The Mega Backdoor Roth IRA

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coolguy954
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The Mega Backdoor Roth IRA

Post by coolguy954 » Mon Apr 14, 2014 9:58 pm

Hi everyone

White coat investor posted a recent article earlier today about The Mega Backdoor Roth IRA

http://whitecoatinvestor.com/the-mega-b ... -roth-ira/

His first variation caught my eye :greedy
Variation # 1 – The employee with a unique 401K

Some 401Ks not only permit $17.5K of either tax-deferred or Roth contributions, but ALSO permit you to contribute your own, after-tax money into the plan up to the $52K limit. A good example of this is the TSP for deployed military doctors. It isn’t a particularly good deal to just contribute after-tax money, UNLESS you can then get that money out and convert it to a Roth. Voila- A Mega Backdoor Roth IRA. Instead of only being able to contribute $5.5K per year, all of a sudden you can contribute $34.5K (plus the $5.5K in your personal and $5.5K in your spousal IRA.) If you’re over 50 and put your first $23K (remember the $5.5K catch-up contribution) into a Roth 401K, you could potentially put up to $65K per year into a Roth IRA. Here are the requirements:

The plan must allow for after-tax contributions above and beyond the $17,500 employee contribution limit, preferably up to the $52,000 limit. So you can put in your $17,500 that is either tax-deferred or Roth, then contribute another $34,500 to the plan in after-tax dollars, similar to a non-deductible traditional IRA.
The plan must allow for non-hardship in-service withdrawals of after-tax contributions.
The plan should prohibit non-hardship in-service withdrawals of tax-deferred contributions (not mandatory, but a useful feature.)
The plan should allow for “lump sum” contributions (not mandatory, but useful.)

Even if your plan doesn’t allow in-service withdrawals (like the TSP), if you are separating soon from the company (or military), you may be able to isolate that basis and accomplish the same thing like I did after I left the military. This is a great deal for someone who has limited tax-protected (and asset-protected) accounts but would like to save more for retirement. Unfortunately, most 401Ks don’t allow after-tax contributions. Check and see if yours does. Be sure the person you’re asking understands you’re not talking about Roth contributions, but contributions above and beyond the $17,500 limit.
This sounds too good to be true..is it?
Can this be done also in combination with the regular back door roth ira trick?
Can this be done every year?
Do I have to have the money in my 401k for 5+ years before I can roll it over like my roth portion of my 401k demands?

poundwise
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Re: The Mega Backdoor Roth IRA

Post by poundwise » Tue Apr 15, 2014 2:19 am

MyMegaCorp doesn't allow after-tax non Roth contributions, but apparently many MegaCorps do (see: http://www.bogleheads.org/forum/viewtop ... 1&t=104829).

I had previously thought that since no solo 401k provider is known to permit after-tax, non-Roth contributions (see: http://www.bogleheads.org/forum/viewtop ... 1&t=112290), it would be impossible to do a Mega Backdoor Roth IRA with self-employment income. But Variation #2 is an obvious way to do this.

So I believe the answers to your questions are: 1) Not if you work for the right company 2) Yes 3) Yes 4) Depends on your company's plan

PS -- I love the moniker "Mega Backdoor IRA." Hope it sticks.

Topic Author
coolguy954
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Re: The Mega Backdoor Roth IRA

Post by coolguy954 » Tue Apr 15, 2014 7:27 am

poundwise wrote:MyMegaCorp doesn't allow after-tax non Roth contributions, but apparently many MegaCorps do (see: http://www.bogleheads.org/forum/viewtop ... 1&t=104829).

I had previously thought that since no solo 401k provider is known to permit after-tax, non-Roth contributions (see: http://www.bogleheads.org/forum/viewtop ... 1&t=112290), it would be impossible to do a Mega Backdoor Roth IRA with self-employment income. But Variation #2 is an obvious way to do this.

So I believe the answers to your questions are: 1) Not if you work for the right company 2) Yes 3) Yes 4) Depends on your company's plan

PS -- I love the moniker "Mega Backdoor IRA." Hope it sticks.
:sharebeer :sharebeer

TOM1964
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Re: The Mega Backdoor Roth IRA

Post by TOM1964 » Tue Apr 15, 2014 7:47 am

I have a balance of $162,929 in my 401k that is attributable to post-tax contributions. I'd love to "Mega Backdoor Roth" this money into my existing Vanguard Roth IRA. Unfortunately, about $50k of that sum represents earnings on the initial post-tax contributions, and that $50k would be taxable at withdrawal, since this is not a Roth 401k.

Would the $50k also be subject to early-withdrawal penalties, even if it was rolled over into a Roth?

