The Mega Backdoor Roth IRA

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jboglefan
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Joined: Thu Feb 18, 2021 10:50 am

Re: The Mega Backdoor Roth IRA

Post by jboglefan »

Does having a previous tIRA cause any tax issue with doing the in-service rollover of after tax contributions from 401K to Roth 401k/Roth IRA?

I have seen many posts that says the previous tIRA won't be an issue, but I also see many that says they move the previous tIRA to 401K first to avoid tax complications. I would rather leave the tIRA as such if that is not an issue with the in-service rollover
retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

jboglefan wrote: Thu Feb 18, 2021 10:58 am Does having a previous tIRA cause any tax issue with doing the in-service rollover of after tax contributions from 401K to Roth 401k/Roth IRA?

I have seen many posts that says the previous tIRA won't be an issue, but I also see many that says they move the previous tIRA to 401K first to avoid tax complications. I would rather leave the tIRA as such if that is not an issue with the in-service rollover
You are getting two different processes confused.

An IRA gets in the way of the ordinary backdoor process (tIRA ---> Roth IRA). An IRA does not get in the way of the "mega-Backdoor process" (after-tax 401k ---> to Roth IRA or Roth 401k).

Welcome to the forum. :happy
jboglefan
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Re: The Mega Backdoor Roth IRA

Post by jboglefan »

An IRA gets in the way of the ordinary backdoor process (tIRA ---> Roth IRA). An IRA does not get in the way of the "mega-Backdoor process" (after-tax 401k ---> to Roth IRA or Roth 401k).
Thank you so much, this was exactly what I hoped to hear!.

So, I do not have to worry about the previous tIRA and go through the process of moving it to 401k for the "mega-Backdoor process" (after-tax 401k ---> to Roth IRA or Roth 401k)
guynyc17
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Joined: Fri Jul 16, 2021 3:30 am

Re: The Mega Backdoor Roth IRA - existing IRA

Post by guynyc17 »

Newbie here and been researching the MBR option for a while today. Here is my situation:

I have a IRRA (think this is a traditional IRA) from Merrill Edge with a little over $80k which was money rolled over from my old employer's 401k when I left. All of this money was pre-tax self contributions + employer contributions; no after-tax amounts at all. Now I also have about $10k ($5k self pre-tax + $5k employer contributions) in my current employer's 401K and found out they do offer both after-tax contributions and in-service withdrawals. My understanding is lets say I contribute a total of $50k this year ($10k self pre-tax + $10k employer contributions + $30k after-tax in the next 6 months), I can move the $20k of self + employer contributions to a traditional IRA, gains on the after-tax contributions to the same traditional IRA and the after-tax contributions themselves to a Roth IRA either on a pro rata basis throughout the year or in one shot at the end of the year. After that the funds in the Roth IRA can grow tax-free till they are eligible for withdrawal and the funds in the traditional IRA grow tax-free but are taxed upon withdrawal.

Had a couple questions on this:
1. Firstly is my above understanding sound or am I missing something?
2. While researching this option, I saw a few comments on other threads saying having a traditional IRA complicates matters for the "pro rata" distribution. I looked at the IRS notice on this topic and I think it pertains only to a distribution from a 401k; it says nothing about a pre-existing funds in a traditional IRA. Also some comments on those threads (and also one on this forum from a couple days back) said a traditional IRA causes issues only for a backdoor IRA strategy and not the mega backdoor strategy.

Wanted to get a definitive answer on this. Thanks!
retiredjg
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by retiredjg »

guynyc17 wrote: Fri Jul 16, 2021 3:53 am My understanding is lets say I contribute a total of $50k this year ($10k self pre-tax + $10k employer contributions + $30k after-tax in the next 6 months), I can move the $20k of self + employer contributions to a traditional IRA, gains on the after-tax contributions to the same traditional IRA......
Welcome to the forum. :happy

Your "elective deferrals" (what you are calling $10k self-pretax) must stay in the 401k until you leave that employer. There are a few exceptions (such as a "hardship distributions" to help pay for illness/emergency).

Some plans, not all, allow the employer contributions to be rolled out to IRA.

The gains on the after-tax contributions might also be rolled out to tIRA, but some plans are more difficult than others about this "split distribution".

....and the after-tax contributions themselves to a Roth IRA either on a pro rata basis throughout the year or in one shot at the end of the year.
Yes. Or you can roll the entire after-tax account to Roth IRA, paying tax on the earnings that have occurred.

After that the funds in the Roth IRA can grow tax-free till they are eligible for withdrawal and the funds in the traditional IRA grow tax-free but are taxed upon withdrawal.
Correct.

