Mega Back Door Roth and Avoiding Excess Contributions

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
invest4
Posts: 216
Joined: Wed Apr 24, 2019 2:19 am

Mega Back Door Roth and Avoiding Excess Contributions

Post by invest4 »

Dear All,

I am attempting to maximize the mega back door Roth option with my employer up to the maximum annual contribution limits of $57,000 for 2020 (first time doing this to max). In doing so, I have some concern about unintentionally making excess contributions and subsequently dealing with the process of making needed corrections (refunding excess contributions, etc.).

I would greatly appreciate your input / experience on the following items:

What is counted toward the $57,000 limit?
* Combined employer and employee contributions - I believe the relevant items in my case are listed below.
- After-Tax - e.g. mega back door Roth contributions
- Pre-Tax - the normal $19,500 for 2020 for example
- Company Match - matching pre-tax contributions for example
- Company Contribution - annual company contribution in lieu of pension
- Roth 401k - could also be included, but my contributions here are zero.

There is also a line item for the Roth Rollover and I am a bit confused about its relationship to the other deposits and whether or not it is ultimately just reflecting the movement of the monies from after-tax to Roth.


Example (total year Jan 1 - Dec 31):

Deposits
After-Tax: $11000
Pre-Tax: $19500
Company Match: $9500
Company Contribution: $9000
Related Roth Rollover: $17000

Total: $66,000

Withdrawals / Expenses / Transfers

After-Tax: -$17000 (note: believe difference between after-tax deposit and withdrawal here is that existing after-tax funds from prior year were also converted)
Pre-Tax: -$100
Company Match: -$60
Company Contribution: -$45
Related Roth Rollover: -$70

Total: $17,275

My current understanding is that these items constitute what has been converted via the mega back door Roth ($17K for example) along with whatever fees (smaller amounts).

Importantly, my impression would be that the total contribution for the current year = $66,000 - $17,275 = $48,725. Is this correct?

Also, has anyone made excess contributions such as in this endeavor and can you please share your experience? Curious if this is something one very much wants to avoid or is relatively straightforward / not a big deal.

Hope all of the above makes some sense and greatly appreciate your time (as always).
AnEngineer
Posts: 92
Joined: Sat Jun 27, 2020 4:05 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by AnEngineer »

I agree that you don't include Roth conversions (not contributions), but I'm not sure about those smaller amounts that you're subtracting. If they're fees paid out of the account I don't think you can subtract them, though maybe you could arrange to pay them with outside money?

I have not made excess contributions, but believe there is a procedure to pull that money out (there may effectively be penalties). More to look out for is if hitting the total annual max will prevent employer contributions. That you'll have to precalculate.
retiredjg
Posts: 41681
Joined: Thu Jan 10, 2008 12:56 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by retiredjg »

The $57k limit is a contribution limit. I think these are the only numbers that matter. Obviously, your HR/plan reps are the ones to ask.

After-Tax: $11000
Pre-Tax: $19500
Company Match: $9500
Company Contribution: $9000

I think there is another possible category that could apply in some plans - forfeitures (from employees who have left before their match gets fully vested). Be sure to ask about that.

Note that the contribution limit is higher if you are 50 years old or older.
magicrat
Posts: 1059
Joined: Sat Nov 29, 2014 7:04 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by magicrat »

Most plans are setup so that you cannot make contributions that exceed the limit.
HomeStretch
Posts: 4895
Joined: Thu Dec 27, 2018 3:06 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by HomeStretch »

If you are a Highly Compensated Employee (HCE), it is possible that the results of the annual 401k testing may cause your employer to reduce your contribution limit as an HCE. Any excess contributions would be returned to you. You can ask your HR group whether this has been an issue in past plan years and when the results for the 2020 testing/any 2020 HCE limitations will be known.
MBB_Boy
Posts: 166
Joined: Sat May 12, 2018 4:09 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by MBB_Boy »

I think you have it right, and this is similar to how I calculated it myself this year. For your deposits paragraph, I just did that but didn't include the converted amount (17K in your example). That doesn't count toward the total.

