Things to consider with a mega backdoor Roth?

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Topic Author
a username for Mike
Posts: 23
Joined: Wed May 11, 2016 9:35 pm

Things to consider with a mega backdoor Roth?

Post by a username for Mike »

Hello,

My company 401(k) plan with Fidelity very recently started allowing after tax contributions along with an in-plan conversion to a Roth 401(k).
  • It does not seem like they allow in-service distributions that would allow a separate Roth IRA, just the in-plan conversion.
  • They do not have any safety controls to prevent overcontributing past the 61k limit, though they do automatically cut off contributions to traditional or Roth 401(k) at the 20.5k limit.
  • Employer matches are done annually equal to 4% of the total amount paid (salary and bonus) in the prior calendar year, but are deposited early in the year.
  • Contributions are done as a percent of paycheck (0-80%) and can be changed each monthly pay period.
  • There are no fees for the in-plan conversion but it requires a call
Questions:
  1. Any advice for avoiding excess contributions? From other reading other posts on this, it sounds like it's a hassle to correct (though not very costly tax-wise if done before the tax filing deadline). I'm currently thinking I'll need to leave a sizable buffer under the limit just in case.
  2. Do employer matches typically count towards the year they're deposited in the account, or the year they're matching? Or does this vary by plan? Edit: I found out more about this, for my particular plan it counts in the year it's deposited in the account, and the deposit happens early in the year. So I should be able to plan for it.
  3. A balance in my traditional 401(k) doesn't trigger the pro-rata rule when doing an in-plan conversion of my after-tax contribution, right? It's only the after-tax earnings I have to worry about? (Or is this something that can vary by plan?)
  4. What else, if anything, should I look out for when attempting this strategy? (I've already looked at the Bogleheads wiki page for Mega-backdoor Roth and read up on the relevant IRS.gov pages)
Some other details specific to my situation that might influence answers:
  • I'm single, in my low 30s and would like to retire early, but haven't made concrete plans for a target age. Tentatively thinking 45-50, but healthcare costs are a big question mark.
  • I have no significant debt.
  • I have ~8 months emergency fund
  • I already contribute the max to my 401(k) and backdoor Roth each year. I generally have at least 40k additional savings/year that currently go in a taxable account, so I think the option to put this in a Roth 401(k) will be very useful
  • My 401(k) options are excellent with low (0.005-0.035%) expense ratio index funds for US bonds, US and Ex-US stocks. These 3 and their individual account equivalents make up my portfolio in ratios of 10%/60%/30% respectively.
  • I've got ~300k in a taxable account and ~300k in retirement accounts. ~200k of the retirement funds are in my traditional 401(k), and the rest are in Roth accounts.
  • Federal tax bracket: 32%, might barely reach 35% this year. State is 6.27%
Last edited by a username for Mike on Fri May 13, 2022 11:04 am, edited 1 time in total.
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retiredjg
Posts: 47982
Joined: Thu Jan 10, 2008 12:56 pm

Re: Things to consider with a mega backdoor Roth?

Post by retiredjg »

a username for Mike wrote: Thu May 12, 2022 8:16 pm
  1. Any advice for avoiding excess contributions? From other reading other posts on this, it sounds like it's a hassle to correct (though not very costly tax-wise if done before the tax filing deadline). I'm currently thinking I'll need to leave a sizable buffer under the limit just in case.
A big buffer is the only protection I can think of.

[*]Do employer matches typically count towards the year they're deposited in the account, or the year they're matching? Or does this vary by plan?
I don't know. What you are describing sounds a bit odd to me.

[*]A balance in my traditional 401(k) doesn't trigger the pro-rata rule when doing an in-plan conversion of my after-tax contribution, right? It's only the after-tax earnings I have to worry about? (Or is this something that can vary by plan?)
. Your pre-tax 401k balance is not involved in this at all. Whatever you convert from after-tax to Roth 401k is pro-rated between your after-tax contributions and their earnings. Just convert it all every paycheck or every month or whatever you find convenient. If you call every paycheck, there should be little to no earnings.

[*]What else, if anything, should I look out for when attempting this strategy? (I've already looked at the Bogleheads wiki page for Mega-backdoor Roth and read up on the relevant IRS.gov pages)[/list]
Nothing I can think of. This is a very painless way to get more money into Roth instead of into taxable. Pretty much a win all the way around.
Topic Author
a username for Mike
Posts: 23
Joined: Wed May 11, 2016 9:35 pm

Re: Things to consider with a mega backdoor Roth?

Post by a username for Mike »

I found out more about my plan, looks like the employer match contributions are done early in the year and count towards that year. So planning contributions and staying under the cap shouldn't be too difficult.

Thanks for your answers retiredjg!
THY4373
Posts: 1816
Joined: Thu Mar 22, 2012 3:17 pm

Re: Things to consider with a mega backdoor Roth?

Post by THY4373 »

retiredjg wrote: Fri May 13, 2022 8:21 am
[*]Do employer matches typically count towards the year they're deposited in the account, or the year they're matching? Or does this vary by plan?
I don't know. What you are describing sounds a bit odd to me.

I worked for an employer who made matching contributions once a year and not per paycheck. As an example in March or April (I forget now) of say 2022 they would make their contributions based on your earnings in 2021. At the time it wasn't a match but rather a straight 10% of your salary. At the time I quit they even made this match for the partial last year I worked the following year.
borjwa
Posts: 1
Joined: Thu May 12, 2022 2:38 am

Re: Things to consider with a mega backdoor Roth?

Post by borjwa »

This might be per plan, but when I called to convert my first after tax contribution, Fidelity offered to make it automatic. Make sure to ask the representative if this is available.
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