Mega Backdoor Question

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Topic Author
JWalterWeatherman
Posts: 11
Joined: Thu Mar 08, 2018 8:47 am

Mega Backdoor Question

Post by JWalterWeatherman »

Hi- I'm looking at what it means to have a mega-backdoor 401k. From my understanding it means that this includes adding post-tax contributions up to the legal limit of $58,000 for 2021. 

So this becomes
$19,500 pretax contributions 
+ X Employer Contributions 
+ Y Post Tax Contributions
= $58,000 maximum

Right now I maximize my pre-tax contributions, max out a backdoor-roth ira, and max out a HSA. I am doing some post tax contributions (due to rounding issues trying to hit the maximum). On my paystub these are listed as "After Tax 401k"

I have a couple of questions
1) Am i correct in assuming these "after tax 401k" contributions are the same thing as Y listed above?

2) For the pre-tax 401k you're taxed on everything (base+profit) when you take the money out. For a roth ira you're contributing post-tax so are only taxed on profits. I don't see a distinction between my pre-tax and post-tax contributions in my online statements (I don't see the "roth" part of the 401k) Wouldn't these after tax contributions be taxed coming in to the 401k and also taxed when withdrawn? Effectively double taxing the money? Because they mix with the other pre-tax 401k funds? Wouldn't it be better to just put the money in a Vanguard Index fund where you are taxed on profit only?

I feel like i'm missing something here. 
Thanks!
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anon_investor
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Joined: Mon Jun 03, 2019 1:43 pm

Re: Mega Backdoor Question

Post by anon_investor »

JWalterWeatherman wrote: Thu Jun 10, 2021 9:51 am Hi- I'm looking at what it means to have a mega-backdoor 401k. From my understanding it means that this includes adding post-tax contributions up to the legal limit of $58,000 for 2021. 

So this becomes
$19,500 pretax contributions 
+ X Employer Contributions 
+ Y Post Tax Contributions
= $58,000 maximum

Right now I maximize my pre-tax contributions, max out a backdoor-roth ira, and max out a HSA. I am doing some post tax contributions (due to rounding issues trying to hit the maximum). On my paystub these are listed as "After Tax 401k"

I have a couple of questions
1) Am i correct in assuming these "after tax 401k" contributions are the same thing as Y listed above?

2) For the pre-tax 401k you're taxed on everything (base+profit) when you take the money out. For a roth ira you're contributing post-tax so are only taxed on profits. I don't see a distinction between my pre-tax and post-tax contributions in my online statements (I don't see the "roth" part of the 401k) Wouldn't these after tax contributions be taxed coming in to the 401k and also taxed when withdrawn? Effectively double taxing the money? Because they mix with the other pre-tax 401k funds? Wouldn't it be better to just put the money in a Vanguard Index fund where you are taxed on profit only?

I feel like i'm missing something here. 
Thanks!
The key ingredient that I see missing is that the "after-tax" contribution has to be converted to Roth, otherwise any growth will be taxed as ordinary income when withdrawn, just like your pre-tax 401k funds. Some 401k plans allow you to convert after-tax funds in-plan to Roth, AND/OR do an in-service withdrawal of the after-tax funds to allow you to roll it over to a Roth IRA.

Without that key Roth conversion, you only have half of the mega backdoor Roth.
lakpr
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Re: Mega Backdoor Question

Post by lakpr »

I think what you are missing is the Roth conversion part. Just like in the Backdoor Roth that you said you are maxing out yearly, you make a non-deductible contribution within the 401k, and then convert it to Roth. If you do not convert it to Roth, the earnings will be taxed as ordinary income.

If your plan allows post-tax contributions, it should also define a mechanism in which you can convert the post-tax contributions to either Roth 401k within the plan (called In-Plan Roth Rollover, or IRR), or roll over to an external Roth IRA. Read your plan's Summary Plan Description on how to accomplish that Roth rollover.

For me, my 401k plan allows only IRR, does not allow rollover to external Roth IRA. The ostensible reason is that, once the post-tax contributions leave the plan, it may be difficult to undo the contributions ... and that might become necessary because the plan is subject to ADP and ACP tests even in a Safe Harbor 401k plan. If the plan fails those tests, the excess contributions to the after-tax bucket should be undone and returned to the participants.