Here's what my summary plan description has to say about in-service withdrawals of post-tax contributions:

POST-TAX
WITHDRAWALS

An in-service withdrawal may be made from your own post-tax
contributions and earnings attributable to those contributions. If less than
the balance of your post-tax contribution account (your contributions as
adjusted for earnings and losses) is requested, the distribution to you will
include a pro rata portion of already taxed voluntary contributions and of
taxable earnings, in accordance with IRS regulations.

EXAMPLE: Assume you have a total of $20,000 in your post-tax
contribution account, of which $16,000 (4/5) are your actual contributions
and $4,000 (1/5) are earnings. If you request a withdrawal of $10,000, you
will receive $8,000 (4/5 of $10,000) as a return of your contributions and
$2,000 (1/5 of $10,000) as taxable earnings.

The earnings you receive will be considered taxable income and may be
subject to the early withdrawal penalty described below.

Under a special tax rule, you may obtain a withdrawal of post-tax
contributions you made before January 1, 1987 without receiving a pro rata
portion of the earnings. Withdrawals you receive after January 1, 1987 will
be taken from your pre-1987 voluntary contributions (not including
earnings) until those contributions are depleted. After that, withdrawals
must include a pro rata portion of taxable earnings.

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hoppy08520
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Re: The Mega Backdoor Roth IRA

Post by hoppy08520 » Tue Apr 15, 2014 8:26 am

This is legit. There's a page in the Bogleheads wiki on this:
http://www.bogleheads.org/wiki/After-tax_401(k)
I wish my 401(k) plan allowed this, but it does not.

susze
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Re: The Mega Backdoor Roth IRA

Post by susze » Tue Apr 15, 2014 1:18 pm

So can you contribute the after tax max every year to cash and just rollover with minimal taxes. Are there plans out there that will allow just a partial in service withdrawl? Thanks

flybynite
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Re: The Mega Backdoor Roth IRA

Post by flybynite » Tue Apr 15, 2014 2:26 pm

poundwise wrote:MyMegaCorp doesn't allow after-tax non Roth contributions, but apparently many MegaCorps do (see: http://www.bogleheads.org/forum/viewtop ... 1&t=104829).

I had previously thought that since no solo 401k provider is known to permit after-tax, non-Roth contributions (see: http://www.bogleheads.org/forum/viewtop ... 1&t=112290), it would be impossible to do a Mega Backdoor Roth IRA with self-employment income. But Variation #2 is an obvious way to do this.

So I believe the answers to your questions are: 1) Not if you work for the right company 2) Yes 3) Yes 4) Depends on your company's plan

PS -- I love the moniker "Mega Backdoor IRA." Hope it sticks.
Apparently my MegaCorp allows after-tax, in plan withdrawal of after-tax (no hardship/pre-59), and in place conversion if you want to make it Roth 401K, or you could just take it out to Vanguard. On the other hand, not sure if after maxing out 401k, 4 kids 529's, charitable contributions, and finally the 2x (spouse and self) Backdoor Roth IRA options we only last year figured out and started using if I have the capacity for any more savings space... but nice to know it's an option! :sharebeer

placeholder
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Re: The Mega Backdoor Roth IRA

Post by placeholder » Tue Apr 15, 2014 2:43 pm

TOM1964 wrote:Would the $50k also be subject to early-withdrawal penalties, even if it was rolled over into a Roth?
No although it would be if you took it in cash BUT you might not have to pay tax at all if your plan allows incoming rollovers from IRAs as you roll the after tax and earnings out to a traditional IRA then roll the earnings back in leaving you a no tax conversion of the after tax contributions.
Last edited by placeholder on Tue Apr 15, 2014 4:50 pm, edited 1 time in total.

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samsoes
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Re: The Mega Backdoor Roth IRA

Post by samsoes » Tue Apr 15, 2014 2:47 pm

Why would you ever want to do this? It will not reduce your tax liability, and ultimately the earnings/growth would be taxable at ordinary income rates, as compared to lower LTCG rates in a taxable account.

One should only contribute to 401(k)'s if there is an immediate pre-tax benefit of the contributions, or a deferred tax-free benefit of a Roth 401(k).

Contributing post-tax dollars to a traditional 401(k) only benefits the tax man/woman.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)

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hoppy08520
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Re: The Mega Backdoor Roth IRA

Post by hoppy08520 » Tue Apr 15, 2014 3:19 pm

gooch wrote:Why would you ever want to do this? It will not reduce your tax liability, and ultimately the earnings/growth would be taxable at ordinary income rates, as compared to lower LTCG rates in a taxable account.

One should only contribute to 401(k)'s if there is an immediate pre-tax benefit of the contributions, or a deferred tax-free benefit of a Roth 401(k).