1. Firstly is my above understanding sound or am I missing something?
Some of each.

The elective deferrals cannot leave the 401k (law). The employer contributions may not be allowed to leave the plan (plans differ). I think you have most of the rest correct.

2. While researching this option, I saw a few comments on other threads saying having a traditional IRA complicates matters for the "pro rata" distribution. I looked at the IRS notice on this topic and I think it pertains only to a distribution from a 401k; it says nothing about a pre-existing funds in a traditional IRA. Also some comments on those threads (and also one on this forum from a couple days back) said a traditional IRA causes issues only for a backdoor IRA strategy and not the mega backdoor strategy.
Having a tIRA (including SEP and SIMPLE IRA) only affects the ordinary back door, not the mega backdoor.

Pro-rating is involved with the mega-backdoor in one way though - when you remove money from the after-tax account, say to roll to Roth IRA, if you do not take it all out, what you do take out is pro-rated between the after-tax contributions and the earnings (gains). In other words, you are not allowed to take out only the contributions and leave the earnings behind. They must leave together although they do not have to go to the same place.
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Re: The Mega Backdoor Roth IRA

Post by placeholder »

jboglefan wrote: Thu Feb 18, 2021 12:08 pm So, I do not have to worry about the previous tIRA and go through the process of moving it to 401k for the "mega-Backdoor process" (after-tax 401k ---> to Roth IRA or Roth 401k)
As long as you roll at least the after tax portion directly to roth and don't go to tira and convert.
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by placeholder »

retiredjg wrote: Fri Jul 16, 2021 6:32 am
Your "elective deferrals" (what you are calling $10k self-pretax) must stay in the 401k until you leave that employer. There are a few exceptions (such as a "hardship distributions" to help pay for illness/emergency).
Or you reach age 59 1/2 of course where it becomes optional to the plan.
guynyc17
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by guynyc17 »

Welcome to the forum. :happy
Thanks!
Your "elective deferrals" (what you are calling $10k self-pretax) must stay in the 401k until you leave that employer. There are a few exceptions (such as a "hardship distributions" to help pay for illness/emergency).
So are you saying the in-service withdrawal may apply only to the employer contributions and the employee contributions cannot be withdrawn unless its an exception?
Pro-rating is involved with the mega-backdoor in one way though - when you remove money from the after-tax account, say to roll to Roth IRA, if you do not take it all out, what you do take out is pro-rated between the after-tax contributions and the earnings (gains). In other words, you are not allowed to take out only the contributions and leave the earnings behind. They must leave together although they do not have to go to the same place.
So you are saying if I had $0 gains I could take out the after-tax contributions while leaving both the pre-tax contributions in the 401K? Interesting, I thought I can withdraw any amount up to $50k in the ratio 40%/60% ($20k/$30k). Will need to research this more I guess.
placeholder
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Re: The Mega Backdoor Roth IRA

Post by placeholder »

What are called employee elective deferrals or designated roth contributions can't be rolled over until you leave service or reach age 59 1/2 and this is by law.
retiredjg
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by retiredjg »

guynyc17 wrote: Fri Jul 16, 2021 6:46 pm
Your "elective deferrals" (what you are calling $10k self-pretax) must stay in the 401k until you leave that employer. There are a few exceptions (such as a "hardship distributions" to help pay for illness/emergency).
So are you saying the in-service withdrawal may apply only to the employer contributions and the employee contributions cannot be withdrawn unless its an exception?
Not quite. I'm saying your elective deferrals (which go to the pre-tax or to the Roth 401k account) cannot be withdrawn without an exception. Contributions to an after-tax account and employer contributions are among the things that your plan might let you withdraw while still working there (in-service withdrawals).

Roth contributions are not the same thing as after-tax contributions. (Yes, it is confusing.)


Pro-rating is involved with the mega-backdoor in one way though - when you remove money from the after-tax account, say to roll to Roth IRA, if you do not take it all out, what you do take out is pro-rated between the after-tax contributions and the earnings (gains). In other words, you are not allowed to take out only the contributions and leave the earnings behind. They must leave together although they do not have to go to the same place.
So you are saying if I had $0 gains I could take out the after-tax contributions while leaving both the pre-tax contributions in the 401K?
Yes.
jalm1
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Joined: Sat Jun 09, 2012 1:55 pm

Re: The Mega Backdoor Roth IRA

Post by jalm1 »

I should have caught onto this earlier, but it look a WSJ article and talking to some other coworkers about this option. My 401k plan allows for after-tax contributions up to the IRS maximum and in-plan conversations. So i should be good for the mega backdoor roth.