Lastly, if you leave the post-tax contributions within the plan without converting to Roth, when you withdraw the money from the plan, it is considered a proportional withdrawal of the pretax funds and post-tax contributions (remember that the earnings on post-tax contributions are considered pre-tax, so there is no such thing as a post-tax growth). Thus you are NOT double-taxed.
retiredjg
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Re: Mega Backdoor Question

Post by retiredjg »

JWalterWeatherman wrote: Thu Jun 10, 2021 9:51 am I have a couple of questions
1) Am i correct in assuming these "after tax 401k" contributions are the same thing as Y listed above?
Looks like it.
2) For the pre-tax 401k you're taxed on everything (base+profit) when you take the money out. For a roth ira you're contributing post-tax so are only taxed on profits. I don't see a distinction between my pre-tax and post-tax contributions in my online statements (I don't see the "roth" part of the 401k) Wouldn't these after tax contributions be taxed coming in to the 401k and also taxed when withdrawn? Effectively double taxing the money? Because they mix with the other pre-tax 401k funds? Wouldn't it be better to just put the money in a Vanguard Index fund where you are taxed on profit only?

I feel like i'm missing something here. 
Thanks!
One of the things you are missing is that the "after tax 401k" is not the same as Roth 401k. Yes, Roth 401k is after-tax. It is confusing, isn't it?

In the case of your plan you have pre-tax contributions, Roth contributions, employer contributions (pre-tax), after-tax contributions. There could be other accounts as well - for example if you rolled an IRA into the 401k, that would be separate too.

If you want to use the mega-backdoor, you would roll the after-tax account out to Roth IRA or do an "in plan Roth rollover" over to Roth 401k. Your plan may allow one, the other, both, or none of these options. That is the first thing you must find out.

And no, the after-tax account is not taxed a second time. When that account is converted to Roth IRA or Roth 401k, you only pay tax on the earnings that have been produced by the contributions.
RTF
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Re: Mega Backdoor Question

Post by RTF »

retiredjg wrote: Thu Jun 10, 2021 10:05 am
JWalterWeatherman wrote: Thu Jun 10, 2021 9:51 am I have a couple of questions
1) Am i correct in assuming these "after tax 401k" contributions are the same thing as Y listed above?
Looks like it.
2) For the pre-tax 401k you're taxed on everything (base+profit) when you take the money out. For a roth ira you're contributing post-tax so are only taxed on profits. I don't see a distinction between my pre-tax and post-tax contributions in my online statements (I don't see the "roth" part of the 401k) Wouldn't these after tax contributions be taxed coming in to the 401k and also taxed when withdrawn? Effectively double taxing the money? Because they mix with the other pre-tax 401k funds? Wouldn't it be better to just put the money in a Vanguard Index fund where you are taxed on profit only?

I feel like i'm missing something here. 
Thanks!
One of the things you are missing is that the "after tax 401k" is not the same as Roth 401k. Yes, Roth 401k is after-tax. It is confusing, isn't it?

In the case of your plan you have pre-tax contributions, Roth contributions, employer contributions (pre-tax), after-tax contributions. There could be other accounts as well - for example if you rolled an IRA into the 401k, that would be separate too.

If you want to use the mega-backdoor, you would roll the after-tax account out to Roth IRA or do an "in plan Roth rollover" over to Roth 401k. Your plan may allow one, the other, both, or none of these options. That is the first thing you must find out.

And no, the after-tax account is not taxed a second time. When that account is converted to Roth IRA or Roth 401k, you only pay tax on the earnings that have been produced by the contributions.

I was thinking about this earlier, is it still considered a Mega-Backdoor Roth when you just do a in plan rollover from after tax to your Roth 401k and not to your personal Roth IRA?
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anon_investor
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Re: Mega Backdoor Question

Post by anon_investor »

RTF wrote: Thu Jun 10, 2021 11:14 am
retiredjg wrote: Thu Jun 10, 2021 10:05 am
JWalterWeatherman wrote: Thu Jun 10, 2021 9:51 am I have a couple of questions
1) Am i correct in assuming these "after tax 401k" contributions are the same thing as Y listed above?
Looks like it.
2) For the pre-tax 401k you're taxed on everything (base+profit) when you take the money out. For a roth ira you're contributing post-tax so are only taxed on profits. I don't see a distinction between my pre-tax and post-tax contributions in my online statements (I don't see the "roth" part of the 401k) Wouldn't these after tax contributions be taxed coming in to the 401k and also taxed when withdrawn? Effectively double taxing the money? Because they mix with the other pre-tax 401k funds? Wouldn't it be better to just put the money in a Vanguard Index fund where you are taxed on profit only?