Contributing post-tax dollars to a traditional 401(k) only benefits the tax man/woman.
You might want to read the blog post more carefully. Very shortly after you contribute to the after-tax 401(k), you roll the after-tax portion over to an IRA and then convert it to a Roth IRA. At that point, your money's in a Roth IRA. It's effectively the same as contributing to an ordinary Roth IRA except you can do a magnitude more.

TOM1964
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Re: The Mega Backdoor Roth IRA

Post by TOM1964 » Tue Apr 15, 2014 7:17 pm

gooch wrote:Why would you ever want to do this? It will not reduce your tax liability, and ultimately the earnings/growth would be taxable at ordinary income rates, as compared to lower LTCG rates in a taxable account.

One should only contribute to 401(k)'s if there is an immediate pre-tax benefit of the contributions, or a deferred tax-free benefit of a Roth 401(k).

Contributing post-tax dollars to a traditional 401(k) only benefits the tax man/woman.
No, I am using my tax-advantaged space for the bond portion of my portfolio. There is no LTCG loss, I am already enjoying that benefit in my taxable accounts, where I keep my equity investments.

I wish to defer taxes on my earnings as they compound. There is no benefit for the tax person.

Topic Author
coolguy954
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Re: The Mega Backdoor Roth IRA

Post by coolguy954 » Tue Apr 15, 2014 7:32 pm

:oops: :oops:

Just read my guidelines for my job 401k plan. Since I am a "highly compensated employee" I can't contribute to the after tax portion of my 401k. I am going to call HR tomorrow about this, doesn't make sense. :annoyed

Bacchus01
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Re: The Mega Backdoor Roth IRA

Post by Bacchus01 » Tue Apr 15, 2014 8:42 pm

Yes, it works.

I did the full amount last year. You do not roll it to an IRA then convert to a Roth, you simply send it straight to a Roth.

I did mine between my Wells Fargo 401K and Vanguard Roth. I called both and they said "yep, we do it all the time." It was painless.

poundwise
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Re: The Mega Backdoor Roth IRA

Post by poundwise » Tue Apr 15, 2014 8:43 pm

coolguy954 wrote:Just read my guidelines for my job 401k plan. Since I am a "highly compensated employee" I can't contribute to the after tax portion of my 401k. I am going to call HR tomorrow about this, doesn't make sense. :annoyed
This limitation is likely due to federally imposed "non-discrimination testing" which is a provision to ensure companies extend retirement benefits equitably (sort of) to all employees. See the HCE section here: http://en.wikipedia.org/wiki/401(k).

One more obstacle to the Holy Grail that is the Mega Backdoor Roth...

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coolguy954
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Re: The Mega Backdoor Roth IRA

Post by coolguy954 » Tue Apr 15, 2014 10:17 pm

poundwise wrote:
coolguy954 wrote:Just read my guidelines for my job 401k plan. Since I am a "highly compensated employee" I can't contribute to the after tax portion of my 401k. I am going to call HR tomorrow about this, doesn't make sense. :annoyed
This limitation is likely due to federally imposed "non-discrimination testing" which is a provision to ensure companies extend retirement benefits equitably (sort of) to all employees. See the HCE section here: http://en.wikipedia.org/wiki/401(k).

One more obstacle to the Holy Grail that is the Mega Backdoor Roth...
so close but so far :-(

ratesguy
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Re: The Mega Backdoor Roth IRA

Post by ratesguy » Tue Apr 15, 2014 10:29 pm

I did this for the first time this year. It was advocated internal 401k presentation and I have no reason to think its not 100pct legit. For me it means that the 52k limit was reached with 17500 from me, 10k profit share from employer and 25k of mt after-tax contributions that I already rolled into a Roth Ira. I'm kicking myself b/c I think this is the third year I had this option bruit only figured it out this year. Oh well - I didn't know about the "standard" back door Roth until I saw it on this forum this year. So my long since abandoned Rofh Ira (income limits kicked in after a few years of contributions) got a nice 36k kick this year. Too bad asset valuations aren't particularly compelling.

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zaboomafoozarg
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Re: The Mega Backdoor Roth IRA

Post by zaboomafoozarg » Tue Apr 15, 2014 10:32 pm

Well shoot, this got me looking at my 401k at TRP. It says that I can contribute up to 10% of my pay in "nondeductible employee contributions". Could this be a possible Roth IRA backdoor? I must request information from HR to find out.

daave
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Re: The Mega Backdoor Roth IRA

Post by daave » Tue Apr 15, 2014 10:40 pm

My company has offered this for a while, and we use Vanguard as our 401k administrator.