However, I went into the 401k site, Merrill lynch, and tried to walk through the process - I haven't yet contributed any after tax funds. The system said i had $X available for an in-plan conversion. I presume that is earnings on my pre-tax contributions and ER match. But its a big number. I understand that if i were to covert those funds today, i would be paying ordinary income tax on that balance - i dont want to do that.

Does anyone know if one can specify which sub account to convert in the in-plan conversion with Merrill, whereby i could only convert the after-tax contributions (once made)? I dont know if i were to start contributing after-tax dollars there would be another bucket available, or am i stuck with a large tax liability for the prior earnings as it all ends up in the same sub account if i wanted to attempt a mega backdoor roth?
retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

^^^In general, most plans allow you to designate what you want converted. To find out for sure, you need to talk to your plan administrator or HR and check our summary plan description.
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Re: The Mega Backdoor Roth IRA

Post by placeholder »

The law allows converting your pretax contributions as well.
What amounts may I roll over in an in-plan Roth rollover?

If your plan allows it, you can roll over any vested plan balance, including earnings, to a designated Roth account, even if these amounts can’t be distributed to you. You can make an in-plan Roth rollover of:

elective deferrals,
matching contributions (including qualified matching contributions),
nonelective contributions (including qualified nonelective contributions),
rollover contributions,
after-tax employee contributions and
earnings on the above contributions.

The plan can specify which of these amounts are eligible for in-plan Roth rollovers and how often these rollovers can be done.
https://www.irs.gov/retirement-plans/re ... ts#6inplan
guynyc17
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by guynyc17 »

Having a hard time reconciling whats below with what I am seeing in the linked IRS article (maybe I am just stupid :| )
https://www.irs.gov/retirement-plans/ro ... ment-plans

It says:
Many savers have made after-tax contributions to a 401(k) or other defined contribution retirement plan. If your account balance contains both pretax and after-tax amounts, any distribution will generally include a pro rata share of both.......you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:
pretax amounts to a traditional IRA or another eligible retirement plan, and
after-tax amounts to a Roth IRA.

Its talking about rollovers from any retirement plan, not just for a backdoor roth which is confusing.
retiredjg wrote: Sat Jul 17, 2021 6:43 am
guynyc17 wrote: Fri Jul 16, 2021 6:46 pm
Pro-rating is involved with the mega-backdoor in one way though - when you remove money from the after-tax account, say to roll to Roth IRA, if you do not take it all out, what you do take out is pro-rated between the after-tax contributions and the earnings (gains). In other words, you are not allowed to take out only the contributions and leave the earnings behind. They must leave together although they do not have to go to the same place.
So you are saying if I had $0 gains I could take out the after-tax contributions while leaving both the pre-tax contributions in the 401K?
Yes.
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FiveK
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by FiveK »

guynyc17 wrote: Sat Sep 04, 2021 7:01 pm Having a hard time reconciling whats below with what I am seeing in the linked IRS article
Might help if you could give an example with numbers to illustrate what isn't adding up.
Its talking about rollovers from any retirement plan, not just for a backdoor roth which is confusing.
Yes, the terminology can be confusing. Are you asking about the backdoor Roth process (that involves only IRAs) or the mega-backdoor Roth process (that involves retirements plans such as 401k and 403b)?
MrJedi
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by MrJedi »

guynyc17 wrote: Sat Sep 04, 2021 7:01 pm Having a hard time reconciling whats below with what I am seeing in the linked IRS article (maybe I am just stupid :| )
https://www.irs.gov/retirement-plans/ro ... ment-plans

It says:
Many savers have made after-tax contributions to a 401(k) or other defined contribution retirement plan. If your account balance contains both pretax and after-tax amounts, any distribution will generally include a pro rata share of both.......you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:
pretax amounts to a traditional IRA or another eligible retirement plan, and
after-tax amounts to a Roth IRA.

Its talking about rollovers from any retirement plan, not just for a backdoor roth which is confusing.
retiredjg wrote: Sat Jul 17, 2021 6:43 am
guynyc17 wrote: Fri Jul 16, 2021 6:46 pm
Pro-rating is involved with the mega-backdoor in one way though - when you remove money from the after-tax account, say to roll to Roth IRA, if you do not take it all out, what you do take out is pro-rated between the after-tax contributions and the earnings (gains). In other words, you are not allowed to take out only the contributions and leave the earnings behind. They must leave together although they do not have to go to the same place.
So you are saying if I had $0 gains I could take out the after-tax contributions while leaving both the pre-tax contributions in the 401K?
Yes.
You would be doing a full rollover of the aftertax source/subaccount. This does not get get prorated with your other subaccounts/sources (employee pretax, employer match, etc.).