I feel like i'm missing something here. 
Thanks!
One of the things you are missing is that the "after tax 401k" is not the same as Roth 401k. Yes, Roth 401k is after-tax. It is confusing, isn't it?

In the case of your plan you have pre-tax contributions, Roth contributions, employer contributions (pre-tax), after-tax contributions. There could be other accounts as well - for example if you rolled an IRA into the 401k, that would be separate too.

If you want to use the mega-backdoor, you would roll the after-tax account out to Roth IRA or do an "in plan Roth rollover" over to Roth 401k. Your plan may allow one, the other, both, or none of these options. That is the first thing you must find out.

And no, the after-tax account is not taxed a second time. When that account is converted to Roth IRA or Roth 401k, you only pay tax on the earnings that have been produced by the contributions.

I was thinking about this earlier, is it still considered a Mega-Backdoor Roth when you just do a in plan rollover from after tax to your Roth 401k and not to your personal Roth IRA?
Yes, because you still end up with Roth funds. I do the in-plan Roth conversions every pay check.
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SteelyEyed
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Re: Mega Backdoor Question

Post by SteelyEyed »

JWalterWeatherman wrote: Thu Jun 10, 2021 9:51 am For a roth ira you're contributing post-tax so are only taxed on profits.
It might help to better understand the different types of contributions. Roths are not taxed at all at the time of distribution. After-Tax are taxed on the way in (like Roth), but the gains are taxed upon distribution.

Depending on your plan, three types of contributions are allowed: Traditional, Roth, and After-Tax.
HomeStretch
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Re: Mega Backdoor Question

Post by HomeStretch »

Not every 401k plan that allows after-tax contributions (step 1 of the mega backdoor) also allows the after-tax contributions to be converted to Roth via either in-plan rollover to Roth 401k or in-service distribution to a Roth IRA (step 2 of the mega backdoor).

Check you plan documents and/or call your 401k provider to see if your plan allows step 2. If it does not, consider stopping the after-tax 401k contributions (growth will be taxed at ordinary income rates) and contribute instead to a Taxable account instead (after 1 year the growth will be taxed at the long-term capital gains rate). Then consider lobbying your company to amend the 401k plan to add step 2!
Topic Author
JWalterWeatherman
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Joined: Thu Mar 08, 2018 8:47 am

Re: Mega Backdoor Question

Post by JWalterWeatherman »

Okay thanks for all of the comments. I see the two options are to (A) keep it in my 401k with fidelity and move it from "after tax" to "Roth 401k" or to (B) extract it from fidelity and move it to another provider like vanguard.

This made me think of a couple of followup questions:
1) Is there a difference between a Roth 401k and a Roth IRA?
2) If I go with B could I merge my fidelity after tax 401k contributions into my Vanguard Roth IRA
3) Does the $58k limit include roth ira? If so my equation would then be: $19,500 pretax contributions + X Employer Contributions + Y Post Tax Contributions + Z Backdoor Roth IRA contributions = $58,000 maximum

Thanks!
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jakehefty17
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Re: Mega Backdoor Question

Post by jakehefty17 »

JWalterWeatherman wrote: Thu Jun 10, 2021 9:51 am So this becomes
$19,500 pretax contributions
+ X Employer Contributions
+ Y Post Tax Contributions
= $58,000 maximum

1) Am i correct in assuming these "after tax 401k" contributions are the same thing as Y listed above?

2) For the pre-tax 401k you're taxed on everything (base+profit) when you take the money out. For a roth ira you're contributing post-tax so are only taxed on profits. I don't see a distinction between my pre-tax and post-tax contributions in my online statements (I don't see the "roth" part of the 401k) Wouldn't these after tax contributions be taxed coming in to the 401k and also taxed when withdrawn? Effectively double taxing the money? Because they mix with the other pre-tax 401k funds? Wouldn't it be better to just put the money in a Vanguard Index fund where you are taxed on profit only?

I feel like i'm missing something here.
Thanks!
1) Yes.
2) No. Many incorrect statements in this paragraph. Basically, contributions come in three varieties:
Pre-Tax contributions are not taxed immediately, instead contributions and growth are taxed withdrawal.
Roth contributions are taxed immediately, and growth is NOT taxed at withdrawal.
After-Tax contributions are taxed immediately, and growth IS taxed at withdrawal.

