Mega Backdoor Roth/Roth IRA question
Mega Backdoor Roth/Roth IRA question
Hello,
1) I opened Roth IRA in Vanguard brokerage account in 2010 and have contributed 5K every year after that. So if I want to withdraw the only contribution before retirement without penalty, I can withdraw $5K every year after 2015 because of the 5 year rule. Is my understanding correct?
2) My company offers Mega Backdoor Roth with Fidelity. I started contributing to Mega Backdoor from 2022 and till now my contribution is 10K and with balance of 14K(gain of 4K). Fidelity does the after-tax contribution to In Plan Roth conversion the same day. Now, if want to withdraw my Megaback door money without penalty and tax before retirement what should I do
-Should I just transfer 10K contribution from Mega backdoor to Roth IRA Vanguard?
-Can I withdraw money as it I started Mega Backdoor in 2022 and it has not been 5 years yet
-Anyone can suggest what are my options to withdraw without tax and penalty
1) I opened Roth IRA in Vanguard brokerage account in 2010 and have contributed 5K every year after that. So if I want to withdraw the only contribution before retirement without penalty, I can withdraw $5K every year after 2015 because of the 5 year rule. Is my understanding correct?
2) My company offers Mega Backdoor Roth with Fidelity. I started contributing to Mega Backdoor from 2022 and till now my contribution is 10K and with balance of 14K(gain of 4K). Fidelity does the after-tax contribution to In Plan Roth conversion the same day. Now, if want to withdraw my Megaback door money without penalty and tax before retirement what should I do
-Should I just transfer 10K contribution from Mega backdoor to Roth IRA Vanguard?
-Can I withdraw money as it I started Mega Backdoor in 2022 and it has not been 5 years yet
-Anyone can suggest what are my options to withdraw without tax and penalty
Thanks, |
FB
Re: Mega Backdoor Roth/Roth IRA question
No, this is a common misunderstanding. You can withdraw all of your contributions at any time for any reason with no tax and no penalty. There is no 5 year wait for this.FB01 wrote: ↑Mon Mar 11, 2024 10:14 am Hello,
1) I opened Roth IRA in Vanguard brokerage account in 2010 and have contributed 5K every year after that. So if I want to withdraw the only contribution before retirement without penalty, I can withdraw $5K every year after 2015 because of the 5 year rule. Is my understanding correct?
If you do withdraw from Roth IRA prior to age 59.5, it needs to be documented on Form 8606 Part III. In order to do this, you need to know how much you have contributed.
This may depend on your age.2) My company offers Mega Backdoor Roth with Fidelity. I started contributing to Mega Backdoor from 2022 and till now my contribution is 10K and with balance of 14K(gain of 4K). Fidelity does the after-tax contribution to In Plan Roth conv
ersion the same day. Now, if want to withdraw my Megaback door money without penalty and tax before retirement what should I do
If you are under 59.5, you should roll the Roth 401k (sourced from the in-plan Roth rollovers) into Roth IRA. Obviously, you have to see if your plans allow that first. If allowed, the $10k of contributions will roll into the contributions bucket of your Roth IRA (available immediately) and the earnings will roll into the earnings bucket of your Roth IRA.
If you are over 59.5, again, you must ask your plan if that money can be removed. However, if your Roth 401k is not yet "qualified", you may have to pay tax on the earnings part if you take the money out (rather than rollover).
This is not allowed. The earnings must go too. But that's fine.-Should I just transfer 10K contribution from Mega backdoor to Roth IRA Vanguard?
You will have to ask your plan if it allows you to withdraw this money. However, unless your first contribution to Roth 401k was more than 5 tax years ago, there will be tax on the earnings.-Can I withdraw money as it I started Mega Backdoor in 2022 and it has not been 5 years yet
401k withdrawal rules are more restrictive than Roth IRA withdrawal rules. Best plan is to roll to Roth IRA if they will let you. Then use the less restrictive Roth IRA rules to withdraw.-Anyone can suggest what are my options to withdraw without tax and penalty
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Re: Mega Backdoor Roth/Roth IRA question
This may depend on your age.2) My company offers Mega Backdoor Roth with Fidelity. I started contributing to Mega Backdoor from 2022 and till now my contribution is 10K and with balance of 14K(gain of 4K). Fidelity does the after-tax contribution to In Plan Roth conv
ersion the same day. Now, if want to withdraw my Megaback door money without penalty and tax before retirement what should I do
If you are under 59.5, you should roll the Roth 401k (sourced from the in-plan Roth rollovers) into Roth IRA. Obviously, you have to see if your plans allow that first. If allowed, the $10k of contributions will roll into the contributions bucket of your Roth IRA (available immediately) and the earnings will roll into the earnings bucket of your Roth IRA.
Thank you retiredjg for your response. I am below 59.5
Question on the above response. My plan allows me to transfer to Roth IRA. So are you saying the I need to transfer all or my after tax contribution (10K of Contribution + 4K of earning) to Roth IRA in Vanguard and then pay tax on 4K?
If I do above, can I withdraw all of my funds immediately?
I was thinking about the possibility of just moving my contributions of 10K to Roth IRA in Vanguard and then start using it so that I do not have to pay tax on my earning. My earnings will remain in Fidelity.
Thanks, |
FB
Re: Mega Backdoor Roth/Roth IRA question
You said that you had already converted in plan. If so, you don't have any after tax, just Roth. The $10k of conversions should be eligible for withdrawal, while the earnings will be Roth earnings. However, pro rata rules mean that you need to move the earnings with the basis. If you only move $10k from the 401k to the IRA, that will be considered partly basis and partly earnings.FB01 wrote: ↑Mon Mar 11, 2024 12:03 pmThis may depend on your age.2) My company offers Mega Backdoor Roth with Fidelity. I started contributing to Mega Backdoor from 2022 and till now my contribution is 10K and with balance of 14K(gain of 4K). Fidelity does the after-tax contribution to In Plan Roth conv
ersion the same day. Now, if want to withdraw my Megaback door money without penalty and tax before retirement what should I do
If you are under 59.5, you should roll the Roth 401k (sourced from the in-plan Roth rollovers) into Roth IRA. Obviously, you have to see if your plans allow that first. If allowed, the $10k of contributions will roll into the contributions bucket of your Roth IRA (available immediately) and the earnings will roll into the earnings bucket of your Roth IRA.
Thank you retiredjg for your response. I am below 59.5
Question on the above response. My plan allows me to transfer to Roth IRA. So are you saying the I need to transfer all or my after tax contribution (10K of Contribution + 4K of earning) to Roth IRA in Vanguard and then pay tax on 4K?
If I do above, can I withdraw all of my funds immediately?