If your after tax source is $1000 contribution and $0 earnings, then there is no proration needed since the after tax source is 100% contribution. Any amount distributed will be contribution.

If your after tax source is $900 contribution and $100 earnings, then it is 90% contribution and 10% earnings. So if you distribute $900, then it must be $810 contribution (nontaxable) and $90 earnings (taxable if sent to Roth IRA). You cannot simply choose the $900 to be the contribution part and leave the $100 earnings in the 401k. That is how pro-rata works in the 401k.
placeholder
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Re: The Mega Backdoor Roth IRA

Post by placeholder »

When you roll out after tax contributions a proportional amount of taxable earnings has to come with it which the way it's been since I started back in 2007 but some years back the irs clarified that plans were allowed to give you those as separate rollovers making it easy to send the after tax into a roth and the earnings into a tira.
retiredjg
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by retiredjg »

guynyc17 wrote: Sat Sep 04, 2021 7:01 pm Having a hard time reconciling whats below with what I am seeing in the linked IRS article (maybe I am just stupid :| )
https://www.irs.gov/retirement-plans/ro ... ment-plans
You are not the first person to be tripped up by this paragraph. But do not let it worry you. The wording does make it seem like the entire 401k plan is involved, but that is not the case.

If you withdraw from the after-tax account, both the after-tax and pre-tax money must come out at the same time, pro-rated. This does not affect the other sub-accounts inside your 401k.
guynyc17
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by guynyc17 »

retiredjg wrote: Sun Sep 05, 2021 6:59 am
guynyc17 wrote: Sat Sep 04, 2021 7:01 pm Having a hard time reconciling whats below with what I am seeing in the linked IRS article (maybe I am just stupid :| )
https://www.irs.gov/retirement-plans/ro ... ment-plans
You are not the first person to be tripped up by this paragraph. But do not let it worry you. The wording does make it seem like the entire 401k plan is involved, but that is not the case.

If you withdraw from the after-tax account, both the after-tax and pre-tax money must come out at the same time, pro-rated. This does not affect the other sub-accounts inside your 401k.
When you say "pre-tax money must come out from the after-tax account along with the after-tax money", are you referring to any gains that happen on that after-tax money that would normally be taxable? Sorry getting confused with the wording because otherwise why would pre-tax money exist in a after-tax account?
retiredjg
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by retiredjg »

guynyc17 wrote: Sun Sep 05, 2021 11:49 am
retiredjg wrote: Sun Sep 05, 2021 6:59 am
guynyc17 wrote: Sat Sep 04, 2021 7:01 pm Having a hard time reconciling whats below with what I am seeing in the linked IRS article (maybe I am just stupid :| )
https://www.irs.gov/retirement-plans/ro ... ment-plans
You are not the first person to be tripped up by this paragraph. But do not let it worry you. The wording does make it seem like the entire 401k plan is involved, but that is not the case.

If you withdraw from the after-tax account, both the after-tax and pre-tax money must come out at the same time, pro-rated. This does not affect the other sub-accounts inside your 401k.
When you say "pre-tax money must come out from the after-tax account along with the after-tax money", are you referring to any gains that happen on that after-tax money that would normally be taxable? Sorry getting confused with the wording because otherwise why would pre-tax money exist in a after-tax account?
Yes, referring to the earnings, if any.

Sometimes people just want to take out their contributions and leave the earnings in there. That is not allowed, they must come out together.
guynyc17
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by guynyc17 »

FiveK wrote: Sat Sep 04, 2021 7:15 pm
guynyc17 wrote: Sat Sep 04, 2021 7:01 pm Having a hard time reconciling whats below with what I am seeing in the linked IRS article
Might help if you could give an example with numbers to illustrate what isn't adding up.
Its talking about rollovers from any retirement plan, not just for a backdoor roth which is confusing.
Yes, the terminology can be confusing. Are you asking about the backdoor Roth process (that involves only IRAs) or the mega-backdoor Roth process (that involves retirements plans such as 401k and 403b)?
So the article makes it seem that when you have pre-tax and after-tax contributions in the same 401K account, you cant withdraw one or the other; you have to withdraw both (at least that was my understanding of the article). The user whose quote I referenced (who's been super helpful) was explaining that's not the case and I was trying to reconcile the 2 explanations. According to him, the after-tax contributions and any gains on that money (which would normally be taxable) must come out at the same time however the usual pre-tax contributions (elective deferrals) plus employer contributions can stay there as is.