What this would mean is that you have more room available, because you are only at 66K-17K, or 49K.
AnEngineer
Posts: 92
Joined: Sat Jun 27, 2020 4:05 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by AnEngineer »

magicrat wrote: Tue Sep 15, 2020 8:15 am Most plans are setup so that you cannot make contributions that exceed the limit.
But not necessarily while also ensuring that you'll get all of your employer match/contribution. Some plans will allow you to fill up first and end up forgoing your expected match.
destiny
Posts: 19
Joined: Sun Mar 11, 2018 8:59 pm
Location: Land of Lincoln

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by destiny »

What is counted toward the $57,000 limit?
* Combined employer and employee contributions - I believe the relevant items in my case are listed below.
- After-Tax - e.g. mega back door Roth contributions
- Pre-Tax - the normal $19,500 for 2020 for example
- Company Match - matching pre-tax contributions for example
- Company Contribution - annual company contribution in lieu of pension
- Roth 401k - could also be included, but my contributions here are zero.
My understanding is that Defined Benefits aka. Pensions contributed by the employer is not counted towards annual $57K limit, maybe someone with expert knowledge can validate this.
once bitten, twice shy
kmanjir
Posts: 31
Joined: Fri Mar 27, 2020 8:45 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by kmanjir »

On a related note, I had asked my HR a question about the following scenario and never really received a response (after they had mentioned that excess contributions would be returned in the form a check to the employee) - I had asked what if the excess after-tax contributions had already undergone an in-plan conversion to Roth, how would the excess contributions be returned then. Would they get pulled out of the Roth, and if so, wouldn't there be penalties for doing so? Maybe I didn't frame the question correctly.
batpot
Posts: 1146
Joined: Thu Jul 11, 2013 8:48 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by batpot »

it would be in your interest not to find out.
adjust your witholdings so that the last paycheck gets you to $57k.

the reason for this is if you hit the max too early, then your company match will almost certainly not be included, since your contribution amount is zero.
Tingting1013
Posts: 234
Joined: Mon Aug 24, 2020 5:44 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by Tingting1013 »

batpot wrote: Tue Sep 15, 2020 12:15 pm the reason for this is if you hit the max too early, then your company match will almost certainly not be included, since your contribution amount is zero.
At my company the match is always made, if that pushes you above the $57k limit it then your after-tax contributions in the amount of the match (plus earnings) are returned to you as excess to bring you back down to $57k.
Last edited by Tingting1013 on Tue Sep 15, 2020 12:22 pm, edited 1 time in total.
Tingting1013
Posts: 234
Joined: Mon Aug 24, 2020 5:44 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by Tingting1013 »

kmanjir wrote: Tue Sep 15, 2020 11:15 am On a related note, I had asked my HR a question about the following scenario and never really received a response (after they had mentioned that excess contributions would be returned in the form a check to the employee) - I had asked what if the excess after-tax contributions had already undergone an in-plan conversion to Roth, how would the excess contributions be returned then. Would they get pulled out of the Roth, and if so, wouldn't there be penalties for doing so? Maybe I didn't frame the question correctly.
You will likely have to pull out the Roth excess yourself. The 401K custodian will send you a letter with the amount of the excess.

No penalty as long as you do it by the next tax filing deadline.
batpot
Posts: 1146
Joined: Thu Jul 11, 2013 8:48 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by batpot »

Tingting1013 wrote: Tue Sep 15, 2020 12:19 pm
batpot wrote: Tue Sep 15, 2020 12:15 pm the reason for this is if you hit the max too early, then your company match will almost certainly not be included, since your contribution amount is zero.
At my company the match is always made, if that pushes you above the $57k limit it then your after-tax contributions in the amount of the match (plus earnings) are returned to you as excess to bring you back down to $57k.
mine requires 8% to get the match...no two companies are the same.
Topic Author
invest4
Posts: 216
Joined: Wed Apr 24, 2019 2:19 am

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by invest4 »

Thanks to everyone for their inputs...greatly appreciated.
magicrat wrote: Tue Sep 15, 2020 8:15 am Most plans are setup so that you cannot make contributions that exceed the limit.
That would be great. Unfortunately, my understanding is that my plan does not do so.
retiredjg wrote: Tue Sep 15, 2020 8:10 am The $57k limit is a contribution limit. I think these are the only numbers that matter. Obviously, your HR/plan reps are the ones to ask.