I was thinking about the possibility of just moving my contributions of 10K to Roth IRA in Vanguard and then start using it so that I do not have to pay tax on my earning. My earnings will remain in Fidelity.
Re: Mega Backdoor Roth/Roth IRA question
Transfer all $14k to your Roth IRA. $10k of that will be added to your Roth IRA contribution basis (just like the direct contributions you made in the past). The $4k becomes part of the earnings bucket in your Roth IRA and you do not pay tax on that when you roll it into Roth IRA. In fact you never pay tax on the earnings in Roth IRA if you wait long enough.
You can withdraw all the contributions....all those $5k direct contributions plus the $10k in after -tax contributions for the mega-backdoor. The earnings that have occurred in Roth 401k and Roth IRA could be withdrawn but will trigger both tax and a penalty. So leave the earnings in Roth IRA if you can.If I do above, can I withdraw all of my funds immediately?
It is my understanding that this is not allowed. But there would be no tax if you leave the earnings in the Roth IRA.I was thinking about the possibility of just moving my contributions of 10K to Roth IRA in Vanguard and then start using it so that I do not have to pay tax on my earning. My earnings will remain in Fidelity.
Are you familiar with Roth IRA withdrawal order?
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Re: Mega Backdoor Roth/Roth IRA question
Are you familiar with Roth IRA withdrawal order?
[/quote]
Thank you retiredjg for your helpful insight.
No. I am not familiar with Roth IRA withdrawal order? Can you help me provide the information?
[/quote]
Thank you retiredjg for your helpful insight.
No. I am not familiar with Roth IRA withdrawal order? Can you help me provide the information?
Thanks, |
FB
Re: Mega Backdoor Roth/Roth IRA question
I think of it as 3 buckets.
Bucket 1 - all of your direct contributions, includes rollover of Roth 401k contributions and mega-backdoor contributions from in plan Roth rollovers
Bucket 2 - conversions, oldest conversion first (I won't go into this part because it appears you don't have any Roth conversions)
Bucket 3 - earnings that have occurred inside Roth IRA, includes rollover of earnings that occurred inside Roth 401k
The first money to come out of Roth IRA comes from bucket 1. When bucket 2 is empty, the next money comes out of bucket 2. And so on.
Bucket 1 - all of your direct contributions, includes rollover of Roth 401k contributions and mega-backdoor contributions from in plan Roth rollovers
Bucket 2 - conversions, oldest conversion first (I won't go into this part because it appears you don't have any Roth conversions)
Bucket 3 - earnings that have occurred inside Roth IRA, includes rollover of earnings that occurred inside Roth 401k
The first money to come out of Roth IRA comes from bucket 1. When bucket 2 is empty, the next money comes out of bucket 2. And so on.
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Re: Mega Backdoor Roth/Roth IRA question
I was reading the Ordering Rules for Distributions (https://www.irs.gov/publications/p590b# ... k100089915), and I think your bucket definitions are a bit off. I'm not nit-picking; I want to make sure I understand things correctly. They are as follows:retiredjg wrote: ↑Mon Mar 11, 2024 1:53 pm I think of it as 3 buckets.
Bucket 1 - all of your direct contributions, includes rollover of Roth 401k contributions and mega-backdoor contributions from in plan Roth rollovers
Bucket 2 - conversions, oldest conversion first (I won't go into this part because it appears you don't have any Roth conversions)
Bucket 3 - earnings that have occurred inside Roth IRA, includes rollover of earnings that occurred inside Roth 401k
The first money to come out of Roth IRA comes from bucket 1. When bucket 2 is empty, the next money comes out of bucket 2. And so on.
- Bucket 1 - All contributions
- Bucket 2 - Conversions and Rollover contributions
- taxable portion
- non-taxable portion
- Bucket 3 - Earnings on contributions
The taxable portion is the amount that must be included as gross income because of the conversion/rollover. This usually comes from the Roth conversion ladder (Traditional IRA -> Roth IRA conversion). This could also come from the Backdoor Roth conversion when it generates gains in that Traditional IRA (usually when it's not done immediately).
The non-taxable portion is the amount that didn't have to be reported as part of the conversion/rollover. This is usually the case for Roth 401K -> Roth IRA rollover. This could also come from the Backdoor Roth conversion (only the basis).
The earnings bucket refers to the contributions' earnings. Given that the Roth 401K -> Roth IRA is considered a rollover and not a *contribution*, one could withdraw the entirety of the Roth 401K rollover amount penalty-free and tax-free. Splitting the after-tax contribution and gains on the Roth 401K is unnecessary. If I am not mistaken, this also aligns with the Roth IRA table for the treatment of distributions https://www.bogleheads.org/wiki/Roth_IRA#cite_note-22.
The Additional Tax on Early Distributions https://www.irs.gov/publications/p590b# ... k100089548 paragraph of the Publication 590b mentions conversions and rollovers amounts. Still, it never discusses splitting the basis and the gains of said conversions and rollovers.
Re: Mega Backdoor Roth/Roth IRA question
Welcome to the forum.
I have asked myself some of these same questions for a long time. This is not a nit-pic. It is a significant difference in procedure.
There is an information disconnect, for sure. It is possible that Pub 590 is just written poorly or even wrong. It is even more possible that the IRS uses words like "rollover" in a way different from us plain humans. I'll try to explain the background of what I said.
If you are not already familiar, withdrawals from Roth IRA are documented on Form 8606 Part III. Line 22 is the "contribution basis" (what I call "bucket 1) and line 24 is the "conversion basis" (what I call bucket 2).
As I said before, it has long appeared to me that the information given in Pub 590A is inconsistent with the form 8606 instructions. Since the 8606 instructions are how things are actually documented on your tax form (and also how tax software handles it) I have to assume it is the correct information.
I am not a tax expert by any means. I have studied this Roth stuff a bit though.
Your thoughts?
I have asked myself some of these same questions for a long time. This is not a nit-pic. It is a significant difference in procedure.
There is an information disconnect, for sure. It is possible that Pub 590 is just written poorly or even wrong. It is even more possible that the IRS uses words like "rollover" in a way different from us plain humans. I'll try to explain the background of what I said.
The reason I described Bucket 1 as "all of your direct contributions, includes rollover of Roth 401k contributions and mega-backdoor contributions from in plan Roth rollovers" is because that is what the instruction for Form 8606 line 22 tells us to do. And yes, this definitely seems contradictory to what Pub 590 says.queloco wrote: ↑Thu Oct 10, 2024 11:46 pm I was reading the Ordering Rules for Distributions (https://www.irs.gov/publications/p590b# ... k100089915), and I think your bucket definitions are a bit off. I'm not nit-picking; I want to make sure I understand things correctly. They are as follows:
- Bucket 1 - All contributions
- Bucket 2 - Conversions and Rollover contributions
- taxable portion
- non-taxable portion
- Bucket 3 - Earnings on contributions
The taxable portion is the amount that must be included as gross income because of the conversion/rollover. This usually comes from the Roth conversion ladder (Traditional IRA -> Roth IRA conversion). This could also come from the Backdoor Roth conversion when it generates gains in that Traditional IRA (usually when it's not done immediately).