Yes I was referring to the mega backdoor strategy.
guynyc17
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by guynyc17 »

retiredjg wrote: Sun Sep 05, 2021 11:51 am
guynyc17 wrote: Sun Sep 05, 2021 11:49 am
retiredjg wrote: Sun Sep 05, 2021 6:59 am
guynyc17 wrote: Sat Sep 04, 2021 7:01 pm Having a hard time reconciling whats below with what I am seeing in the linked IRS article (maybe I am just stupid :| )
https://www.irs.gov/retirement-plans/ro ... ment-plans
You are not the first person to be tripped up by this paragraph. But do not let it worry you. The wording does make it seem like the entire 401k plan is involved, but that is not the case.

If you withdraw from the after-tax account, both the after-tax and pre-tax money must come out at the same time, pro-rated. This does not affect the other sub-accounts inside your 401k.
When you say "pre-tax money must come out from the after-tax account along with the after-tax money", are you referring to any gains that happen on that after-tax money that would normally be taxable? Sorry getting confused with the wording because otherwise why would pre-tax money exist in a after-tax account?
Yes, referring to the earnings, if any.

Sometimes people just want to take out their contributions and leave the earnings in there. That is not allowed, they must come out together.
Ok, that makes sense. I am going to try and see if I can move the after-tax money to a Roth IRA on the same day immediately so that there are $0 gains to worry about. If there are gains, I am assuming you can do one of 2 things:
1. Take the after-tax money and the gains on it, pay tax on the gains and then move the entire amount to a Roth IRA
2. Move the after-tax money to a Roth IRA, move the gains on the after-tax money to a traditional IRA

Also, are there additional tax forms to worry about during tax time if you do a mega backdoor strategy?
guynyc17
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Joined: Fri Jul 16, 2021 3:30 am

Re: The Mega Backdoor Roth IRA

Post by guynyc17 »

placeholder wrote: Sat Sep 04, 2021 8:15 pm When you roll out after tax contributions a proportional amount of taxable earnings has to come with it which the way it's been since I started back in 2007 but some years back the irs clarified that plans were allowed to give you those as separate rollovers making it easy to send the after tax into a roth and the earnings into a tira.
Ok so they made it simpler; that makes more sense. This shit is confusing to say the least.
retiredjg
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by retiredjg »

guynyc17 wrote: Sun Sep 05, 2021 11:58 am Ok, that makes sense. I am going to try and see if I can move the after-tax money to a Roth IRA on the same day immediately so that there are $0 gains to worry about. If there are gains, I am assuming you can do one of 2 things:
1. Take the after-tax money and the gains on it, pay tax on the gains and then move the entire amount to a Roth IRA
2. Move the after-tax money to a Roth IRA, move the gains on the after-tax money to a traditional IRA

Also, are there additional tax forms to worry about during tax time if you do a mega backdoor strategy?
Actually option 1 would be reversed.....you would "move the entire amount to Roth IRA and pay tax on the gains".

Either of those can be done. If you use option 1, the taxable part of the conversion will have a 5 tax year clock attached to it. You will need to keep up with the dates and the amounts of the conversion that were taxable and were not taxable.

You actually need to keep up with that no matter how money gets into your Roth IRA.


The mega-backdoor does not require any extra tax forms. It is all handled by the 1099 that your employer produces.
guynyc17
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Re: The Mega Backdoor Roth IRA - existing IRA

Post by guynyc17 »

retiredjg wrote: Sun Sep 05, 2021 12:07 pm
guynyc17 wrote: Sun Sep 05, 2021 11:58 am Ok, that makes sense. I am going to try and see if I can move the after-tax money to a Roth IRA on the same day immediately so that there are $0 gains to worry about. If there are gains, I am assuming you can do one of 2 things:
1. Take the after-tax money and the gains on it, pay tax on the gains and then move the entire amount to a Roth IRA
2. Move the after-tax money to a Roth IRA, move the gains on the after-tax money to a traditional IRA

Also, are there additional tax forms to worry about during tax time if you do a mega backdoor strategy?
Actually option 1 would be reversed.....you would "move the entire amount to Roth IRA and pay tax on the gains".

Either of those can be done. If you use option 1, the taxable part of the conversion will have a 5 tax year clock attached to it. You will need to keep up with the dates and the amounts of the conversion that were taxable and were not taxable.

You actually need to keep up with that no matter how money gets into your Roth IRA.


The mega-backdoor does not require any extra tax forms. It is all handled by the 1099 that your employer produces.
Appreciate the way you present info in a technically accurate manner :D

When you say 5-year clock, I assume you mean for withdrawal purposes? Or for actually paying the tax on it?

When you say "keep up with that..........", you mean keeping records on what the after-tax amount was, what the gains were, where each of those amounts was moved, what tax was paid on it etc.?

