience here for the benefit of others.

Thanks once again!

SnowBog
Posts: 267
Joined: Fri Dec 21, 2018 11:21 pm

Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Sun Jul 05, 2020 9:26 pm

Shaka wrote:
Sun Jul 05, 2020 8:11 pm
Thank you SnowBog for the reminder! This is why I'm starting with just a 1% AFTER-TAX contribution...to learn how to setup this conversion process with minimal chance for tax gains if it takes longer than expected.

My 401K plan has both BROKERAGELINK and BROKERAGELINK ROTH accounts connected to it (the ROTH balance being $0.00). I've e-mailed my company's Fidelity rep to ask where the AFTER-TAX contribution will show up initially, the process to convert it over, and whether using the BROKERAGELINK ROTH account or a separate ROTH account is the best approach. Based on this thread it appears some Fidelity plans mingle pre-tax and post-tax monies and keeping them separate may allow for more direct control over what the money can be invested in. We'll see how my particular plan works shortly.

Perhaps I'll post on my experience here for the benefit of others.

Thanks once again!
I did something very similar initially. I learn by doing!

For what its worth - you should be able to see where your after-tax funds will go. Assuming most Fidelity 401k navigation is similar...
  • Go into NetBenefits (the 401k plan portion of Fidelity - from your main Fidelity page, should select your 401k account - if not taken there directly, likely have a "NetBenefits" link in the top right corner)
  • Select your 401k account (if it isn't already)
  • Select "Investments" from the top navigation menu
  • Click "Change Investments" from the sub-menu navigation
  • Click "Change Investment Elections" option from under the "Future Investments"
That should show you a list of where "future investments" will be directed. Pay attention to the "Source: After-tax" values - that's where your 1% will end up initially (it might be set to the same as your pre-tax contributions by default - can't remember).

I'd also recommend clicking the "Select Funds" option under "Choose your own investments", which will let you change the election for each "source" (such as After-Tax). Find the After-tax source, and from the drop-down menu select "Change investment elections for this source", then click "Go". That will show you all available options for where your funds can go. Not sure if you'll see your Roth Brokerage link account as an option... (My guess is no - but what do I know...) If you don't, but your plan offers an "in-plan conversion" - then you'd want to check to see if you could put it into BrokerageLink - and if it can be converted from there (or if it needs to stay in the non-BrokerageLink options for automatic conversion). You can cancel out and not make changes if you don't want (but you need to navigate down the path to see the list of options for you...).

I'd also recommend checking your "Contribution" settings - look towards the bottom - below where you enter a % for pre-tax, after-tax, etc. In my plan, that's where I see the "in-plan" conversion options (initially a quarterly convert, now a "Daily Roth In-Plan Conversion" option, hiding under "Other Contributions."

p.s. I'm jealous that you have both the BrokerageLink and BrokerageLink Roth options. Ideally you'll have an "in-plan conversion" option - and then you can automate the whole process! Enjoy!

Shaka
Posts: 8
Joined: Sat Jul 04, 2020 8:04 pm

Re: Where to start with mega backdoor Roth IRA?

Post by Shaka » Thu Jul 09, 2020 9:57 pm

SnowBog wrote:
Sun Jul 05, 2020 9:26 pm
I did something very similar initially. I learn by doing!

For what its worth - you should be able to see where your after-tax funds will go. Assuming most Fidelity 401k navigation is similar...
  • Go into NetBenefits (the 401k plan portion of Fidelity - from your main Fidelity page, should select your 401k account - if not taken there directly, likely have a "NetBenefits" link in the top right corner)
  • Select your 401k account (if it isn't already)
  • Select "Investments" from the top navigation menu
  • Click "Change Investments" from the sub-menu navigation
  • Click "Change Investment Elections" option from under the "Future Investments"
That should show you a list of where "future investments" will be directed. Pay attention to the "Source: After-tax" values - that's where your 1% will end up initially (it might be set to the same as your pre-tax contributions by default - can't remember).

I'd also recommend clicking the "Select Funds" option under "Choose your own investments", which will let you change the election for each "source" (such as After-Tax). Find the After-tax source, and from the drop-down menu select "Change investment elections for this source", then click "Go". That will show you all available options for where your funds can go. Not sure if you'll see your Roth Brokerage link account as an option... (My guess is no - but what do I know...) If you don't, but your plan offers an "in-plan conversion" - then you'd want to check to see if you could put it into BrokerageLink - and if it can be converted from there (or if it needs to stay in the non-BrokerageLink options for automatic conversion). You can cancel out and not make changes if you don't want (but you need to navigate down the path to see the list of options for you...).