The non-taxable portion is the amount that didn't have to be reported as part of the conversion/rollover. This is usually the case for Roth 401K -> Roth IRA rollover. This could also come from the Backdoor Roth conversion (only the basis).
If you are not already familiar, withdrawals from Roth IRA are documented on Form 8606 Part III. Line 22 is the "contribution basis" (what I call "bucket 1) and line 24 is the "conversion basis" (what I call bucket 2).
I disagree with your interpretation of this. Again, referring to the instruction for line 22 on Form 8606, it says to include amounts that are "treated as investment in the contract". Unless, I'm mistaken, that means your contributions to Roth 401k and it does not include the earnings of those contributions while they were in the Roth 401k.The earnings bucket refers to the contributions' earnings. Given that the Roth 401K -> Roth IRA is considered a rollover and not a *contribution*, one could withdraw the entirety of the Roth 401K rollover amount penalty-free and tax-free. Splitting the after-tax contribution and gains on the Roth 401K is unnecessary.
I may be misunderstanding your comment here, but that section does discuss splitting the basis and the gains when it says....The Additional Tax on Early Distributions https://www.irs.gov/publications/p590b# ... k100089548 paragraph of the Publication 590b mentions conversions and rollovers amounts. Still, it never discusses splitting the basis and the gains of said conversions and rollovers.
- "Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover."
As I said before, it has long appeared to me that the information given in Pub 590A is inconsistent with the form 8606 instructions. Since the 8606 instructions are how things are actually documented on your tax form (and also how tax software handles it) I have to assume it is the correct information.
I am not a tax expert by any means. I have studied this Roth stuff a bit though.
Your thoughts?
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Re: Mega Backdoor Roth/Roth IRA question
(emphasis mine)
But in the context of a Megabackdoor, wouldn't those be conversions, not contributions to Roth 401(k)? The contribution is made to after-tax bucket, then converted to Roth. Shouldn't that basis be entered on line 24 instead?retiredjg wrote: ↑Fri Oct 11, 2024 9:07 am I disagree with your interpretation of this. Again, referring to the instruction for line 22 on Form 8606, it says to include amounts that are "treated as investment in the contract". Unless, I'm mistaken, that means your contributions to Roth 401k and it does not include the earnings of those contributions while they were in the Roth 401k.
Re: Mega Backdoor Roth/Roth IRA question
You might logically think so, but no.pasadena wrote: ↑Fri Oct 11, 2024 9:19 am (emphasis mine)
But in the context of a Megabackdoor, wouldn't those be conversions, not contributions to Roth 401(k)? The contribution is made to after-tax bucket, then converted to Roth. Shouldn't that basis be entered on line 24 instead?retiredjg wrote: ↑Fri Oct 11, 2024 9:07 am I disagree with your interpretation of this. Again, referring to the instruction for line 22 on Form 8606, it says to include amounts that are "treated as investment in the contract". Unless, I'm mistaken, that means your contributions to Roth 401k and it does not include the earnings of those contributions while they were in the Roth 401k.
Contrary to actual Roth IRA conversions or rollovers from the pre tax 401k to a Roth IRA, in plan Roth rollover (IRRs) amounts rolled to a Roth IRA are to be included on line 22 of Form 8606 per the following statement in the 8606 Inst:
Note that these amounts are also shown in Box 5 of the 1099R reporting a Roth 401k direct rollover, so you can increase your regular Roth IRA basis (line 22) by the amount shown in that Box 5 when you receive the 1099R (coded H). Since these amounts go on line 22, they come out before any amounts shown on line 24 of Form 8606 for income tax purposes.Increase the amount on line 22 by any amount rolled in
from a designated Roth, Roth SEP, or Roth SIMPLE
account that is treated as investment in the contract.
Last edited by Alan S. on Fri Oct 11, 2024 10:09 am, edited 1 time in total.
Re: Mega Backdoor Roth/Roth IRA question
Sorry, I skipped over mega BDR earlier.pasadena wrote: ↑Fri Oct 11, 2024 9:19 am (emphasis mine)
But in the context of a Megabackdoor, wouldn't those be conversions, not contributions to Roth 401(k)? The contribution is made to after-tax bucket, then converted to Roth. Shouldn't that basis be entered on line 24 instead?retiredjg wrote: ↑Fri Oct 11, 2024 9:07 am I disagree with your interpretation of this. Again, referring to the instruction for line 22 on Form 8606, it says to include amounts that are "treated as investment in the contract". Unless, I'm mistaken, that means your contributions to Roth 401k and it does not include the earnings of those contributions while they were in the Roth 401k.
Yes. To us, a megabackdoor would be a conversion. And for a long time, the discussion here put those on line 24 (conversion basis). We learned that was only partially correct.
A mega BDR that converts OUT to Roth IRA is included on line 24 - conversion basis and is handled just like an ordinary backdoor Roth.
A megaBDR that is done by in-plan Roth rollover is included on line 22 according to the instructions of Form 8606.
Go figure.
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Re: Mega Backdoor Roth/Roth IRA question
Alan S. wrote: ↑Fri Oct 11, 2024 10:01 amYou might logically think so, but no.
Contrary to actual Roth IRA conversions or rollovers from the pre tax 401k to a Roth IRA, in plan Roth rollover (IRRs) amounts rolled to a Roth IRA are to be included on line 22 of Form 8606 per the following statement in the 8606 Inst:
Note that these amounts are also shown in Box 5 of the 1099R reporting a Roth 401k direct rollover, so you can increase your regular Roth IRA basis (line 22) by the amount shown in that Box 5 when you receive the 1099R (coded H). Since these amounts go on line 22, they come out before any amounts shown on line 24 of Form 8606 for income tax purposes.Increase the amount on line 22 by any amount rolled in
from a designated Roth, Roth SEP, or Roth SIMPLE
account that is treated as investment in the contract.
OK so it appears that you are right. I checked my last 1099R - I do in-plan conversions from after-tax contributions to Roth, and left all the money there (I did not roll it over to my Roth IRA).retiredjg wrote: ↑Fri Oct 11, 2024 10:03 amSorry, I skipped over mega BDR earlier.
Yes. To us, a megabackdoor would be a conversion. And for a long time, the discussion here put those on line 24 (conversion basis). We learned that was only partially correct.