After-Tax: $11000
Pre-Tax: $19500
Company Match: $9500
Company Contribution: $9000

I think there is another possible category that could apply in some plans - forfeitures (from employees who have left before their match gets fully vested). Be sure to ask about that.

Note that the contribution limit is higher if you are 50 years old or older.
Forfeitures...these are the kinds of 'gold nuggets' I love our forum for.
I spoke with the reps. from the plan administrator and believe we are aligned in regard to what 'counts'.
AnEngineer wrote: Tue Sep 15, 2020 7:54 am I agree that you don't include Roth conversions (not contributions), but I'm not sure about those smaller amounts that you're subtracting. If they're fees paid out of the account I don't think you can subtract them, though maybe you could arrange to pay them with outside money?

I have not made excess contributions, but believe there is a procedure to pull that money out (there may effectively be penalties). More to look out for is if hitting the total annual max will prevent employer contributions. That you'll have to precalculate.
You are correct about the fees. Unfortunately, there is also not the possibility to pay for them outside of the plan (asked about that one some time ago...disappointing, but not surprising).
Tingting1013 wrote: Tue Sep 15, 2020 12:21 pm
kmanjir wrote: Tue Sep 15, 2020 11:15 am On a related note, I had asked my HR a question about the following scenario and never really received a response (after they had mentioned that excess contributions would be returned in the form a check to the employee) - I had asked what if the excess after-tax contributions had already undergone an in-plan conversion to Roth, how would the excess contributions be returned then. Would they get pulled out of the Roth, and if so, wouldn't there be penalties for doing so? Maybe I didn't frame the question correctly.
You will likely have to pull out the Roth excess yourself. The 401K custodian will send you a letter with the amount of the excess.

No penalty as long as you do it by the next tax filing deadline.
When speaking with the people from the plan admin, it didn't sound like a particularly hairy situation as long as it is quickly taken care of. However, I suspect that if there are any earnings on the excess contributions, there will be some tax consequence (1099-R) with both the excess contribution and earnings coming back to you. One thought was also whether or not it would have an impact on my W-2. I suspect that since I am only dealing with after-tax, then this would not be a problem (versus excess pre-tax contributions which would then need to be added back to your taxable wages).
batpot wrote: Tue Sep 15, 2020 12:28 pm
Tingting1013 wrote: Tue Sep 15, 2020 12:19 pm
batpot wrote: Tue Sep 15, 2020 12:15 pm the reason for this is if you hit the max too early, then your company match will almost certainly not be included, since your contribution amount is zero.
At my company the match is always made, if that pushes you above the $57k limit it then your after-tax contributions in the amount of the match (plus earnings) are returned to you as excess to bring you back down to $57k.
mine requires 8% to get the match...no two companies are the same.
My impression from the plan admin is that the match would continue to be made without interruption. Of course, I always struggle a bit as the knowledge of the reps. at the plan administrator varies greatly. Typically, I get the first level rep who hands me to the second and then finally to a third who is a 'specialist' and has some experience. Does not always instill great confidence...particularly if you find yourself educating them vs the other way around.

I really start to think whether or not I should be cautious and ensure I do not get too "cute" in regard to maxing it out for this year. Unless I adjust my current contributions, I am relatively certain i will have excess. The challenge is that I would need to change my contributions which are delayed for a couple of pay periods before going into effect, etc...moving target. After we complete 3Q, I will do an assessment and see what adjustments may make sense.