I'd also recommend checking your "Contribution" settings - look towards the bottom - below where you enter a % for pre-tax, after-tax, etc. In my plan, that's where I see the "in-plan" conversion options (initially a quarterly convert, now a "Daily Roth In-Plan Conversion" option, hiding under "Other Contributions."

p.s. I'm jealous that you have both the BrokerageLink and BrokerageLink Roth options. Ideally you'll have an "in-plan conversion" option - and then you can automate the whole process! Enjoy!
So I talked with the Fidelity rep assigned to my company's plan, and here is what I found out. Not that much to be jealous about:

While my 401K plan will track which money came from AFTER-TAX contributions, it is not a SOURCE for which I can select investments independently of the PRE-TAX or EMPLOYER MATCH contributions; all money related to the 401K plan is invested automatically into the same holdings.

The "BrokerageLink Roth" account appears to be unrelated to performing a ROTH CONVERSION of the AFTER-TAX money. It still haven't figured out exactly when this account would see any money. I'll call the Fidelity rep next week to figure this out.

The Fidelity Rep recommends opening a personal ROTH IRA account (not under my employer's plan). This personal ROTH IRA account is where the money/holdings will be placed when performing the AFTER-TAX conversion. The converted holdings will remain in the same investments they were originally invested in based on my 401K allocations. After the conversion I have the full range of Fidelity investment options to change into if desired.

Unfortunately my company's plan only allows us to perform 4 conversion per year. These must be done by phone. This means I will have some taxable gains in the 3 months between transfers, but probably not too much.

I asked the Fidelity rep the following question: "Will the conversion only pull money from the AFTER-TAX source (and possible the AFTER-TAX gains)? There is a confusing example about this on the link you sent (https://www.fidelity.com/viewpoints/ret ... r-guidance) that I don’t understand." His response was: "Only After-Tax 401k assets are eligible to directly transfer while you are still actively employed, so yes, the Principal and Earning will have to transfer. This is a pro-rata transaction and therefore you can move all or part of the after-tax, but the proportional amount of principal and earnings have to be pro-rated across the entire After-Tax account balance." I'm not really sure what this "pro-rata" stuff means. Can anyone explain this plain English?! =)

The Fidelity rep also said: "[The gains on the AFTER-TAX contributions prior to performing the conversion] will be subject to taxes (as they are looked at as a “conversion,” and you don’t have to move the earnings to the Roth IRA. You can also elect to open a Rollover IRA and complete the direct transfer of the earnings to the Rollover IRA and the principal (contributions) to the Roth IRA. In any event, you will receive appropriate tax form (Form 1099-R and 5498 forms) for these transactions, as tax filings." I'm not sure what the reason or difference is between converting the AFTER-TAX principal to a Roth IRA and the gains between conversions to the Rollover IRA. Does anyone know what he is getting at and the reason for this?

My first AFTER-TAX contribution to my 401K will drop next week, so I'll have fun setting these accounts up then!

Thanks all again for your invaluable insights!

SnowBog
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Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Thu Jul 09, 2020 10:40 pm

Shaka wrote:
Thu Jul 09, 2020 9:57 pm
Unfortunately my company's plan only allows us to perform 4 conversion per year. These must be done by phone. This means I will have some taxable gains in the 3 months between transfers, but probably not too much.
Personally I don't make after-tax contributions until after my pre-tax (and match) is filled up for the year. Then I switch to after-tax. I probably do 4 transfers a year as well, but these are within about 6 months.
Shaka wrote:
Thu Jul 09, 2020 9:57 pm
This is a pro-rata transaction and therefore you can move all or part of the after-tax, but the proportional amount of principal and earnings have to be pro-rated across the entire After-Tax account balance.[/color]" I'm not really sure what this "pro-rata" stuff means. Can anyone explain this plain English?! =)
As I understand it, let's say you put in $10,000 after-tax which has $1,000 gain, for a total of $11,000. If you opt to convert 50%, that would be $5,000 of contributions + $500 if gain. They are pro-rated (aka same ratio).

But more simply, you'd typically convert 100% so it doesn't really matter.
Shaka wrote:
Thu Jul 09, 2020 9:57 pm
I'm not sure what the reason or difference is between converting the AFTER-TAX principal to a Roth IRA and the gains between conversions to the Rollover IRA. Does anyone know what he is getting at and the reason for this?
The "Rollover IRA" is a Traditional IRA. On its own, the idea is the gains can be moved to a traditional IRA without having any taxes owned at time is transfer. Much like they were in your 401k, the gains will remain tax-deferred until such time as you withdraw them.

If you are doing Backdoor Roth conversions, this balance left in a Traditional IRA will end up creating problems.

Plus the main benefit of a Mega Backdoor Roth is super-sizing your Roth balance. Part of that is by getting as much into the account as possible. Paying a small amount of taxes on what's likely small gains waiting to convert, then letting it grow tax free forever is generally the better option.

Spirit Rider
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Re: Where to start with mega backdoor Roth IRA?

Post by Spirit Rider » Thu Jul 09, 2020 11:55 pm

Keep in mind.

You can do a split rollover of employee after-tax contributions to a Roth IRA and the earnings to a traditional IRA. If your 401k plan accepts IRA rollovers, you can do that and still use the Backdoor Roth by rolling the accumulated traditional IRA balance back into the 401k by 12/31.