A mega BDR that converts OUT to Roth IRA is included on line 24 - conversion basis and is handled just like an ordinary backdoor Roth.
A megaBDR that is done by in-plan Roth rollover is included on line 22 according to the instructions of Form 8606.
Go figure.
Box 5 says Employee contrib/desig Roth contrib or insurance premiums - so it says contrib. and not conversion
Box 7 is coded G, which is Direct rollover of a distribution to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA.
Checking previous years where I did the conversion and rollover to my Roth IRA in one step, it was coded H for Direct rollover of a designated Roth account distribution to a Roth IRA.
None of this makes sense to me but hey, the IRS is the one who's right.
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Re: Mega Backdoor Roth/Roth IRA question
Following. I never cease to be amazed by the complexities and inconsistencies in our tax code. SMH.
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Re: Mega Backdoor Roth/Roth IRA question
Thanks, and thank you for your thorough response. I will quote your comments to make sure I don't lose anything from your response.
Yes! The disconnect comes from having a crystal clear understanding of how the money enters the Roth 401K.There is an information disconnect, for sure. It is possible that Pub 590 is just written poorly or even wrong. It is even more possible that the IRS uses words like "rollover" in a way different from us plain humans.
Unfortunately, I just started learning about this, so I am unfamiliar with Form 8606 Part III --I see Pub 590B mentions it for calculating what money should be taxed and which should not. I would be great if you could share a link where I can learn more about this.I'll try to explain the background of what I said.
The reason I described Bucket 1 as "all of your direct contributions, includes rollover of Roth 401k contributions and mega-backdoor contributions from in plan Roth rollovers" is because that is what the instruction for Form 8606 line 22 tells us to do. And yes, this definitely seems contradictory to what Pub 590 says.queloco wrote: ↑Thu Oct 10, 2024 11:46 pm I was reading the Ordering Rules for Distributions (https://www.irs.gov/publications/p590b# ... k100089915), and I think your bucket definitions are a bit off. I'm not nit-picking; I want to make sure I understand things correctly. They are as follows:
- Bucket 1 - All contributions
- Bucket 2 - Conversions and Rollover contributions
- taxable portion
- non-taxable portion
The taxable portion is the amount that must be included as gross income because of the conversion/rollover. This usually comes from the Roth conversion ladder (Traditional IRA -> Roth IRA conversion). This could also come from the Backdoor Roth conversion when it generates gains in that Traditional IRA (usually when it's not done immediately).
- Bucket 3 - Earnings on contributions
The non-taxable portion is the amount that didn't have to be reported as part of the conversion/rollover. This is usually the case for Roth 401K -> Roth IRA rollover. This could also come from the Backdoor Roth conversion (only the basis).
If you are not already familiar, withdrawals from Roth IRA are documented on Form 8606 Part III. Line 22 is the "contribution basis" (what I call "bucket 1) and line 24 is the "conversion basis" (what I call bucket 2).
However, I think you are right because I found what you said about the Roth 401K contributions being treated the same in the Roth IRA account after the rollover in the section "Determination of 5-Taxable-year Period after a Rollover to a Roth IRA" of https://www.irs.gov/irb/2007-22_IRB#TD-9324
What it's interesting here is that it appears the nonqualified distributions are split between basis and earnings, but qualified are not and the entire amount of the distribution is consider basis. I am < 59 1/2 so in my case, the distribution is nonqualified. I looked up here (https://www.law.cornell.edu/cfr/text/26/1.402A-1) for the qualified vs nonqualified definition.If a nonqualified distribution from a designated Roth account is rolled over into a Roth IRA, the portion of the distribution that constitutes a nontaxable return of investment in the contract is treated as basis in the Roth IRA. However, the final regulations, like the proposed regulations, provide that, if a qualified distribution from a designated Roth account is rolled over into a Roth IRA, the entire amount of the distribution will be treated as basis in the Roth IRA.
At this point, I want to provide more context for my case. I am < 59 1/2 and I am *only* contributing to my Roth 401K through an in-plan distribution: I contribute after-tax dollars to my after-tax 401K, and after the contribution is made, the money is "moved" immediately to my Roth 401K. I used "moved" to avoid using converted or rolled over. So, all the money that has ever entered my Roth 401K has been after-tax and coming from IRRs (In-plan Roth Rollovers).
I was under the impression that all of these "movements" were conversions/rollovers. I just checked my 1099-R, and I see that these contributions are reported as follows:
- box 5: Employee contrib/desig Roth contrib or insurance premiums
- box 7: G (Direct rollover of a distribution to a qualified plan, a section 403B plan, a governmental section 457(b) plan, or an IRA)
So, it looks like I am right. All the money is entered into the Roth 401K as a rollover. Is that right?
I also found the following Q & A in the Treasury Decision 9324 (https://www.irs.gov/irb/2007-22_IRB#TD-9324):
For context, 408A(d)(4), refers to the grouping rules in the context of Roth IRA withdrawal rules. So, this again confirmed what you said regarding the Roth 401K basis being considered the basis in the Roth IRA after the rollover is executed. But there is still a nagging thought in my mind, which is that the contributions to my Roth 401K are solely coming from IRRs, which are reported in my 1099-R as (allow me to repeat myself just to make the post easier to follow):Q-3. For purposes of the ordering rules on distributions from Roth IRAs, what portion of a distribution from a rollover contribution from a designated Roth account is treated as contributions?
A-3. (a) Under section 408A(d)(4), distributions from Roth IRAs are deemed to consist first of regular contributions, then of conversion contributions, and finally, of earnings. For purposes of section 408A(d)(4), the amount of a rollover contribution that is treated as a regular contribution is the portion of the distribution that is treated as investment in the contract under A-6 of §1.402A-1, and the remainder of the rollover contribution is treated as earnings. Thus, the entire amount of any qualified distribution from a designated Roth account that is rolled over into a Roth IRA is treated as a regular contribution to the Roth IRA. Accordingly, a subsequent distribution from the Roth IRA in the amount of that rollover contribution is not includible in gross income under the rules of A-8 of §1.408A-6.