It's been a learning experience thus far and hopefully I will be able to do a better job with setting my contribution % at the onset of next year to make for a smoother ride. Ultimately, I am grateful that my plan has the option as I am keen increase my share of Roth vs pre-tax (current portfolio is 85% pre-tax and 15% Roth).
grp2c
Posts: 130
Joined: Sat Mar 08, 2014 5:51 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by grp2c »

DW's former employer did what you are concerned about for 2019. DW contributed to the max for aftertax non roth contributions for 2019. Contributions were correct as of 1/2020. DW was hired by different employer on 2/1/20. Former company did a true-up match on 4/1/20. Without knowing this occurred, she requested a rollover of the entire 401k (pretax 401k to traditional ira and aftertax contributions to roth ira) on 4/20/20. Company did an audit on 5/1/20 and found the true-up match caused and excess contribution of aftertax nonroth contributions for 2019. This is normally corrected by distributing the excess as a return of aftertax contributions and making it ordinary income subject to 2020 taxes. However, since she already rolled the funds in a roth ira, she had made an ineligible roth rollover. She received a letter from the 401k provider (fidelity netbenefits) to correct this with the current brokerage holding the roth ira (fidelity retail). She completed an IRA return of excess contribution form stating the amount that was ineligible to be rolled over. Fidelity retail then calculated the earnings on this amount since the rollover. The excess contribution plus earnings was then distributed to her checking account.

Fidelity says she will get a 1099-R for 2020. Not sure if she will get 2, one for the excess from 401k and one from fidelity retail.

Technically, since at the time of rollover the aftertax nonroth amount was less than her original contributions, I believe the taxes on the amount of earnings from rollover amount to basis should be waived however I'm not going to fight for this at this point.
User avatar
Thrifty Femme
Posts: 511
Joined: Sun Apr 12, 2015 1:54 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by Thrifty Femme »

magicrat wrote: Tue Sep 15, 2020 8:15 am Most plans are setup so that you cannot make contributions that exceed the limit.
For the elective deferral limit, yes. Max contribution limit, no. I guess no one expects very many people to contribute the max.

OP can look up exactly how much they contributed in early January next year and notify the benefits department of the excess contribution explaining that the plan is out of compliance with the IRS until they return the excess contribution and associated earnings. That will get things moving along rather quickly :happy. OP will receive a check for the distribution and a 1099 the following year.
neverpanic
Posts: 378
Joined: Sun May 10, 2020 12:26 am

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by neverpanic »

invest4 wrote: Tue Sep 15, 2020 3:38 pm When speaking with the people from the plan admin, it didn't sound like a particularly hairy situation as long as it is quickly taken care of. However, I suspect that if there are any earnings on the excess contributions, there will be some tax consequence (1099-R) with both the excess contribution and earnings coming back to you.
Make a good faith effort to account for any earnings linked to the excess contribution, but don't be handcuffed by it. Get the excess out of the account as soon as you discover the overage and then file your return as normal.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
magicrat
Posts: 1059
Joined: Sat Nov 29, 2014 7:04 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by magicrat »

Thrifty Femme wrote: Tue Sep 15, 2020 6:25 pm
magicrat wrote: Tue Sep 15, 2020 8:15 am Most plans are setup so that you cannot make contributions that exceed the limit.
For the elective deferral limit, yes. Max contribution limit, no. I guess no one expects very many people to contribute the max.

OP can look up exactly how much they contributed in early January next year and notify the benefits department of the excess contribution explaining that the plan is out of compliance with the IRS until they return the excess contribution and associated earnings. That will get things moving along rather quickly :happy. OP will receive a check for the distribution and a 1099 the following year.
My megacorp 401k prevents one from going over the $57k limit.
User avatar
Thrifty Femme
Posts: 511
Joined: Sun Apr 12, 2015 1:54 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by Thrifty Femme »

magicrat wrote: Tue Sep 15, 2020 6:34 pm
Thrifty Femme wrote: Tue Sep 15, 2020 6:25 pm
magicrat wrote: Tue Sep 15, 2020 8:15 am Most plans are setup so that you cannot make contributions that exceed the limit.
For the elective deferral limit, yes. Max contribution limit, no. I guess no one expects very many people to contribute the max.