As of this January, they added a feature where we can do both in-plan after-tax 401k to roth 401k conversions, and after-tax 401k to a personal roth ira rollovers, both directly from the Vanguard website. It used to be that I had to call up every other Monday after my paycheck had cleared to ask them to do the rollover. I contribute the after-tax funds into the Vanguard Prime Money Market fund to avoid gain/loss in value in the few days it's sitting there while the rollover processes each time.

I'm not yet at the point where I can max out the 52K in 401k related contributions and 5K in backdoor roth contributions, so I prefer using the after-tax-401k to roth over a regular backdoor roth, since it involves less tax paperwork (no form 8606!).
Last edited by daave on Tue Apr 15, 2014 11:05 pm, edited 1 time in total.

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zaboomafoozarg
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Re: The Mega Backdoor Roth IRA

Post by zaboomafoozarg » Tue Apr 15, 2014 10:41 pm

Bacchus01 wrote:Yes, it works.

I did the full amount last year. You do not roll it to an IRA then convert to a Roth, you simply send it straight to a Roth.

I did mine between my Wells Fargo 401K and Vanguard Roth. I called both and they said "yep, we do it all the time." It was painless.
Did you do this at the end of the year, or more often than that?

AdamP
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Re: The Mega Backdoor Roth IRA

Post by AdamP » Tue Apr 15, 2014 10:45 pm

ratesguy wrote:I'm kicking myself b/c I think this is the third year I had this option bruit only figured it out this year.
Same boat. I've had this option since I started at my current company, but didn't know what it was or that I could fill my Roth with it until earlier this year. And on the slightly annoying side, even after I figured out, with the normal 2 paycheck contribution delay (unnecessarily imposed, as payroll is informed immediately) I'm going to be -just- under $52k total contributions this year. But yes, it is super nice to have a way to grow my Roths nearly as quickly as my 401k/IRAs. And, fortunately, the in-service rollovers are a piece of cake.

A possible bummer: A company that I might move to later this year doesn't have after-tax contributions. Better to have loved and lost...
daave wrote:I contribute the after-tax funds into the Vanguard Prime Money Market fund to avoid gain/loss in value in the few days it's sitting there while the rollover processes each time.
Although I can't separate where my pre/post-tax contributions go, after losing about 1% last week during the withdrawal processing time, I switched my contributions to a money market as well. I'll just exchange the pre-tax stuff once the withdrawal is completed. Interestingly, the statement clearly shows when I have a gain of the after-tax contribution vs withdrawal, but it doesn't show losses. I'll have to research this.

ratesguy
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Re: The Mega Backdoor Roth IRA

Post by ratesguy » Tue Apr 15, 2014 11:02 pm

I did it once (recently) - my pay is front loaded b/c of bonus and company share deliveries. My understanding is you can do it as often as you want (eg 1k at a shot or whatever) but there is a small time component related to making the call and depositing the check (I was a bit surprised I coudn't just do it online - my 401k is with Fidelity - instead I had to actually call and get a paper check).

The downside of waiting and doing it once per year is that you'll likely have gains that will be subject to tax. Whereas a strategy of rolling over as soon as the money hits the 401k would avoid any time to accrue gains before it goes into the Roth.

For a real world example, my 25k contribution wound up being about 26.2k b/c of appreciation. So I'll pay tax on the 1,200 as additional ordinary income next year. But I get more into the Roth. It could make sense to go through the hassle of investing your after-tax money in your 401k more in low expected return assets like bonds so long as you keep on top of your AA as a whole.

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Re: The Mega Backdoor Roth IRA

Post by psychoslowmatic » Wed Apr 16, 2014 8:23 am

I wish there was a list of employers that offered this floating around. I know many people don't want their usernames associated with their employer, is there someplace where people could anonymously add the info, maybe in the wiki? I asked my employer to add the after-tax option, they considered it but their advisor said they'd be subject to a new non-discrimination test, probably fail some of the current ones, and incur extra admin costs, so they refused. I've heard on this site that Google, GM, and Ford offer after-tax contributions as an option, but I don't work for any of them

daave
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Re: The Mega Backdoor Roth IRA

Post by daave » Wed Apr 16, 2014 9:18 am

psychoslowmatic wrote:I wish there was a list of employers that offered this floating around. I know many people don't want their usernames associated with their employer, is there someplace where people could anonymously add the info, maybe in the wiki?
The wiki still shows exactly who added what via the edit history. Maybe one of the moderators could volunteer to compose the list, accepting additions to it via private message and proxying the results to the wiki?

If the goal here is to provide Bogleheads with useful data about 401(k) plans that they can look at when considering a job offer, perhaps we should include more than just whether after-tax rollovers to roth are allowed, but a comprehensive analysis of what each plan offers, including matching, costs, etc?