- box 5: Employee contrib/desig Roth contrib or insurance premiums
- box 7: G (Direct rollover of a distribution to a qualified plan, a section 403B plan, a governmental section 457(b) plan, or an IRA)
So, I think this confirms that my Roth 401K has no "direct contributions." It only has IRRs and earnings. I then looked closer at the text:
That is treated as investment in the contract under A-6 of §1.402A-1"
I went to the definition of A-6 of §1.402A-1(https://www.law.cornell.edu/cfr/text/26/1.402A-1) which states the following:
They talked about rolling over a designated Roth account to another designated Roth account, which I found weird because the Treasury Decision was talking about rollovers to a Roth IRA. One thing that caught my attention was the following text that talks about the investment in the contract is money contributed that wouldn't have been included in gross income if the rollover had not happen:A-6. (a) If a distribution from a designated Roth account is rolled over to another designated Roth account in a direct rollover, the amount of the rollover contribution allocated to investment in the contract in the recipient designated Roth account is the amount that would not have been includible in gross income (determined without regard to section 402(e)(4)) if the distribution had not been rolled over. Thus, if an amount that is a qualified distribution is rolled over, the entire amount of the rollover contribution is allocated to investment in the contract.
I then looked up what Box 5 means (https://www.irs.gov/instructions/i1099r ... 1000292007)in my 1099-R, and I found the following that confirms that the money that I put in must not be reported as part of gross income:the amount of the rollover contribution allocated to investment in the contract in the recipient designated Roth account is the amount that would not have been includible in gross income (determined without regard to section 402(e)(4)) if the distribution had not been rolled over.
Given that language, all the other documents linked in my response, and your input, I think all the IRRs I have in Roth 401K are considered contributions. As such, when the Roth 401K rollover happens, my Roth 401K IRRs will roll over as contributions, too. So this is *your* definition of Bucket 1 = Direct Contributions + IRRs Roth 401KEnter the employee's contributions, designated Roth account contributions, or insurance premiums that the employee may recover tax free this year (even if they exceed the box 1 amount). The entry in box 5 may include any of the following: (a) designated Roth account contributions or contributions actually made on behalf of the employee over the years under the plan that were required to be included in the income of the employee when contributed (after-tax contributions), (b) contributions made by the employer but considered to have been contributed by the employee under section 72(f), (c) the accumulated cost of premiums paid for life insurance protection taxable to the employee in previous years and in the current year under Regulations section 1.72-16 (cost of current life insurance protection) (only if the life insurance contract itself is distributed), and (d) premiums paid on commercial annuities. Do not include any DVECs, any elective deferrals, or any contribution to a retirement plan that was not an after-tax contribution.
You are again correct. If IRRs are considered contributions to the Roth 401K, when they roll over, they keep their nature of contributions, and as such, they become part of the basis. This rule applies for any non-qualified distribution (this is my case because I am < 59 1/2). So, Roth 401K contributions go to Bucket 1, and Roth 401K earnings go to Bucket 3. The rollover doesn't trigger any taxable event, though.I disagree with your interpretation of this. Again, referring to the instruction for line 22 on Form 8606, it says to include amounts that are "treated as investment in the contract". Unless, I'm mistaken, that means your contributions to Roth 401k and it does not include the earnings of those contributions while they were in the Roth 401k.The earnings bucket refers to the contributions' earnings. Given that the Roth 401K -> Roth IRA is considered a rollover and not a *contribution*, one could withdraw the entirety of the Roth 401K rollover amount penalty-free and tax-free. Splitting the after-tax contribution and gains on the Roth 401K is unnecessary.
Yeah, it seems to me that we need to pay special attention how the money enters the Roth IRA. In my particular case, considering the IRR as rollovers and not contributions in the Roth 401K seems to make justice to how the money entered the Roth 401K but it was getting on the way in my understanding on how the money then enters the Roth IRA.I may be misunderstanding your comment here, but that section does discuss splitting the basis and the gains when it says....The Additional Tax on Early Distributions https://www.irs.gov/publications/p590b# ... k100089548 paragraph of the Publication 590b mentions conversions and rollovers amounts. Still, it never discusses splitting the basis and the gains of said conversions and rollovers.
- "Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover."
As I said before, it has long appeared to me that the information given in Pub 590A is inconsistent with the form 8606 instructions. Since the 8606 instructions are how things are actually documented on your tax form (and also how tax software handles it) I have to assume it is the correct information.
Thank you again for sharing your knowledge. It took me some time to get back to you because I wanted to do my homework and not just ask you follow-up questions without making any effort.I am not a tax expert by any means. I have studied this Roth stuff a bit though.
Your thoughts?
Please triple-check my assumption that IRRs on Roth 401K will become based once they land on the Roth IRA.
Re: Mega Backdoor Roth/Roth IRA question
I'll have to look at this tomorrow because my nighttime brain just can't follow your point.
One thing I did understand is this last statement..."Please triple-check my assumption that IRRs on Roth 401K will become based once they land on the Roth IRA."
Yes. IRRs in your 401k do become part of Roth IRA contribution basis (what I call bucket 1) when you rollover a Roth 401k to Roth IRA. This is captured on line 22 on Form 8606. This is contrary to what one would expect, but that is how the IRS handles it.
A Roth IRA may also have a conversion basis (what I call bucket 2) and that is captured on line 24 on Form 8606.
The best way to become familiar with this is to print out both Form 8606 and the instructions for Form 8606 (available on the internet) and read the for and the instructions a bunch of times. For the questions you have, you can ignore Parts I and II. You are only interested in Part III (bottom part of the back page). That is the part of the form that deals with withdrawals from Roth IRA.
One thing I did understand is this last statement..."Please triple-check my assumption that IRRs on Roth 401K will become based once they land on the Roth IRA."
Yes. IRRs in your 401k do become part of Roth IRA contribution basis (what I call bucket 1) when you rollover a Roth 401k to Roth IRA. This is captured on line 22 on Form 8606. This is contrary to what one would expect, but that is how the IRS handles it.
A Roth IRA may also have a conversion basis (what I call bucket 2) and that is captured on line 24 on Form 8606.
The best way to become familiar with this is to print out both Form 8606 and the instructions for Form 8606 (available on the internet) and read the for and the instructions a bunch of times. For the questions you have, you can ignore Parts I and II. You are only interested in Part III (bottom part of the back page). That is the part of the form that deals with withdrawals from Roth IRA.
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Re: Mega Backdoor Roth/Roth IRA question
queloco, I've read this over again with a fresh brain. It seems you are concerned about whether the money in your Roth 401k is considered a contribution to the 401k or a rollover.
In your case, it appears all the money in your Roth 401k comes from IRRs (in-plan Roth rollovers of after-tax contributions) and the earnings those IRRs have created while sitting in Roth 401k.
In truth, when you roll a designated Roth account (your Roth 401k) into Roth IRA, I don't think it matters how the money got there in the first place. If you are under age 59.5, the contributions and the the IRRs roll to the contribution bucket (bucket 1) of Roth IRA and the earnings roll into the earnings bucket (bucket 3) of the Roth IRA.
If the designated Roth account (Roth 401k) were "qualified", it would all roll into the contribution bucket (bucket 1) of the Roth IRA.
If there are other questions that I missed let me know.
