Author Topic: Backdoor Roth from after tax 401k contributions made long ago?  (Read 1504 times)

Lancebaby

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Backdoor Roth from after tax 401k contributions made long ago?
« on: October 02, 2017, 02:39:20 PM »
So. . I am confused on the use and benefit of backdoor Roth.  I was looking at my 401K statement and see that I have approx $100k of after money (not sure how much is contributions or growth) . .Can I move this without penalty to a Roth?  Should I?  Given that it has already been taxed, can I just move it anywhere? 

What would be the benefit of a Roth conversion on that amount?

Thanks

Aggie1999

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #1 on: October 02, 2017, 03:23:44 PM »
From what I understand the pro rata rule would apply if you move the after tax bucket to IRA's. The percentage that is contributions would go to a Roth IRA while the growth would go to a traditional IRA. You can't just roll over the contributions to a rIRA while leaving the growth in the after tax 401k bucket. Someone please correct me if I am wrong.

The benefit of moving the contributions to a rIRA is that any future growth will be tax free when you reach retirement age.

Undecided

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #2 on: October 02, 2017, 06:31:33 PM »
From what I understand the pro rata rule would apply if you move the after tax bucket to IRA's. The percentage that is contributions would go to a Roth IRA while the growth would go to a traditional IRA. You can't just roll over the contributions to a rIRA while leaving the growth in the after tax 401k bucket. Someone please correct me if I am wrong.

The benefit of moving the contributions to a rIRA is that any future growth will be tax free when you reach retirement age.

My 401(k) servicer will issue two checks, which makes it pretty easy to send the after-tax contributions to a Roth and the earnings to a traditional IRA, and then to roll the traditional IRA balance (which is only the earnings from the after-tax 401(k) contributions, in my case) back to the 401(k). OP may be able to do the same.

Aggie1999

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #3 on: October 03, 2017, 08:53:33 AM »
From what I understand the pro rata rule would apply if you move the after tax bucket to IRA's. The percentage that is contributions would go to a Roth IRA while the growth would go to a traditional IRA. You can't just roll over the contributions to a rIRA while leaving the growth in the after tax 401k bucket. Someone please correct me if I am wrong.

The benefit of moving the contributions to a rIRA is that any future growth will be tax free when you reach retirement age.

My 401(k) servicer will issue two checks, which makes it pretty easy to send the after-tax contributions to a Roth and the earnings to a traditional IRA, and then to roll the traditional IRA balance (which is only the earnings from the after-tax 401(k) contributions, in my case) back to the 401(k). OP may be able to do the same.

Nice. Didn't think about rolling the tIRA balance back into the 401k. That would still allow someone to do a normal backdoor roth without having to worry about the pro rata stuff with money already in a tIRA.

therethere

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #4 on: October 03, 2017, 09:05:07 AM »
Posting to follow.... Am I correct that this would avoid any taxes in the year everything is rolled over?

I've got about 2500 in earnings on my After Tax 401k (contributed around 15k). I'm delaying rolling it over because I assumed the 2500 earnings would be taxable income and then knock down how much I'm able to deduct for a traditional IRA (I'm in the phaseout range and likely won't be next year).  I may have to call the company because I did not see these options online. My only choices were rollover everything into Roth IRA and pay tax. Or only roll over the earnings.

Undecided

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #5 on: October 03, 2017, 02:56:28 PM »
Posting to follow.... Am I correct that this would avoid any taxes in the year everything is rolled over?

I've got about 2500 in earnings on my After Tax 401k (contributed around 15k). I'm delaying rolling it over because I assumed the 2500 earnings would be taxable income and then knock down how much I'm able to deduct for a traditional IRA (I'm in the phaseout range and likely won't be next year).  I may have to call the company because I did not see these options online. My only choices were rollover everything into Roth IRA and pay tax. Or only roll over the earnings.

It's worth calling your administrator (or getting your hands on the actual paperwork), but even with those choices, you could first roll over only the earnings, to a traditional IRA, then immediately roll over "everything" (assuming that only means everything within your after-tax sub account) left in the 401(k) to your Roth IRA, and then (assuming your 401(k) takes incoming rollovers), roll back the traditional IRA into the 401(k).

MDM

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #6 on: October 03, 2017, 03:08:55 PM »
So. . I am confused on the use and benefit of backdoor Roth.  I was looking at my 401K statement....
A Backdoor Roth IRA does not involve a 401k - only non-deductible tIRA contributions and then conversion to Roth IRA.

Posting to follow.... Am I correct that this would avoid any taxes in the year everything is rolled over?
Yes, if your 401k plan allows.

Quote
I've got about 2500 in earnings on my After Tax 401k (contributed around 15k). I'm delaying rolling it over because I assumed the 2500 earnings would be taxable income and then knock down how much I'm able to deduct for a traditional IRA (I'm in the phaseout range and likely won't be next year).  I may have to call the company because I did not see these options online. My only choices were rollover everything into Roth IRA and pay tax. Or only roll over the earnings.
This (and the OP's situation) is a Mega Backdoor Roth IRA.  Much depends on exactly what the 401k plan allows.  See the Summary Plan Description if you don't get good help from the company benefits people.

I think you get this, but for other readers: rollovers have no effect on the IRS limits for IRA contributions.  You could roll over $1MM and still be able to make a $5500 contribution.  Whether that $5500 is deductible, however, depends on income.

therethere

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #7 on: October 03, 2017, 03:13:24 PM »
Thanks MDM! I think I know the basics. I was trying to do it online which is where it was throwing me off. It was saying they would send me a check for the non-taxable portion and roll the pre-tax 401k into a traditional IRA. I was hoping to do a clean Roth IRA and traditional IRA rollover at once.

I guess it will require a phone call. I just need to have a script for DH to follow so I want to make sure I get it right...

Aggie1999

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #8 on: October 04, 2017, 07:44:31 AM »
Question: If one rolls the after tax 401k growth  into a tIRA and then back into the 401k, what bucket does the money go to in the 401k? Back into the after tax bucket or into the pre-tax bucket?

MDM

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Re: Backdoor Roth from after tax 401k contributions made long ago?
« Reply #9 on: October 04, 2017, 08:27:21 AM »
Question: If one rolls the after tax 401k growth  into a tIRA and then back into the 401k, what bucket does the money go to in the 401k? Back into the after tax bucket or into the pre-tax bucket?
Pre-tax.