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Re: The Mega Backdoor Roth IRA

Post by placeholder » Wed Apr 16, 2014 10:04 am

Note that you need two components: after tax contributions and ability to take in service rollovers or do in plan Roth conversions with the contributions.

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Crushtheturtle
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Re: The Mega Backdoor Roth IRA

Post by Crushtheturtle » Wed Apr 16, 2014 10:39 am

Looking briefly at the TSP literature, it appears as though they do not allow in service transfers/ rollovers. Does anyone have better info?
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killjoy2012
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Re: The Mega Backdoor Roth IRA

Post by killjoy2012 » Wed Apr 16, 2014 12:37 pm

placeholder wrote:Note that you need two components: after tax contributions and ability to take in service rollovers or do in plan Roth conversions with the contributions.
Agree. My MegaCorp allows for after-tax 401k contributions, but no source-specific in-service withdrawals. So if I have a $100k 401k balance of which $10k is "after tax" contributions + earnings, I cannot just do a rollover/withdrawal of that $10k into a Roth IRA. They require in-service withdrawals to come across all sources evenly. BUT, upon separation from the company, that $10k could be rolled over into a Roth IRA.

Of course at my MegaCorp, being a HCE, the after-tax contribution limits keep me way below the Maga Backdoor Roth concept.

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Re: The Mega Backdoor Roth IRA

Post by placeholder » Wed Apr 16, 2014 5:52 pm

My company limits the total percentage of salary you can contribute so I never can do the full amount of after tax although they did raise that 5% this year so it'll be closer.

Bacchus01
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Re: The Mega Backdoor Roth IRA

Post by Bacchus01 » Wed Apr 16, 2014 6:47 pm

zaboomafoozarg wrote:
Bacchus01 wrote:Yes, it works.

I did the full amount last year. You do not roll it to an IRA then convert to a Roth, you simply send it straight to a Roth.

I did mine between my Wells Fargo 401K and Vanguard Roth. I called both and they said "yep, we do it all the time." It was painless.
Did you do this at the end of the year, or more often than that?
Our plan allowed us to do it as often as we wanted to at no charge. Some limit the frequency. For me, I maxed out my deductions at 75% and took it over about 3 paychecks and moved it each time.

HCE limits are not required for post-tax contributions, only pre-tax. I was not subject to HCE constraints on my post-tax deductions which is why I could do 75% at once.

Visceral
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Re: The Mega Backdoor Roth IRA

Post by Visceral » Wed Apr 16, 2014 7:15 pm

I found a lengthy thread on after-tax 401K contributions here http://www.bogleheads.org/forum/viewtop ... =2&t=66208. I'm always picking up good information from this place.

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Re: The Mega Backdoor Roth IRA

Post by placeholder » Thu Apr 17, 2014 5:27 pm

In my case the 401k automatically switches to after tax when the deferral limit is reached and continues matching so I just contribute the max I can and the after tax will accumulate at the end of the year so I do a rollover early in the next year.

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zaboomafoozarg
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Re: The Mega Backdoor Roth IRA

Post by zaboomafoozarg » Thu Apr 17, 2014 5:36 pm

For people who have done this with a Vanguard Roth IRA, how exactly does it work? Does you have to get your 401k provider to transfer the money directly to Vanguard, or does your 401k provider send you a check which you then have to send to Vanguard with a form indicating you want to do this type of rollover?

adptnt
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Re: The Mega Backdoor Roth IRA

Post by adptnt » Fri Apr 18, 2014 8:12 am

zaboomafoozarg wrote:For people who have done this with a Vanguard Roth IRA, how exactly does it work? Does you have to get your 401k provider to transfer the money directly to Vanguard, or does your 401k provider send you a check which you then have to send to Vanguard with a form indicating you want to do this type of rollover?
I haven't done this but was inquiring with our benefits office yesterday. They would send a check directly to whichever institution holds my Roth IRA for a $55.00 fee along with a wire form. Alternatively, to avoid the fee, they can mail the check directly to me. You may need to check directly with your benefits office.

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Re: The Mega Backdoor Roth IRA

Post by placeholder » Fri Apr 18, 2014 11:11 am

zaboomafoozarg wrote:For people who have done this with a Vanguard Roth IRA, how exactly does it work? Does you have to get your 401k provider to transfer the money directly to Vanguard, or does your 401k provider send you a check which you then have to send to Vanguard with a form indicating you want to do this type of rollover?
It varies by plan for instance mine will send a check made out to the receiving institution but sent to my home address for security purposes so it doesn't matter who the IRA provider is.

Lodbrok
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Re: The Mega Backdoor Roth IRA

Post by Lodbrok » Fri Apr 18, 2014 2:26 pm

Without getting too far off topic, wouldn't the ideal solution involve your employer allowing you to exchange regular compensation for a higher employer match to your 401k? Are there any legal or tax reasons why this isn't offered?