So the 1099 should specify what contributions were, what rollover was, what's taxable, not taxable etc?
retiredjg
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

If that money is withdrawn from Roth IRA before the 5 tax year clock runs out, there is a 10% penalty on it.

For example, if you save $5,000 in the after tax account and the earnings are $200, you rollover/convert $5,200 into Roth IRA. You will pay taxes on the $200.

The clock starts running in January of the year you do the rollover/conversion. So if you do the rollover/conversion in 2021, the clock runs out on December 31, 2025. In this example, if you take the money out before 12/31/25, you will owe a 10% penalty on the $200.

If you do several rollover/conversions from after-tax to Roth IRA in a year, they are all lumped together as if it was just one.

So the information to keep up with is the date (year) of the rollover/conversion(s), how much was taxable ($200) and how much was rolled over ($5,200). (You should also keep up with ordinary contributions and rollovers from Roth 401k.)

The 1099 should have all this information. Keep the 1099s as part of your records.

When it comes to withdrawing from Roth IRA, you cannot cherry pick what money you take out. The first money to come out is designated as direct contributions (if you have any). The next money to come out is designated to oldest conversion (like this example) and the taxable portion of the conversions comes before the non-taxable portion. The last money to come out is the earnings that have occurred inside the Roth IRA from all sources.

This article explains it a little more fully.

https://fairmark.com/retirement/roth-ac ... -overview/
guynyc17
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Re: The Mega Backdoor Roth IRA

Post by guynyc17 »

I don't plan on having direct contributions; just the conversions from mega backdoor and whatever gains occur, if any.

So if I understand the order of taking out money, lets say I have the following table.
Year of conversion Amount of conversion Gain on conversion by the end of FY2026
FY2021 $5000 $1000
FY2022 $5000 $1000
FY2023 $5000 $1000

That means the first 2 conversions and the gains on them are past the 5-year deadline. However if I withdraw lets say $12k on 1st Jan 2027, the first $10k is from the first 2 conversions (made in 2021 and 2022) and is tax-free. The next $2k comes from the third conversion and is taxed even though the gains from the first 2 conversions are past the 5-year deadline.

If the above is correct, I am confused with the last part of the statement "...and the taxable portion of the conversions comes before the non-taxable portion". Wouldn't the amount converted in any year either be all taxable or non-taxable given the clock runs out at the same time for a conversion in a given year?
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FiveK
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Re: The Mega Backdoor Roth IRA

Post by FiveK »

guynyc17 wrote: Mon Sep 06, 2021 9:25 pm ...I am confused with the last part of the statement "...and the taxable portion of the conversions comes before the non-taxable portion". Wouldn't the amount converted in any year either be all taxable or non-taxable given the clock runs out at the same time for a conversion in a given year?
The quoted phrase refers to when the conversion was done. If you hadn't converted immediately, such that there was a $10 gain and you converted $5010, the $10 is the "taxable portion of the conversion".
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Re: The Mega Backdoor Roth IRA

Post by guynyc17 »

That's what I thought earlier but then when you convert any money to a Roth IRA, do you not have to pay tax on any gains between taking the money out from a after-tax 401k and moving it into the Roth? That would make the entire deposit tax-free right?
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FiveK
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Re: The Mega Backdoor Roth IRA

Post by FiveK »

guynyc17 wrote: Mon Sep 06, 2021 10:28 pm ...do you not have to pay tax on any gains between taking the money out from a after-tax 401k and moving it into the Roth?
Yes, you do have to pay tax on those gains. That is what makes the gain "the taxable portion of the conversion" when the money went into the Roth.

Later, when it comes time to withdraw money from the Roth, is when the ordering rules (shown in table form in that link) apply.
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

guynyc17 wrote: Mon Sep 06, 2021 9:25 pm I don't plan on having direct contributions; just the conversions from mega backdoor and whatever gains occur, if any.

So if I understand the order of taking out money, lets say I have the following table.
Year of conversion Amount of conversion Gain on conversion by the end of FY2026
FY2021 $5000 $1000
FY2022 $5000 $1000
FY2023 $5000 $1000

That means the first 2 conversions and the gains on them are past the 5-year deadline. However if I withdraw lets say $12k on 1st Jan 2027, the first $10k is from the first 2 conversions (made in 2021 and 2022) and is tax-free. The next $2k comes from the third conversion and is taxed even though the gains from the first 2 conversions are past the 5-year deadline.