OP can look up exactly how much they contributed in early January next year and notify the benefits department of the excess contribution explaining that the plan is out of compliance with the IRS until they return the excess contribution and associated earnings. That will get things moving along rather quickly :happy. OP will receive a check for the distribution and a 1099 the following year.
My megacorp 401k prevents one from going over the $57k limit.
Yours is on the ball! My last two did not.
User avatar
BroIceCream
Posts: 259
Joined: Tue Oct 30, 2018 11:31 pm
Location: California

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by BroIceCream »

magicrat wrote: Tue Sep 15, 2020 6:34 pm My megacorp 401k prevents one from going over the $57k limit.
My megacorp 401K also stops "my" contributions after the limit is reached, but keeps contributing their 401k-matching % and profit-sharing deposits through the end of the year.

At the start of the next year, they will "refund" any excess to me ( I wish they'd just apply it toward my contributions for next year).
The 'refunded' excess monies are first taken from my "after-tax" contributions, so there is no subsequent taxation event.
magicrat
Posts: 1059
Joined: Sat Nov 29, 2014 7:04 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by magicrat »

BroIceCream wrote: Wed Sep 16, 2020 12:09 pm
magicrat wrote: Tue Sep 15, 2020 6:34 pm My megacorp 401k prevents one from going over the $57k limit.
My megacorp 401K also stops "my" contributions after the limit is reached, but keeps contributing their 401k-matching % and profit-sharing deposits through the end of the year.

At the start of the next year, they will "refund" any excess to me ( I wish they'd just apply it toward my contributions for next year).
The 'refunded' excess monies are first taken from my "after-tax" contributions, so there is no subsequent taxation event.
That stinks. My company keeps the match going and just puts it into the deferred comp plan.
Alan S.
Posts: 9868
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by Alan S. »

Most plans correct excess annual additions violations (Sec 415c) by distributing from the after tax balance plus earnings on the excess.

But when the plan determines your exact excess amount, if you have rolled the entire balance of the after tax sub account out to your Roth IRA and there is no remaining after tax balance to fund the corrective distribution, the plan is likely to reflect that correction by issuing two 1099R forms, one coded E to reflect the excess amount (even though you rolled it to your Roth IRA) and the other to reflect the allowed direct rollover amount. The E coded 1099R would be the amount of your excess distribution contributed to your Roth IRA that needs to be treated as an excess regular Roth IRA contribution and removed from your Roth IRA.
Tingting1013
Posts: 234
Joined: Mon Aug 24, 2020 5:44 pm

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by Tingting1013 »

Alan S. wrote: Wed Sep 16, 2020 1:15 pm The E coded 1099R would be the amount of your excess distribution contributed to your Roth IRA that needs to be treated as an excess regular Roth IRA contribution and removed from your Roth IRA.
Plus removing any subsequent earnings while that excess was in the Roth IRA, correct?
Alan S.
Posts: 9868
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Mega Back Door Roth and Avoiding Excess Contributions

Post by Alan S. »

Tingting1013 wrote: Wed Sep 16, 2020 1:22 pm
Alan S. wrote: Wed Sep 16, 2020 1:15 pm The E coded 1099R would be the amount of your excess distribution contributed to your Roth IRA that needs to be treated as an excess regular Roth IRA contribution and removed from your Roth IRA.
Plus removing any subsequent earnings while that excess was in the Roth IRA, correct?
Yes, the IRA custodian will automatically calculate that in most cases. Earnings removed from the receiving IRA are subject to penalty, but earnings from the plan for the excess annual additions are not.
Post Reply