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zaboomafoozarg
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Re: The Mega Backdoor Roth IRA

Post by zaboomafoozarg » Tue Apr 22, 2014 6:25 pm

Looks like this is a go with my 401k! They only let me put 10% of my salary in there, but it'll more than double the Roth IRA contribution I can make each year.

Too bad I didn't know about this a few years ago :oops:

madbrain
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Re: The Mega Backdoor Roth IRA

Post by madbrain » Tue Apr 22, 2014 9:13 pm

I have done this as my former employer allowed after-tax 401k contributions and withdrawals. Sadly, not the current one.
My Roth IRA is now 6 figures as a result, despite having been eligible to directly contribute only once. Some of the money is from conversions, some from earnings, and most from the after-tax 401k rollovers.

I think there is a problem with tracking the basis. At least in Turbotax, there is no way to easily do this.
If I were to take early withdrawals from the Roth IRA, I believe the after-tax money that was rolled over shouldn't be subject to income taxes.
The after-tax 401k contributions were already taxed originally, and the earnings attributable to those contributions were taxed too at the time of the rollover to the Roth IRA.
Maybe the early withdrawal should be subject to penalties, still. But not income taxes.

I don't see any simple way to track this or report this when withdrawing.

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Re: The Mega Backdoor Roth IRA

Post by placeholder » Wed Apr 23, 2014 12:52 am

It's up to you to save the information from the form 8606 that was filed when you did the conversion or rollover to Roth.

madbrain
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Re: The Mega Backdoor Roth IRA

Post by madbrain » Wed Apr 23, 2014 5:01 am

placeholder wrote:It's up to you to save the information from the form 8606 that was filed when you did the conversion or rollover to Roth.
I'm not seeing how that form is applicable to rollovers from after-tax 401k to Roth IRA.

Lodbrok
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Re: The Mega Backdoor Roth IRA

Post by Lodbrok » Sun May 18, 2014 7:54 am

I'm curious if anyone has followed the approach described in this thread with a Vanguard Individual 401k. Can you make after-tax contributions and can you make inservice withdrawals?

I spoke with someone on the phone, and my impression was that it is possible, but given that I haven't set up the 401k yet, I'm unclear as to whether the representative fully understood what I was asking about. I'm about to call back and ask again, but I figured someone on Bogleheads would surely have investigated this already.

Please let me know. Thanks!

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Re: The Mega Backdoor Roth IRA

Post by placeholder » Sun May 18, 2014 11:43 am

Here is a thread from a few years ago where no one really came up with one:
http://www.bogleheads.org/forum/viewtop ... =1&t=85852

jontherevelator
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Joined: Fri Aug 09, 2013 2:17 pm

Re: The Mega Backdoor Roth IRA

Post by jontherevelator » Sun May 18, 2014 11:48 am

madbrain wrote:The after-tax 401k contributions were already taxed originally, and the earnings attributable to those contributions were taxed too at the time of the rollover to the Roth IRA.
Maybe the early withdrawal should be subject to penalties, still. But not income taxes.
I have no personal experience with early withdrawals from a Roth IRA of conversion money - and I don't know if a rollover from an after-tax 401(k) counts as a "conversion" - but this Fairmark article describes the phase-out period of the early withdrawal penalty for Roth IRA conversion money.

http://fairmark.com/retirement/roth-acc ... onversion/
JTR

Kelly
Posts: 270
Joined: Sun Nov 18, 2012 7:39 am

Re: The Mega Backdoor Roth IRA

Post by Kelly » Sun May 18, 2014 11:52 am

If you are a gov't CSRS or CSRS offset employee you can make a mega roth contribution.

Write a check to the Voluntary Contribution Program equal to a max of 10% of your lifetime earnings. You can then roll this to an IRA and convert it to a Roth. A great deal. If you have other IRAs with deferred growth that would get pulled into the prorata rule you can first transfer that deferred growth to the TSP.

2cents2
Posts: 366
Joined: Sun Mar 02, 2014 11:31 am

Re: The Mega Backdoor Roth IRA

Post by 2cents2 » Sun May 18, 2014 1:39 pm

Kelly wrote:If you are a gov't CSRS or CSRS offset employee you can make a mega roth contribution.