In your case, it appears all the money in your Roth 401k comes from IRRs (in-plan Roth rollovers of after-tax contributions) and the earnings those IRRs have created while sitting in Roth 401k.
In truth, when you roll a designated Roth account (your Roth 401k) into Roth IRA, I don't think it matters how the money got there in the first place. If you are under age 59.5, the contributions and the the IRRs roll to the contribution bucket (bucket 1) of Roth IRA and the earnings roll into the earnings bucket (bucket 3) of the Roth IRA.
If the designated Roth account (Roth 401k) were "qualified", it would all roll into the contribution bucket (bucket 1) of the Roth IRA.
If there are other questions that I missed let me know.
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Re: Mega Backdoor Roth/Roth IRA question
Correct.
Correct.In your case, it appears all the money in your Roth 401k comes from IRRs (in-plan Roth rollovers of after-tax contributions) and the earnings those IRRs have created while sitting in Roth 401k.
Yes, this concerns me. IRRs were introduced in ~2010, so all non-qualified distributions (rollovers) from Roth 401K to Roth IRA that happened before ~2010 are treated as we have been discussing: Roth 401K basis to Roth IRA basis (Bucket 1) and Roth 401K earnings to Roth IRA earnings (Bucket 3). However, after ~2010, rollovers became a thing. So, to me, treating Roth 401K rollovers as Roth IRA rollovers feels like the natural evolution of this. That's why, in my original post, I mentioned Pub 590B.In truth, when you roll a designated Roth account (your Roth 401k) into Roth IRA, I don't think it matters how the money got there in the first place. If you are under age 59.5, the contributions and the the IRRs roll to the contribution bucket (bucket 1) of Roth IRA and the earnings roll into the earnings bucket (bucket 3) of the Roth IRA.
I will keep digging a bit more and see what I find.
You nailed it. Sorry if I made the post more complicated than it was supposed to be, but I was a bit overwhelmed with all the information I had in my head. Thanks for summarizing my question in a very cleary way.If there are other questions that I missed let me know.
Re: Mega Backdoor Roth/Roth IRA question
If you want to understand how the IRS has instructed us to handle this on our taxes, read the instructions to Form 8606. And Alan S.'s comments above.
If you want to understand the history of how this came about, keep digging as you have been. Maybe you'll find something, but I doubt it.
If you want to understand why it is different from what one would expect, I suggest you go find something else to do because understanding everything the IRS does not simply an exercise in frustration.
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Re: Mega Backdoor Roth/Roth IRA question
Yeah, that's on my TODO list.
I am not interested in this history; instead, I want to find the document in which they say that IRRs should be in Bucket 1 or Bucket 2. That's all. I understand your point about Form 8606 on how to report the IRRs when the Roth 401K -> Roth IRA rollover happens. To me, that only indicates that the money has already been taxed and shouldn't be taxed again. However, it doesn't mean you can directly consider the IRR basis as basis in the Roth IRA. I might be wrong, and you might be correct, but that's not the actual point. The point here is to find out *where* this is specified so the rest of the community benefits.If you want to understand the history of how this came about, keep digging as you have been. Maybe you'll find something, but I doubt it.
Again, I'm just trying to find evidence to feel better about interpreting the code.If you want to understand why it is different from what one would expect, I suggest you go find something else to do because understanding everything the IRS does not simply an exercise in frustration.
Thanks again for your time and patience
Re: Mega Backdoor Roth/Roth IRA question
You might try this (including the links at the end):queloco wrote: ↑Wed Oct 16, 2024 2:44 pm I am not interested in this history; instead, I want to find the document in which they say that IRRs should be in Bucket 1 or Bucket 2. That's all. I understand your point about Form 8606 on how to report the IRRs when the Roth 401K -> Roth IRA rollover happens. To me, that only indicates that the money has already been taxed and shouldn't be taxed again. However, it doesn't mean you can directly consider the IRR basis as basis in the Roth IRA. I might be wrong, and you might be correct, but that's not the actual point. The point here is to find out *where* this is specified so the rest of the community benefits.
https://www.irs.gov/retirement-plans/pl ... th-account
Re: Mega Backdoor Roth/Roth IRA question
I think once you read the instructions for line 22 (contribution basis), you will see that it says exactly that.queloco wrote: ↑Wed Oct 16, 2024 2:44 pm I am not interested in this history; instead, I want to find the document in which they say that IRRs should be in Bucket 1 or Bucket 2. That's all. I understand your point about Form 8606 on how to report the IRRs when the Roth 401K -> Roth IRA rollover happens. To me, that only indicates that the money has already been taxed and shouldn't be taxed again. However, it doesn't mean you can directly consider the IRR basis as basis in the Roth IRA. I might be wrong, and you might be correct, but that's not the actual point. The point here is to find out *where* this is specified so the rest of the community benefits.
And once you read the instructions for line 24 (conversion basis), you will see that it says not to include rollovers from designated Roth accounts (including IRRs).
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Re: Mega Backdoor Roth/Roth IRA question
@retiredjg is correct.queloco wrote: ↑Wed Oct 16, 2024 2:44 pm However, it doesn't mean you can directly consider the IRR basis as basis in the Roth IRA. I might be wrong, and you might be correct, but that's not the actual point. The point here is to find out *where* this is specified so the rest of the community benefits.
The form 8606 instructions state: “Increase the amount on line 22 by any amount rolled in from a designated Roth... account that is treated as investment in the contract.” A Roth 401(k) subaccount is a ‘designated Roth account’ and ‘investment in the contract’ essentially means basis.
The basis rolled from your designated Roth account (i.e. Roth 401(k) subaccount) to your Roth IRA will be reported in 1099-R Box 5. The difference between 1099-R Box 1 and Box 5 would be attributable to earnings in your basis tracking.
Re: Mega Backdoor Roth/Roth IRA question
Everything @retiredjg said is absolutely correct. Note that it's all within the context of computing the taxable amount of distributions on Form 8606.
But strangely... if any of the IRRs had a taxable component, there'd be a complication. An IRR would have a taxable component if there was a bit of time between the after-tax contribution and the subsequent rollover to the Roth 401k, and in that time there were some earnings. Let's say it's $100. (This won't happen to OP since their IRRs happen immediately.) The IRR would start a 5-year clock before that $100 could be distributed without penalty. Even after a rollover to a Roth IRA, and even though the entire IRR -- including the $100 -- would count as Roth IRA contribution basis on Form 8606, the 5-year penalty clock would continue running for purposes of computing the 10% penalty on Form 5329.