Depending on your 401k provider/employer, your 401k account may support separate accounts for each type of contribution. Since you have after-tax contributions, you must have an after-tax "sub" account within your 401k. There is no mixing different types of contributions.

What you're missing is the real benefit of the conversion. By converting funds from the After-Tax account to a Roth account, you are saving yourself from being taxed on the future growth.

Read your employer's 401k plan documentation. You need to find out if you are capable of either an in-plan conversion to a Roth 401k "sub" account, OR if you can take an in-service distribution (which you would then ROLL OVER into a Roth IRA). You'll be taxed only on the growth of your after-tax contributions, at the time of distribution/rollover. Be aware that not all plans support the Mega-backdoor Roth.

There's a page under construction that members have been contributing to. Although it's not finished there's a fair amount of info there. Check it out. https://www.bogleheads.org/wiki/User:La ... tributions
JWalterWeatherman wrote: Thu Jun 10, 2021 11:41 am Okay thanks for all of the comments. I see the two options are to (A) keep it in my 401k with fidelity and move it from "after tax" to "Roth 401k" or to (B) extract it from fidelity and move it to another provider like vanguard.

This made me think of a couple of followup questions:
1) Is there a difference between a Roth 401k and a Roth IRA?
2) If I go with B could I merge my fidelity after tax 401k contributions into my Vanguard Roth IRA
3) Does the $58k limit include roth ira? If so my equation would then be: $19,500 pretax contributions + X Employer Contributions + Y Post Tax Contributions + Z Backdoor Roth IRA contributions = $58,000 maximum

Thanks!
A) Basically yes. You may need to make Roth 401k contributions first. Depends on the rules surrounding your plan. Read your documentation.
B) If you can take an in-service distribution, you can rollover into a Roth IRA with any brokerage.
1) From a tax standpoint, no. From a withdrawal standpoint there are minor differences.
2) Yes. Or any other Roth IRA. As long as your plan ALLOWS IT.
3) No. Roth IRA has it's own, completely separate annual limit ($6000 if under 50 years old). Don't alter your equation.

Read into your plan documentation to find out if the mega-backdoor Roth "process" is available to you. Check out the (under construction) wiki page I linked above for more info. Not everyone has this strategy available due to 401k plan rules and restrictions.
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski
Topic Author
JWalterWeatherman
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Re: Mega Backdoor Question

Post by JWalterWeatherman »

Okay thanks and :oops: I remember roth ira is post tax and gains are not taxed- I just flubbed it with all of this discussion today. Through all of your help I understand the key part of the mega backdoor is that you're taking after tax contributions and making it so that the growth will also be tax free.

I'll review my plan documentation and contact my benefits team to understand what options are available to me. I'll follow up here with my official options.
retiredjg
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Re: Mega Backdoor Question

Post by retiredjg »

RTF wrote: Thu Jun 10, 2021 11:14 am I was thinking about this earlier, is it still considered a Mega-Backdoor Roth when you just do a in plan rollover from after tax to your Roth 401k and not to your personal Roth IRA?
Yes. :D
retiredjg
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Re: Mega Backdoor Question

Post by retiredjg »

JWalterWeatherman wrote: Thu Jun 10, 2021 11:41 am 1) Is there a difference between a Roth 401k and a Roth IRA?
Yes. And no. There have different rules for distributionsIn so in that way they are different. But in the end you would probably roll the Roth 401k into Roth IRA so in that way they are not different.

2) If I go with B could I merge my fidelity after tax 401k contributions into my Vanguard Roth IRA
Yes you can do this, but it is much easier to just move the after-tax money to Roth 401k or to Roth IRA at Fidelity. Later on, roll those over to the. Roth IRA at Vanguard.

3) Does the $58k limit include roth ira? If so my equation would then be: $19,500 pretax contributions + X Employer Contributions + Y Post Tax Contributions + Z Backdoor Roth IRA contributions = $58,000 maximum
No. IRA contributions are not included in the $58k limit for 401k plans.
Topic Author
JWalterWeatherman
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Re: Mega Backdoor Question

Post by JWalterWeatherman »

Okay good news I think both options are available to me.