If the above is correct, I am confused with the last part of the statement "...and the taxable portion of the conversions comes before the non-taxable portion". Wouldn't the amount converted in any year either be all taxable or non-taxable given the clock runs out at the same time for a conversion in a given year?
There are two kinds of "earnings" or "gains" possible in this scenario. It is common to confuse them.
  • -the earnings that accrue inside the after-tax account before the rollover/conversion and the

    -the earnings that accrue inside the Roth IRA after the rollover/conversion

The earnings that accrue inside the after-tax account would be part of the $5000 conversions. Those earnings (if any) would be the "taxable part of the conversion". The after-tax contributions that led to the $5000 amounts would be the non-taxable part of the conversion.

The earnings that accrue inside the Roth IRA would be the $1000 amounts you mention above - they fall to the bottom of the withdrawal stack and are the last thing withdrawn from Roth IRA.

See if that answers your question. If not, try again.
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

guynyc17 wrote: Mon Sep 06, 2021 9:25 pm Wouldn't the amount converted in any year either be all taxable or non-taxable given the clock runs out at the same time for a conversion in a given year?
You are also confusing "taxed" with "penalty".

When you do the rollover/conversion, the tax is paid. There is no further tax on the money as long as it does not come out of the Roth IRA too early.

If any part of the conversion is taxable, that part is attached to a clock. If you take the money out before the clock is finished running, there is a 10% penalty (which technically is an additional tax but let's call it penalty to be clear).
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Re: The Mega Backdoor Roth IRA

Post by guynyc17 »

I think I understand. The "taxable part of the conversion" simply refers to the taxed portion of the conversion from the after-tax account (if any); it does not mean that it will be taxed again when you withdraw in the order shown in the link.

I think I get the 10% penalty; that's like the 10% penalty when you withdraw from the 401K before you are 59.5 years old and is in addition to the regular tax you pay on those withdrawals
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Re: The Mega Backdoor Roth IRA

Post by guynyc17 »

Can the mega backdoor strategy be used on behalf of spouses that either do not earn or earn less? In other words, if $58k is the contribution limit for a single person, does this become $116k if you file married filing jointly?
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

No. Only one person - the employee - can contribute to a work plan.
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Re: The Mega Backdoor Roth IRA

Post by placeholder »

The spousal ira allows someone to make contributions to their own ira based on marital assets so it doesn't expand the allowed contributions to the main earner's account.
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tarnation
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Re: The Mega Backdoor Roth IRA

Post by tarnation »

I have read through most of this and still have questions. The plan offers after tax contributions and automatic in-plan Roth conversion every pay period. These conversion amounts are held in a subaccount and may be withdrawn at any time.

Let's say I pile a ton of money in the after-tax with conversions, then roll out to an pre existing Roth IRA (which I've had more than five years), My question is, what are the withdrawal rules for that IRA, if I need the money back. I can get my original contributions to the IRA (without tax or penalty), then the converted amounts next (in chronological order) even though they weren't converted in that account?
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Re: The Mega Backdoor Roth IRA

Post by MrJedi »

tarnation wrote: Thu Sep 09, 2021 2:06 pm I have read through most of this and still have questions. The plan offers after tax contributions and automatic in-plan Roth conversion every pay period. These conversion amounts are held in a subaccount and may be withdrawn at any time.

Let's say I pile a ton of money in the after-tax with conversions, then roll out to an pre existing Roth IRA (which I've had more than five years), My question is, what are the withdrawal rules for that IRA, if I need the money back. I can get my original contributions to the IRA (without tax or penalty), then the converted amounts next (in chronological order) even though they weren't converted in that account?
The Roth 401k basis that is rolled over into the Roth IRA is lumped into the same contribution basis pool like direct Roth IRA contributions.
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

tarnation wrote: Thu Sep 09, 2021 2:06 pm I have read through most of this and still have questions. The plan offers after tax contributions and automatic in-plan Roth conversion every pay period. These conversion amounts are held in a subaccount and may be withdrawn at any time.

Let's say I pile a ton of money in the after-tax with conversions, then roll out to an pre existing Roth IRA (which I've had more than five years), My question is, what are the withdrawal rules for that IRA, if I need the money back. I can get my original contributions to the IRA (without tax or penalty), then the converted amounts next (in chronological order) even though they weren't converted in that account?
Here is a link to what Alan S. has told us about this matter. It is consistent with what MrJedi said - the in-plan Roth Rollovers (IRR) are added to ordinary contribution basis, not to conversion basis as one would expect.

viewtopic.php?p=6207040#p6207040
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tarnation
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Re: The Mega Backdoor Roth IRA

Post by tarnation »

MrJedi wrote: Thu Sep 09, 2021 2:19 pm
tarnation wrote: Thu Sep 09, 2021 2:06 pm I have read through most of this and still have questions. The plan offers after tax contributions and automatic in-plan Roth conversion every pay period. These conversion amounts are held in a subaccount and may be withdrawn at any time.