Write a check to the Voluntary Contribution Program equal to a max of 10% of your lifetime earnings. You can then roll this to an IRA and convert it to a Roth. A great deal. If you have other IRAs with deferred growth that would get pulled into the prorata rule you can first transfer that deferred growth to the TSP.
They've streamlined this procedure a little bit. You can send your (after tax) voluntary contributions directly to your Roth and send your VCP earnings into your TSP. (You can only ask for a refund once and it has to occur before OPM converts your VCP to an additional annuity which happens sometime after you retire unless other instructions are received.)
http://www.opm.gov/forms/pdf_fill/ri38-124.pdf

Voluntary Contributions Under the Civil Service Retirement
http://www.opm.gov/retirement-services/ ... i83-10.pdf

Kelly
Posts: 270
Joined: Sun Nov 18, 2012 7:39 am

Re: The Mega Backdoor Roth IRA

Post by Kelly » Sun May 18, 2014 2:14 pm

2cents2 wrote: They've streamlined this procedure a little bit. You can send your (after tax) voluntary contributions directly to your Roth and send your VCP earnings into your TSP.


My understanding is that while the form has these boxes you still have to be qualified to make the Roth transfer as you would a contribution. So a large sum into the VCP (say $100k) would be over the annual contribution limit so the only option is to roll it to an IRA and then convert. Am I missing something?

Kelly

pyld76
Posts: 158
Joined: Thu Feb 09, 2012 4:15 pm

Re: The Mega Backdoor Roth IRA

Post by pyld76 » Sun May 18, 2014 4:16 pm

MyMegaCorp has a traditional 401(k) with an after-tax component (the plan does not have a Roth 401k component). The plan allows for in-service withdrawal of after-tax contributions for a $20 fee. The plan does not permit one to invest after-tax and pre-tax contributions differently (this becomes important--because I'm about 70/30 stocks/bonds for the 401k allocation, so in years where the market is up, the after-tax portion can generate nontrival earnings). Fidelity is the plan administrator.

I can contribute up to %20 of my compensation after tax (would be %50, but I'm an HCE. I've never understood why, since the plan has a safe-harbor match which should eliminate any discrimination testing, but whatever). The plan also allows you to contribute the 17.5 (or whatever the pretax limit is) and then redirect contributions for the remainder of the year to the after-tax components.

So, I defer a percentage of salary which hits the pretax 17.5 limit in around late october, and then do after-tax contributions for the remainder of the year. This ensures that after-tax monies won't be earning, well, earnings for more than a few months.

In January, I call Fidelity and instruct them to initiate a rollover. Mechanically, this happens thus:

1. Fidelity issues a check for the balance of the after-tax monies minus $20 to "Vanguard Fiduciary Trust Company, FBO pyld76".
2. Check is mailed to my home.
3. I mail the check along with a letter of instruction to Vanguard. The letter of instruction essentially says "this is a rollover from a qualified retirement plan, invest it in my Roth IRA number blah funds blah and blah in such-and-so a ratio."
4. At the end of the year, Fidelity cuts a proper 1099R with code G in box 7. I exhale that it happened correctly.

This results in a "direct rollover" from my after-tax 401k balance from the previous year to my Roth IRA at Vanguard. My process is not great--I do end up paying some tax on the earnings from october/november until the subsequent rollover in January. It's been less than $200 the few times I've done this, I view tax on a hundred bucks or two to be a worthy tradoff to pad my Roth IRA above and beyond the $5500 I can contribute/backdoor every year. I don't have a traditional/deductible IRA. I run a risk by rolling in January that if the IRS decides the "after-tax 401k in-service rollover to Roth IRA" path is not kosher I'd have a tax problem or a mechanical nightmare to undo the rollover.

Mine is not Mega--I only do this for a few grand/year at present. However, I merely leave my 401k deferral percentage the same and thus the number increases over time as my pay has gone up. It's a great, albeit convoluted, way to get more money into a Roth.

The difficult parts in the process are having a 401k that takes non-Roth post-tax contributions AND has in-service withdrawals prior to age 59.5. The other difficulty is getting someone at Fidelity who can properly interpret the plan document. FWIW, Fidelity always has made me acknowledge on a recorded line that the IRS has not issued guidance on this particular move. Take that for what it's worth.

2cents2
Posts: 366
Joined: Sun Mar 02, 2014 11:31 am

Re: The Mega Backdoor Roth IRA

Post by 2cents2 » Sun May 18, 2014 4:58 pm

Kelly wrote:
2cents2 wrote: They've streamlined this procedure a little bit. You can send your (after tax) voluntary contributions directly to your Roth and send your VCP earnings into your TSP.


My understanding is that while the form has these boxes you still have to be qualified to make the Roth transfer as you would a contribution. So a large sum into the VCP (say $100k) would be over the annual contribution limit so the only option is to roll it to an IRA and then convert. Am I missing something?

Kelly
AFAIK they changed the form as a result of the tax law changes for Roth rollovers in 2010.