Shaka
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Joined: Sat Jul 04, 2020 8:04 pm

Re: Where to start with mega backdoor Roth IRA?

Post by Shaka » Thu Jul 09, 2020 11:57 pm

Spirit Rider wrote:
Thu Jul 09, 2020 11:55 pm
Keep in mind.

You can do a split rollover of employee after-tax contributions to a Roth IRA and the earnings to a traditional IRA. If your 401k plan accepts IRA rollovers, you can do that and still use the Backdoor Roth by rolling the accumulated traditional IRA balance back into the 401k by 12/31.
Do you know WHY one would do this versus just converting it all over to the Roth IRA? That's what I'm confused about.

Thanks!

Spirit Rider
Posts: 13215
Joined: Fri Mar 02, 2007 2:39 pm

Re: Where to start with mega backdoor Roth IRA?

Post by Spirit Rider » Fri Jul 10, 2020 12:07 am

Shaka wrote:
Thu Jul 09, 2020 11:57 pm
Do you know WHY one would do this versus just converting it all over to the Roth IRA? That's what I'm confused about.
To not pay any current taxes on any earnings. The rollover of the pre-tax earnings to a traditional IRA and back to the 401k would both be tax-free.

SnowBog
Posts: 267
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Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Fri Jul 10, 2020 9:02 am

Spirit Rider wrote:
Fri Jul 10, 2020 12:07 am
Shaka wrote:
Thu Jul 09, 2020 11:57 pm
Do you know WHY one would do this versus just converting it all over to the Roth IRA? That's what I'm confused about.
To not pay any current taxes on any earnings. The rollover of the pre-tax earnings to a traditional IRA and back to the 401k would both be tax-free.
I'd argue Tax Deferred, not Tax Free. You'll eventually have to deal with taxes when you withdraw the gains after years of growth. Personally, I prefer to pay the minimal taxes and have a larger Roth amount, where it remains tax free.

But one could argue if you are going to retire early or have low income years to do Roth conversions with minimal taxes, deferring the taxes could work out as well.

Spirit Rider
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Re: Where to start with mega backdoor Roth IRA?

Post by Spirit Rider » Fri Jul 10, 2020 11:20 am

SnowBog wrote:
Fri Jul 10, 2020 9:02 am
Spirit Rider wrote:
Fri Jul 10, 2020 12:07 am
Shaka wrote:
Thu Jul 09, 2020 11:57 pm
Do you know WHY one would do this versus just converting it all over to the Roth IRA? That's what I'm confused about.
To not pay any current taxes on any earnings. The rollover of the pre-tax earnings to a traditional IRA and back to the 401k would both be tax-free.
I'd argue Tax Deferred, not Tax Free. You'll eventually have to deal with taxes when you withdraw the gains after years of growth. Personally, I prefer to pay the minimal taxes and have a larger Roth amount, where it remains tax free.

But one could argue if you are going to retire early or have low income years to do Roth conversions with minimal taxes, deferring the taxes could work out as well.
I never said the assets became tax-free only that the "rollovers" would be tax-free. This is just the same Roth conversion metrics used in any other situation.

You were the one who asked WHY and I answered why. I don't why you would "argue" with my response.

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emlowe
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Re: Where to start with mega backdoor Roth IRA?

Post by emlowe » Fri Jul 10, 2020 11:36 am

Interesting how all plans are somewhat different.

My company is also with Fidelity - my After-Tax is called "After-tax Basic" - so I can set contributions for

"Pre-Tax Contribution"
"Roth Basic"
"After-tax Basic"
"Employee pre-tax Catch-Up" (ok yes dating myself...)
"Employee Roth Catch-Up"


The best part though is the automatic same-day sweep/conversion of After-tax contributions to the in-plan Roth 401k. No phone calls, and no earnings to worry about (there may be a few pennies from time to time)

The downside is I have to set the same investments for both the Traditional 401k and the Roth 401k - but I like the ease of the automatic in-plan conversion so this is acceptable to me
Ferri Core 4: 40% Bonds | 6% Reit | 18% Total i18n | 36% Total US

SnowBog
Posts: 267
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Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Fri Jul 10, 2020 1:59 pm

Spirit Rider wrote:
Fri Jul 10, 2020 11:20 am
You were the one who asked WHY and I answered why. I don't why you would "argue" with my response.
No argument here... Just trying to clarify...

Both of us where trying to explain the same thing to poster Shaka , who is the one that asked "why".
Last edited by SnowBog on Fri Jul 10, 2020 2:16 pm, edited 1 time in total.

SnowBog
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Joined: Fri Dec 21, 2018 11:21 pm

Re: Where to start with mega backdoor Roth IRA?

Post by SnowBog » Fri Jul 10, 2020 2:03 pm

emlowe wrote:
Fri Jul 10, 2020 11:36 am
Interesting how all plans are somewhat different.
That's what makes it hard to answer questions, as so much is dependent upon your specific plan.

General things still apply, but the mechanics, names, costs, what's allowed vs. what's not can vary greatly.

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