Option A Added in 2020 (Rollover from after tax to roth 401k)
It looks like option 1, In plan rollover of after tax to 401k was just added last year.
The following information is meant to help explain the Roth in-plan conversion feature added to the Savings Plan.
I can even set it to happen automatically.
You can elect to have your ongoing after-tax contributions to the [savings plan] automatically convert to a Roth account. The automated conversion feature allows you to build your Roth savings beyond the level available through payroll contributions alone. Additionally, converting after-tax contributions automatically to Roth status can help avoid generating in-plan investment earnings that would be taxable upon conversion.

To avoid additional taxable income on these automatic conversions, all of your eligible non-Roth after-tax account balances must first be converted to a Roth account. This will require you to pay tax on any associated investment earnings for the tax year of the initial conversion. Contact us for more information and to make this election.
Option B Available (External Roth IRA)
This is the method of rolling over / withdrawl from after-tax fidelity with intent to merge with my roth IRA at vanguard. From my Summary Plan Description it looks like this is available. I think based on the wording its available at all times but there is a little ambiguity as to if it is only available when leaving the company.
After-tax Contributions
If you terminate employment and receive a distribution, your after-tax contributions are not taxed. However, earnings on these investments are generally taxed as ordinary income.
You may roll over your after-tax contributions to a Roth IRA or to another employer’s plan that accepts rollovers of after-tax balances. Earnings associated with your after-tax contributions are pre-tax amounts, and may be rolled over to another employer’s plan, traditional IRA or Roth IRA. If you roll over earnings associated with your after-tax contributions to another employer’s plan or to a traditional IRA, the amounts will not be included in income until they are distributed to you. However, earnings rolled over to a Roth IRA will be subject to tax, similar to a rollover of tax-deferred balances to a Roth IRA. Note, earnings that accumulate in your Roth IRA after the roll over are generally not taxed.
Based on these discussions i'm leaning toward the first option, keeping it all at fidelity and just moving it from after tax to roth 401k. I also like that I can set it to be automatic so I'll call them soon to set this up.

Thanks everyone for all of the information!
retiredjg
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Re: Mega Backdoor Question

Post by retiredjg »

JWalterWeatherman wrote: Thu Jun 10, 2021 1:27 pm Based on these discussions i'm leaning toward the first option, keeping it all at fidelity and just moving it from after tax to roth 401k. I also like that I can set it to be automatic so I'll call them soon to set this up.
This is the best option and something you can set and only check on occasionally.

It might also be possible to roll this designated rollover Roth 401k out to your Roth IRA every once in awhile. If you end up doing that, you need to be documenting how every dollar has gotten into your Roth IRA, from the beginning to the end. Well, you need to do that anyway. :happy
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anon_investor
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Re: Mega Backdoor Question

Post by anon_investor »

JWalterWeatherman wrote: Thu Jun 10, 2021 1:27 pm Okay good news I think both options are available to me.

Option A Added in 2020 (Rollover from after tax to roth 401k)
It looks like option 1, In plan rollover of after tax to 401k was just added last year.
The following information is meant to help explain the Roth in-plan conversion feature added to the Savings Plan.
I can even set it to happen automatically.
You can elect to have your ongoing after-tax contributions to the [savings plan] automatically convert to a Roth account. The automated conversion feature allows you to build your Roth savings beyond the level available through payroll contributions alone. Additionally, converting after-tax contributions automatically to Roth status can help avoid generating in-plan investment earnings that would be taxable upon conversion.

To avoid additional taxable income on these automatic conversions, all of your eligible non-Roth after-tax account balances must first be converted to a Roth account. This will require you to pay tax on any associated investment earnings for the tax year of the initial conversion. Contact us for more information and to make this election.
Option B Available (External Roth IRA)
This is the method of rolling over / withdrawl from after-tax fidelity with intent to merge with my roth IRA at vanguard. From my Summary Plan Description it looks like this is available. I think based on the wording its available at all times but there is a little ambiguity as to if it is only available when leaving the company.
After-tax Contributions
If you terminate employment and receive a distribution, your after-tax contributions are not taxed. However, earnings on these investments are generally taxed as ordinary income.
You may roll over your after-tax contributions to a Roth IRA or to another employer’s plan that accepts rollovers of after-tax balances. Earnings associated with your after-tax contributions are pre-tax amounts, and may be rolled over to another employer’s plan, traditional IRA or Roth IRA. If you roll over earnings associated with your after-tax contributions to another employer’s plan or to a traditional IRA, the amounts will not be included in income until they are distributed to you. However, earnings rolled over to a Roth IRA will be subject to tax, similar to a rollover of tax-deferred balances to a Roth IRA. Note, earnings that accumulate in your Roth IRA after the roll over are generally not taxed.
Based on these discussions i'm leaning toward the first option, keeping it all at fidelity and just moving it from after tax to roth 401k. I also like that I can set it to be automatic so I'll call them soon to set this up.

