mega backdoor - Roth IRA vs Roth 401k

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Topic Author
bearpaws
Posts: 20
Joined: Thu Apr 18, 2013 12:45 pm

mega backdoor - Roth IRA vs Roth 401k

Post by bearpaws » Tue Jan 05, 2016 6:49 pm

Hi all,

My employer just started allowing after-tax 401k contributions that also allows in-plan withdrawal couple times a year, which of course means now I get to do a mega backdoor contribution! When I spoke with the administrators, they said I could either convert the after tax money into either a Roth IRA or a Roth 401k. What do you guys see as the pros and cons of each one? Within the 401k, the main options I'd be interested in are target date retirement funds with very low fees.

Also, is one rollover (or conversion? not sure the difference in terminology) easier as far as not making mistakes? I've read a number of people's 401k administrators have made mistakes during this whole process.

Thanks!

Alan S.
Posts: 8612
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: mega backdoor - Roth IRA vs Roth 401k

Post by Alan S. » Tue Jan 05, 2016 7:18 pm

I would favor the Roth IRA rollover unless you have creditor issues and Roth IRAs are not creditor protected in your state, or if you need the 401k balance to fund a 401k loan.

Here are the advantages of the Roth IRA rollover vs. an IRR (in plan Roth rollover):

1) Access to the funds prior to separation - an IRR could render otherwise distributable assets non distributable before separation or attaining a certain age based requirement.
2) Notice 2014-54 can be utilized to eliminate taxation of any earnings for a Roth IRA rollover, but probably not for an IRR.
3) Roth IRA rollover can be recharacterized in the event of some error where a larger taxable amount ended up in the rollover. IRRs can never be recharacterized.
4) Roth IRA Distribution tax rules much more favorable - earnings come out last, not pro rated as in the Roth 401k.
5) More beneficiary flexibility in IRAs than in qualified plans
6) Roth IRA accounting is responsibility of taxpayer; Designated Roths have complex rules regarding split accounting between distributable and non distributable portions and employee has no control over any accounting errors. IRRs are also relatively new.
7) Roth IRAs do not have RMDs, which means you would eventually roll the Roth 401k over to a Roth IRA anyway.
8) More penalty waiver options for early distributions of taxable amounts in an IRA than in a Roth 401k.
9) Broader investment options than in most plans if you select the right Roth custodian.

Topic Author
bearpaws
Posts: 20
Joined: Thu Apr 18, 2013 12:45 pm

Re: mega backdoor - Roth IRA vs Roth 401k

Post by bearpaws » Thu Apr 07, 2016 5:49 pm

following up from my previous question...

I understand the total defined contribution limit is 53k/year via the mega backdoor roth conversion. If I max that out, is it possible to add another 5,500 through the "regular" backdoor Roth method?

Thanks!

icefr
Posts: 613
Joined: Sun Apr 17, 2011 10:50 am

Re: mega backdoor - Roth IRA vs Roth 401k

Post by icefr » Thu Apr 07, 2016 6:25 pm

bearpaws wrote:following up from my previous question...

I understand the total defined contribution limit is 53k/year via the mega backdoor roth conversion. If I max that out, is it possible to add another 5,500 through the "regular" backdoor Roth method?

Thanks!
Yes. I do both.

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