But strangely... if any of the IRRs had a taxable component, there'd be a complication. An IRR would have a taxable component if there was a bit of time between the after-tax contribution and the subsequent rollover to the Roth 401k, and in that time there were some earnings. Let's say it's $100. (This won't happen to OP since their IRRs happen immediately.) The IRR would start a 5-year clock before that $100 could be distributed without penalty. Even after a rollover to a Roth IRA, and even though the entire IRR -- including the $100 -- would count as Roth IRA contribution basis on Form 8606, the 5-year penalty clock would continue running for purposes of computing the 10% penalty on Form 5329.
Re: Mega Backdoor Roth/Roth IRA question
Yes! I finally got the time to read the 8606 Form instructions. You are right. For line 24, as you said, they have the following text that double-confirm that IRRs should go in line 22:retiredjg wrote: ↑Wed Oct 16, 2024 5:16 pm I think once you read the instructions for line 22 (contribution basis), you will see that it says exactly that.
And once you read the instructions for line 24 (conversion basis), you will see that it says not to include rollovers from designated Roth accounts (including IRRs).
Don’t include amounts rolled in from a designated Roth, Roth SEP, or Roth SIMPLE account because these amounts are included on line 22.
Okay, so all the IRRs go in line 22. From a tax perspective, these amounts are deemed not taxable for the distribution (Roth 401K -> Roth IRA rollover). Interestingly, the IRS has decided to treat the IRRs (taxable and non-taxable) as investments in contracts. But I won't argue that decision --more on this later.
I checked my form 1099-R, and my IRRs have a taxable portion, usually no more than ~4 dollars per year. So basically, I am in the situation that @ssel described below:
Unfortunately, this happens because in-plan rollovers don't always occur immediately when the after-tax contribution is made in the 401K. The logic described above by @ssel is mentioned in the Designated Roth Account FAQ https://www.irs.gov/retirement-plans/re ... h-accounts section "How are in-plan Roth rollovers taxed?":ssel wrote: ↑Sat Oct 19, 2024 4:23 am But strangely... if any of the IRRs had a taxable component, there'd be a complication. An IRR would have a taxable component if there was a bit of time between the after-tax contribution and the subsequent rollover to the Roth 401k, and in that time there were some earnings. Let's say it's $100. (This won't happen to OP since their IRRs happen immediately.) The IRR would start a 5-year clock before that $100 could be distributed without penalty. Even after a rollover to a Roth IRA, and even though the entire IRR -- including the $100 -- would count as Roth IRA contribution basis on Form 8606, the 5-year penalty clock would continue running for purposes of computing the 10% penalty on Form 5329.
I guess I will have to use the form 1099-R to keep track of the taxable portion of the IRR when I withdraw them from my Roth IRA account.In-plan Roth rollovers are not subject to the 10% additional tax on early distributions. However, they are subject to a special recapture rule when a plan distributes any part of an in-plan Roth rollover within a 5-taxable-year period, making the distribution subject to the 10% additional tax on early distributions under IRC Section 72(t) unless:
* an exception to this tax applies, or
* the distribution is allocable to any nontaxable portion of the in-plan Roth rollover.
The 5-taxable-year period begins January 1 of the year of the in-plan Roth rollover and ends on December 31 of the fifth year. This special recapture rule does not apply when you roll over the distribution to another designated Roth account or to your Roth IRA, but does apply to a subsequent distribution from the rolled over account or IRA within the 5-taxable-year period.
Re: Mega Backdoor Roth/Roth IRA question
Sounds like you have it figured out.
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Re: Mega Backdoor Roth/Roth IRA question
One additional question regarding gains
Let's say my IRR's non-taxable portion is $900, and the taxable portion is $9. When I roll them over from the Roth 401K to the Roth IRA, I will report $909 in box 22 of form 8606. If I wait > 5 years, I can withdraw the $909 tax-free and penalty-free. Otherwise, I will have to pay a penalty on the $9 (Recapture rule, 10% tax).
What happens to the gains of those $909 while sitting on the Roth 401K? Let's say I have $100 gains. So, the total balance on my Roth 401K is $1009. According to the instructions, these $1009 will be reported in box 22 (contribution basis). So even though the $100 gains were reported in box 22, I should still consider them as gains in the Roth IRA (bucket 3). Is that correct?
Let's say my IRR's non-taxable portion is $900, and the taxable portion is $9. When I roll them over from the Roth 401K to the Roth IRA, I will report $909 in box 22 of form 8606. If I wait > 5 years, I can withdraw the $909 tax-free and penalty-free. Otherwise, I will have to pay a penalty on the $9 (Recapture rule, 10% tax).
What happens to the gains of those $909 while sitting on the Roth 401K? Let's say I have $100 gains. So, the total balance on my Roth 401K is $1009. According to the instructions, these $1009 will be reported in box 22 (contribution basis). So even though the $100 gains were reported in box 22, I should still consider them as gains in the Roth IRA (bucket 3). Is that correct?
Re: Mega Backdoor Roth/Roth IRA question
Only $909 goes on Line 22. The part that goes on Line 22 is "any amount rolled in from a designated Roth... account that is treated as investment in the contract". The extra $100 is not considered "investment in the contract".
Yes to that part.I should still consider them as gains in the Roth IRA (bucket 3).
Re: Mega Backdoor Roth/Roth IRA question
Agree. The earnings that occurred once the money was in Roth 401k rolls into the "earnings bucket" of the Roth IRA. But this is not a number you have to keep up with. And you could not keep up with it because it changes every day.
What you do have to keep up with is the contribution basis (line 22) and the conversion basis (line 24). Whatever dollars that are in your Roth IRA that are not line 22 or line 24....are earnings.
What you do have to keep up with is the contribution basis (line 22) and the conversion basis (line 24). Whatever dollars that are in your Roth IRA that are not line 22 or line 24....are earnings.
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Re: Mega Backdoor Roth/Roth IRA question
Right, my bad. Thanks @sselOnly $909 goes on Line 22. The part that goes on Line 22 is "any amount rolled in from a designated Roth... account that is treated as investment in the contract". The extra $100 is not considered "investment in the contract".
Ok, this makes a lot of sense now. Thanks @retiredjgBut this is not a number you have to keep up with. And you could not keep up with it because it changes every day.
What you do have to keep up with is the contribution basis (line 22) and the conversion basis (line 24). Whatever dollars that are in your Roth IRA that are not line 22 or line 24....are earnings.
Re: Mega Backdoor Roth/Roth IRA question
I went through the thread again, and I am unclear on where to report the taxable portion of the IRR.
Let's say my IRR's non-taxable portion is $900 (Box 5 of Form 1099-R), and the taxable portion is $9 (Box 2a of Form 1099-R). When I roll them over from the Roth 401K to the Roth IRA, I am sure that $900 should go into box 22 of form 8606 because they are considered an "investment in the contract." Where should the taxable portion ($9) be reported?