Thanks everyone for all of the information!
I am not at Fidelity, but for my 401k I do the in-plan Roth conversions every pay check. It is just an easier/faster process than trying to rollover to my Roth IRA (which I can in my plan). I initially thought I might do in-plan Roth conversions every pay check and then do a big transfer to my Roth IRA annually, but inertia took over and I have been doing the "Mega backdoor Roth" for a few years now and it all still in my 401k. As long as your 401k investment options are good low cost index funds, then not a big difference during the accumuation phase whether its in your 401k or Roth IRA.
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jakehefty17
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Re: Mega Backdoor Question

Post by jakehefty17 »

JWalterWeatherman wrote: Thu Jun 10, 2021 1:27 pm Okay good news I think both options are available to me.

Option A Added in 2020 (Rollover from after tax to roth 401k)
It looks like option 1, In plan rollover of after tax to 401k was just added last year.
The following information is meant to help explain the Roth in-plan conversion feature added to the Savings Plan.
I can even set it to happen automatically.
You can elect to have your ongoing after-tax contributions to the [savings plan] automatically convert to a Roth account. The automated conversion feature allows you to build your Roth savings beyond the level available through payroll contributions alone. Additionally, converting after-tax contributions automatically to Roth status can help avoid generating in-plan investment earnings that would be taxable upon conversion.

To avoid additional taxable income on these automatic conversions, all of your eligible non-Roth after-tax account balances must first be converted to a Roth account. This will require you to pay tax on any associated investment earnings for the tax year of the initial conversion. Contact us for more information and to make this election.
Option B Available (External Roth IRA)
This is the method of rolling over / withdrawl from after-tax fidelity with intent to merge with my roth IRA at vanguard. From my Summary Plan Description it looks like this is available. I think based on the wording its available at all times but there is a little ambiguity as to if it is only available when leaving the company.
After-tax Contributions
If you terminate employment and receive a distribution, your after-tax contributions are not taxed. However, earnings on these investments are generally taxed as ordinary income.
You may roll over your after-tax contributions to a Roth IRA or to another employer’s plan that accepts rollovers of after-tax balances. Earnings associated with your after-tax contributions are pre-tax amounts, and may be rolled over to another employer’s plan, traditional IRA or Roth IRA. If you roll over earnings associated with your after-tax contributions to another employer’s plan or to a traditional IRA, the amounts will not be included in income until they are distributed to you. However, earnings rolled over to a Roth IRA will be subject to tax, similar to a rollover of tax-deferred balances to a Roth IRA. Note, earnings that accumulate in your Roth IRA after the roll over are generally not taxed.
Based on these discussions i'm leaning toward the first option, keeping it all at fidelity and just moving it from after tax to roth 401k. I also like that I can set it to be automatic so I'll call them soon to set this up.

Thanks everyone for all of the information!
That's great. I'd agree the in-plan conversion method is much easier and minimizes taxes. Especially when it's an automatic option! I'm jealous. My account has many restrictions and won't allow in-plan conversions. Can only make 1 distribution of after-tax funds per year, and when I do, there's a 6 month suspension to after-tax contributions. Makes everything more of a pain, but I'm going to try to do it next year.

Anyway I've been struggling with the same stuff lately so I'm all over this process right now.

Sounds like you've got it figured out! :beer
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski
invest4
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Re: Mega Backdoor Question

Post by invest4 »

I would strongly encourage you to TALK with your plan administrator to make sure you really understand how the whole thing works including potential fees, etc. Positively, an automatic option is awesome and will likely help avoid mistakes.
HomeStretch
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Re: Mega Backdoor Question

Post by HomeStretch »

Option B - the Summary Plan Description excerpt applies to separated participants and does not state that active participants (such as you) can do in-service distributions of after-tax contributions to a Roth IRA.