Let's say I pile a ton of money in the after-tax with conversions, then roll out to an pre existing Roth IRA (which I've had more than five years), My question is, what are the withdrawal rules for that IRA, if I need the money back. I can get my original contributions to the IRA (without tax or penalty), then the converted amounts next (in chronological order) even though they weren't converted in that account?
The Roth 401k basis that is rolled over into the Roth IRA is lumped into the same contribution basis pool like direct Roth IRA contributions.
Really? So worst case scenario in an emergency, my taxable cash makes a round trip with only a couple of 1099s and no tax or penalty.
Is there an authoritataive source you could point me to? I’ll have to convince my wife. 😬
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FiveK
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Re: The Mega Backdoor Roth IRA

Post by FiveK »

tarnation wrote: Thu Sep 09, 2021 5:11 pm
MrJedi wrote: Thu Sep 09, 2021 2:19 pm
tarnation wrote: Thu Sep 09, 2021 2:06 pm I have read through most of this and still have questions. The plan offers after tax contributions and automatic in-plan Roth conversion every pay period. These conversion amounts are held in a subaccount and may be withdrawn at any time.

Let's say I pile a ton of money in the after-tax with conversions, then roll out to an pre existing Roth IRA (which I've had more than five years), My question is, what are the withdrawal rules for that IRA, if I need the money back. I can get my original contributions to the IRA (without tax or penalty), then the converted amounts next (in chronological order) even though they weren't converted in that account?
The Roth 401k basis that is rolled over into the Roth IRA is lumped into the same contribution basis pool like direct Roth IRA contributions.
Really? So worst case scenario in an emergency, my taxable cash makes a round trip with only a couple of 1099s and no tax or penalty.
Is there an authoritataive source you could point me to? I’ll have to convince my wife. 😬
Alan S. is highly credible based on historical guidance. If he (or anyone) could point to the specific part of the 8606 instructions mentioned, that might be even more persuasive for an "across the dinner table" discussion.
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tarnation
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Re: The Mega Backdoor Roth IRA

Post by tarnation »

FiveK wrote: Thu Sep 09, 2021 5:41 pm
tarnation wrote: Thu Sep 09, 2021 5:11 pm
MrJedi wrote: Thu Sep 09, 2021 2:19 pm
tarnation wrote: Thu Sep 09, 2021 2:06 pm I have read through most of this and still have questions. The plan offers after tax contributions and automatic in-plan Roth conversion every pay period. These conversion amounts are held in a subaccount and may be withdrawn at any time.

Let's say I pile a ton of money in the after-tax with conversions, then roll out to an pre existing Roth IRA (which I've had more than five years), My question is, what are the withdrawal rules for that IRA, if I need the money back. I can get my original contributions to the IRA (without tax or penalty), then the converted amounts next (in chronological order) even though they weren't converted in that account?
The Roth 401k basis that is rolled over into the Roth IRA is lumped into the same contribution basis pool like direct Roth IRA contributions.
Really? So worst case scenario in an emergency, my taxable cash makes a round trip with only a couple of 1099s and no tax or penalty.
Is there an authoritataive source you could point me to? I’ll have to convince my wife. 😬
Alan S. is highly credible based on historical guidance. If he (or anyone) could point to the specific part of the 8606 instructions mentioned, that might be even more persuasive for an "across the dinner table" discussion.
Yes, I didn’t not mean to imply ALan S. Was not credible. I some how did not see retired’s post before I posted. Thanks for all the help.
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Re: The Mega Backdoor Roth IRA

Post by FiveK »

tarnation wrote: Thu Sep 09, 2021 11:31 pm Yes, I didn’t not mean to imply ALan S. Was not credible. I some how did not see retired’s post before I posted. Thanks for all the help.
Didn't appear any offense was intended.

If that dinner table conversation goes something like "Ok, it's good to know the Form 8606 instructions make that clear. Could you show me where in the instructions that is specified?" how will you respond?
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Re: The Mega Backdoor Roth IRA

Post by retiredjg »

I wouldn't mind being able to point to something in the IRS instructions about this. I've done a little looking, not an exhaustive search. I wish I had saved Alan's early comments about where this information is.
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Re: The Mega Backdoor Roth IRA

Post by gfmels »

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FiveK
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Re: The Mega Backdoor Roth IRA

Post by FiveK »

Ah, yes, the good ol' "investment in the contract"....

Thanks, gfmels.
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