Let's say my IRR's non-taxable portion is $900 (Box 5 of Form 1099-R), and the taxable portion is $9 (Box 2a of Form 1099-R). When I roll them over from the Roth 401K to the Roth IRA, I am sure that $900 should go into box 22 of form 8606 because they are considered an "investment in the contract." Where should the taxable portion ($9) be reported?
Re: Mega Backdoor Roth/Roth IRA question
You're asking what to do when you: "roll them over from the Roth 401K to Roth IRA". Nothing. Section 3 of Form 8606 isn't needed at that point. You don't fill out Box 22, and there's no tax or penalty to be reported. (Well, the total rollover does get reported as a nontaxable amount on 1040 Line 5a.)queloco wrote: ↑Mon Oct 28, 2024 11:49 pm Let's say my IRR's non-taxable portion is $900 (Box 5 of Form 1099-R), and the taxable portion is $9 (Box 2a of Form 1099-R). When I roll them over from the Roth 401K to the Roth IRA, I am sure that $900 should go into box 22 of form 8606 because they are considered an "investment in the contract." Where should the taxable portion ($9) be reported?
Now suppose you go on to do a nonqualified distribution of these funds after they've been rolled over. That's when you'll fill out Box 22. The $9 that's subject to a 10% penalty is reported on Form 5329.
Re: Mega Backdoor Roth/Roth IRA question
I'm going to offer a different approach here.ssel wrote: ↑Tue Oct 29, 2024 12:52 amYou're asking what to do when you: "roll them over from the Roth 401K to Roth IRA". Nothing. Section 3 of Form 8606 isn't needed at that point. You don't fill out Box 22, and there's no tax or penalty to be reported. (Well, the total rollover does get reported as a nontaxable amount on 1040 Line 5a.)queloco wrote: ↑Mon Oct 28, 2024 11:49 pm Let's say my IRR's non-taxable portion is $900 (Box 5 of Form 1099-R), and the taxable portion is $9 (Box 2a of Form 1099-R). When I roll them over from the Roth 401K to the Roth IRA, I am sure that $900 should go into box 22 of form 8606 because they are considered an "investment in the contract." Where should the taxable portion ($9) be reported?
Now suppose you go on to do a nonqualified distribution of these funds after they've been rolled over. That's when you'll fill out Box 22. The $9 that's subject to a 10% penalty is reported on Form 5329.
Let's say you have done an IRR of $909 , you've paid the tax on the $9, and you want to move that $909 IRR out to Roth IRA for whatever reason.
There is no requirement to use form 8606 to document this move, but I suggest that you do it anyway - use form 8606 to keep up with your running balance of contribution basis (line 22) and conversion basis (line 24). The IRS is not going to get the 8606 form that year (unless it is needed for something else) but they don't care if you tell your tax software about the distribution.
All of the $909 goes onto line 22, not just the $900. Your own personal records will tell you that $9 of that money has a 5 tax year clock and when the clock ends. I don't know of any IRS guidance on what to do after this (how to spend from line 22)...so I guess you have to use your own best judgement.
If you do not do your own taxes with software, you are going to have to keep up with everything by hand or trust your tax-preparer to do it (don't rely on this).
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Re: Mega Backdoor Roth/Roth IRA question
I am not nit-picking; just double-checking. Here, you meant Roth 401K, right?
I didn't know this wasn't required. I guess this helps with recordkeeping, so better to do it. Good suggestion.There is no requirement to use form 8606 to document this move, but I suggest that you do it anyway - use form 8606 to keep up with your running balance of contribution basis (line 22) and conversion basis (line 24). The IRS is not going to get the 8606 form that year (unless it is needed for something else) but they don't care if you tell your tax software about the distribution.
Okay, yeah, I was puzzled because those $9 dollars, under my own definition, are not really "investments in the contract," but I guess there is no other option. Reporting them in line 22 and keeping track of the 5 tax year clock and when the clock ends makes sense to me. I am planning on consider the total amount of the IRR in Roth IRA bucket #1, so whenever I touch the IRR taxable amount, I will check the tax year clock and pay the penalty (10% of said amount) if applicable.All of the $909 goes onto line 22, not just the $900. Your own personal records will tell you that $9 of that money has a 5 tax year clock and when the clock ends. I don't know of any IRS guidance on what to do after this (how to spend from line 22)...so I guess you have to use your own best judgement.
For better or worse, I've always used TurboTax, so I will play around with it and see how I can enter the IRR total amount in line 22 when I execute the Roth 401K -> Roth IRA rollover.If you do not do your own taxes with software, you are going to have to keep up with everything by hand or trust your tax-preparer to do it (don't rely on this).
Re: Mega Backdoor Roth/Roth IRA question
You think I meant "Roth 401k" for what, specifically? If you mean specifically instead of "IRR", I guess you are right, that's what I mean.
But note: Roth 401k can consist of both Roth contributions (which cannot be rolled out early) and IRRs from after-tax contributions (which can be rolled out early). I guess I didn't want someone to get the idea they could roll out their Roth contributions early.
Part III of form 8606 is only required if you make a withdrawal from Roth IRA. But it can also be used to keep up with your running total for both contribution basis and conversion basis. I suggest that you also keep your own records. When the time comes for withdrawals, your Turbo tax may have glitched and you'll want to verify the numbers again.I didn't know this wasn't required. I guess this helps with recordkeeping, so better to do it. Good suggestion.There is no requirement to use form 8606 to document this move, but I suggest that you do it anyway - use form 8606 to keep up with your running balance of contribution basis (line 22) and conversion basis (line 24). The IRS is not going to get the 8606 form that year (unless it is needed for something else) but they don't care if you tell your tax software about the distribution.
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Re: Mega Backdoor Roth/Roth IRA question
I read "out to Roth IRA" as if I wanted to move the IRR out "from" the Roth IRA. English is not my mother tongue.move that $909 IRR out to Roth IRA for whatever reason.
Dang, I didn't know this. It's not my case as I only have IRRs on my Roth 401k. I will read more about this.But note: Roth 401k can consist of both Roth contributions (which cannot be rolled out early) and IRRs from after-tax contributions (which can be rolled out early). I guess I didn't want someone to get the idea they could roll out their Roth contributions early.
Yeah, totally. I also have all the forms I have received these years in digital form. So, I am doing whatever is possible to have a sound record-keeping system.Part III of form 8606 is only required if you make a withdrawal from Roth IRA. But it can also be used to keep up with your running total for both contribution basis and conversion basis. I suggest that you also keep your own records. When the time comes for withdrawals, your Turbo tax may have glitched and you'll want to verify the numbers again.