Keep in mind for the future that a Roth 401k has an annual required minimum distribution (RMD) starting at age 72 whereas a Roth IRA does not. You can avoid this by rolling over the Roth 401k to a Roth IRA the year before RMDs start.
Ramjet
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Re: Mega Backdoor Question

Post by Ramjet »

Do post tax contributions show up as another line item in your 401K?

If you forget how much you have contributed post tax for some reason, how do you know how much to convert?
VT & HFEA
lakpr
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Re: Mega Backdoor Question

Post by lakpr »

Ramjet wrote: Fri Jun 11, 2021 5:54 am Do post tax contributions show up as another line item in your 401K?

If you forget how much you have contributed post tax for some reason, how do you know how much to convert?
Obviously I can't speak for every plan, but yes, I can see what the amount is in the "after-tax 401k" sub account at my plan administrator website at any given time.

My plan administrator unfortunately insists on paper authorization to do the Roth conversion, not automatic in-plan conversion like Fidelity does ... so between the time money shows up in the after-tax sub account and I send my authorization forms signed and mailed, there is always a few days lag that could result in either gains or losses. I usually ask for, therefore, only about 90% of the balance I see on the site, with the gamble that the market does not drop 10% within the few days I request the Roth conversion.

This will also let me do the "tax loss harvesting" within the plan. Say I contributed $1000 to the after-tax sub account, and I mailed in a Roth conversion request for $900. By the time Roth conversion takes place, the balance had hit $925, a $75 loss. By converting only $900, I still have $25 in the after-tax subaccount; this would not become $100 (to get back to even) by the time the next paycheck rolls around. When in the next paycheck I contribute another $1000, now the balance is $1025, and say market gains another $50 to $1075. Next paycheck I convert $1000 instead of $900, for a cumulative conversion of $1900 on a $2000 contribution, and I have $75 left to convert yet. My original loss of $75 had shrunk to a loss of only $25 now.

Had I converted the entire $925, I would be stuck paying tax on the gains from $1000 to $1075 on the second paycheck contribution, but no deduction on the loss suffered from $1000 to $925 on the first paycheck contribution.
Ramjet
Posts: 926
Joined: Thu Feb 06, 2020 11:45 am
Location: Ohio

Re: Mega Backdoor Question

Post by Ramjet »

lakpr wrote: Fri Jun 11, 2021 7:50 am
Ramjet wrote: Fri Jun 11, 2021 5:54 am Do post tax contributions show up as another line item in your 401K?

If you forget how much you have contributed post tax for some reason, how do you know how much to convert?
Obviously I can't speak for every plan, but yes, I can see what the amount is in the "after-tax 401k" sub account at my plan administrator website at any given time.

My plan administrator unfortunately insists on paper authorization to do the Roth conversion, not automatic in-plan conversion like Fidelity does ... so between the time money shows up in the after-tax sub account and I send my authorization forms signed and mailed, there is always a few days lag that could result in either gains or losses. I usually ask for, therefore, only about 90% of the balance I see on the site, with the gamble that the market does not drop 10% within the few days I request the Roth conversion.

This will also let me do the "tax loss harvesting" within the plan. Say I contributed $1000 to the after-tax sub account, and I mailed in a Roth conversion request for $900. By the time Roth conversion takes place, the balance had hit $925, a $75 loss. By converting only $900, I still have $25 in the after-tax subaccount; this would not become $100 (to get back to even) by the time the next paycheck rolls around. When in the next paycheck I contribute another $1000, now the balance is $1025, and say market gains another $50 to $1075. Next paycheck I convert $1000 instead of $900, for a cumulative conversion of $1900 on a $2000 contribution, and I have $75 left to convert yet. My original loss of $75 had shrunk to a loss of only $25 now.

Had I converted the entire $925, I would be stuck paying tax on the gains from $1000 to $1075 on the second paycheck contribution, but no deduction on the loss suffered from $1000 to $925 on the first paycheck contribution.
Thank you!
VT & HFEA
retiredjg
Posts: 44343
Joined: Thu Jan 10, 2008 12:56 pm

Re: Mega Backdoor Question

Post by retiredjg »

lakpr wrote: Fri Jun 11, 2021 7:50 am
Ramjet wrote: Fri Jun 11, 2021 5:54 am Do post tax contributions show up as another line item in your 401K?