Here is another link for you:
http://www.fedsmith.com/2013/01/10/befo ... p-annuity/

Alan S.
Posts: 8409
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: The Mega Backdoor Roth IRA

Post by Alan S. » Sun May 18, 2014 7:32 pm

It is quite interesting that the VCP plan specifically allows the employee to request two direct rollovers, the large after tax amount to a Roth IRA and the earnings to the TSP. This appears contrary to IRS Notice 2009-68, which gave rise to the various isolation of basis approaches. While doing two direct rollovers to Roth and pre tax accounts has not caused any problems to date, that method is probably the most likely to result in any IRS challenges. When a private plan does these direct rollovers to IRA accounts, there may be more of a risk than when the CSRS/VCP sends the pre tax amount to the TSP since the VCP has specific forms that offer this option.

If you have a large after tax contribution and the earnings are negligible, I would opt to simply having the distribution directly rolled into a Roth IRA. You will of course be taxed on the small amount of earnings. This rollover contribution to your Roth is treated the same as an IRA conversion when it comes to taking distributions in the first 5 years. The small pre tax amount comes out first (but after any regular Roth IRA contributions) and is subject to 10% penalty in the first 5 years on the pre tax amount only. The much larger after tax portion of the rollover is then distributed without any penalty because it was not taxable when rolled over to the Roth IRA.

Next scenario would be that your account contains more earnings than you want to pay taxes on, and you want to isolate the basis as safely as possible. In that case, rather than the twin rollovers, it is safer to request a distribution payable to yourself, and within 60 days first roll the pre tax amount to your TIRA and when complete the after tax amount to your Roth IRA. You will have to replace the 20% withholding on the pre tax amount. But this method is protected by tax code Sec 402(c)(2) which states that when an employee receives a distribution, the first dollars rolled over are deemed the pre tax portion of the distribution. It may be a little more work than twin direct rollovers, but should have less risk than then the twin direct rollovers.

Kelly
Posts: 270
Joined: Sun Nov 18, 2012 7:39 am

Re: The Mega Backdoor Roth IRA

Post by Kelly » Sun May 18, 2014 8:26 pm

Unless I'm misunderstanding your (2cents) post you still have to deal with the contribution limit on a transfer directly from the VCP to Roth. That would be a Roth contribution as I understand it . Unless there's some special provision allowing a VCP to Roth transfer you still have to make the stop in an IRA and then convert. Please let me know if the IRS would allow several hundred thousand dollar transfer directly from VCP to a Roth without finding a violation of the annual contribution rule.

I'm planning to do that but I've worked out these steps:

1- Isolate my nondeductible IRA basis by transferring the deferred growth to the TSP. This will allow me to avoid the pro rata rule
2-Fund the VCP
3-Roll the VCP to that IRA which is all basis
4-Convert the IRA

Step one also allows me to get all the IRA basis into a Roth as well.

Alan S.
Posts: 8409
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: The Mega Backdoor Roth IRA

Post by Alan S. » Sun May 18, 2014 9:43 pm

Kelly wrote:Unless I'm misunderstanding your (2cents) post you still have to deal with the contribution limit on a transfer directly from the VCP to Roth. That would be a Roth contribution as I understand it . Unless there's some special provision allowing a VCP to Roth transfer you still have to make the stop in an IRA and then convert. Please let me know if the IRS would allow several hundred thousand dollar transfer directly from VCP to a Roth without finding a violation of the annual contribution rule.

I'm planning to do that but I've worked out these steps:

1- Isolate my nondeductible IRA basis by transferring the deferred growth to the TSP. This will allow me to avoid the pro rata rule
2-Fund the VCP
3-Roll the VCP to that IRA which is all basis
4-Convert the IRA

Step one also allows me to get all the IRA basis into a Roth as well.
You can do a qualified Roth rollover directly to a Roth IRA from all types of qualified retirement plans. If you have a large basis in the employer plan, such as in plans that allow after tax contributions into a separate sub account, and distributions from that separate account, you avoid the mandatory pro rating by bypassing your TIRA. There is NO DOLLAR LIMIT to these qualified Roth rollovers or for ordinary Roth conversions since 2010.

Your plan would work, but you can do this is two steps instead of 4:
1) Make the VCP after tax contribution
2) Roll it directly to your Roth IRA before the contribution has a chance to generate earnings.

EnjoyIt
Posts: 2068
Joined: Sun Dec 29, 2013 8:06 pm

Re: The Mega Backdoor Roth IRA

Post by EnjoyIt » Mon May 19, 2014 3:21 am

Can someone please explain to me why this is such a good idea?

I am in the 39.6% bracket. Why would I want to pay that tax now on money that I was able to invest pretax up to 52K in a solo401K instead. I assume when I retire I will be in a much lower bracket. I really must be missing something.

-Beck

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