If you forget how much you have contributed post tax for some reason, how do you know how much to convert?
Obviously I can't speak for every plan, but yes, I can see what the amount is in the "after-tax 401k" sub account at my plan administrator website at any given time.

My plan administrator unfortunately insists on paper authorization to do the Roth conversion, not automatic in-plan conversion like Fidelity does ... so between the time money shows up in the after-tax sub account and I send my authorization forms signed and mailed, there is always a few days lag that could result in either gains or losses. I usually ask for, therefore, only about 90% of the balance I see on the site, with the gamble that the market does not drop 10% within the few days I request the Roth conversion.

This will also let me do the "tax loss harvesting" within the plan. Say I contributed $1000 to the after-tax sub account, and I mailed in a Roth conversion request for $900. By the time Roth conversion takes place, the balance had hit $925, a $75 loss. By converting only $900, I still have $25 in the after-tax subaccount; this would not become $100 (to get back to even) by the time the next paycheck rolls around. When in the next paycheck I contribute another $1000, now the balance is $1025, and say market gains another $50 to $1075. Next paycheck I convert $1000 instead of $900, for a cumulative conversion of $1900 on a $2000 contribution, and I have $75 left to convert yet. My original loss of $75 had shrunk to a loss of only $25 now.

Had I converted the entire $925, I would be stuck paying tax on the gains from $1000 to $1075 on the second paycheck contribution, but no deduction on the loss suffered from $1000 to $925 on the first paycheck contribution.
An interesting approach. And this might be necessary with your plan, but it is not like that at every plan.

We've have a few posters tell us their administrators keep up with the basis and apply it against future losses. I would assume this was at least on an annual basis. However, it might be ongoing for all I know.

I think most people just have the entire after-tax account converted rather than a portion of it. But certainly no harm done with your approach.
lakpr
Posts: 7673
Joined: Fri Mar 18, 2011 9:59 am

Re: Mega Backdoor Question

Post by lakpr »

retiredjg wrote: Fri Jun 11, 2021 8:28 am
lakpr wrote: Fri Jun 11, 2021 7:50 am
Ramjet wrote: Fri Jun 11, 2021 5:54 am Do post tax contributions show up as another line item in your 401K?

If you forget how much you have contributed post tax for some reason, how do you know how much to convert?
Obviously I can't speak for every plan, but yes, I can see what the amount is in the "after-tax 401k" sub account at my plan administrator website at any given time.

My plan administrator unfortunately insists on paper authorization to do the Roth conversion, not automatic in-plan conversion like Fidelity does ... so between the time money shows up in the after-tax sub account and I send my authorization forms signed and mailed, there is always a few days lag that could result in either gains or losses. I usually ask for, therefore, only about 90% of the balance I see on the site, with the gamble that the market does not drop 10% within the few days I request the Roth conversion.

This will also let me do the "tax loss harvesting" within the plan. Say I contributed $1000 to the after-tax sub account, and I mailed in a Roth conversion request for $900. By the time Roth conversion takes place, the balance had hit $925, a $75 loss. By converting only $900, I still have $25 in the after-tax subaccount; this would not become $100 (to get back to even) by the time the next paycheck rolls around. When in the next paycheck I contribute another $1000, now the balance is $1025, and say market gains another $50 to $1075. Next paycheck I convert $1000 instead of $900, for a cumulative conversion of $1900 on a $2000 contribution, and I have $75 left to convert yet. My original loss of $75 had shrunk to a loss of only $25 now.

Had I converted the entire $925, I would be stuck paying tax on the gains from $1000 to $1075 on the second paycheck contribution, but no deduction on the loss suffered from $1000 to $925 on the first paycheck contribution.
An interesting approach. And this might be necessary with your plan, but it is not like that at every plan.

We've have a few posters tell us their administrators keep up with the basis and apply it against future losses. I would assume this was at least on an annual basis. However, it might be ongoing for all I know.

I think most people just have the entire after-tax account converted rather than a portion of it. But certainly no harm done with your approach.
Unfortunately yes this is necessary with my plan. In 2020, it did crash more than 10% when I requested the Roth conversion, and when I tallied the figures at the end, I found that when the request for conversion took place that emptied the after-tax account, it reset everything. Not a big deal, but I ended up having to pay approximately $40 in extra tax than what my paper calculations showed me.

Sometimes that gamble of the market not dropping more than 10% before I do the Roth conversion, does backfire.
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