Author Topic: Backdoor Roth OR after tax IRA  (Read 1151 times)

the_fixer

  • Bristles
  • ***
  • Posts: 476
  • Location: Colorado
  • mind on my money money on my mind
Backdoor Roth OR after tax IRA
« on: February 24, 2017, 03:36:36 PM »
I thought I had it figured out but after talking to the investment person at my work I am more confused than ever.

Our income will not allow us to get a tax break on the IRA and we will likely be in the phase out range or above for a normal Roth so I had planned to do a backdoor Roth conversion with after tax dollars. My workplace Fidelity 401k allows after tax contributions up to 75% of base pay and they also allow in service rollovers / distributions. I called fidelity and verified this.
--------------------------------
My original plan
Max my pretax 401K as fast as possible then switch to after tax contributions and roll it over to a backdoor Roth quarterly. My understanding is I will pay taxes on any gains that happen between the time I put it in the after tax and roll it over to the Roth but with such a short time it should not be that much.
 -------------------------------
Advisors advice (not with Fidelity my company pays a 3rd party company to offer advice)
Set pretax 401k at a % to max it out by the end of the year and setup a % for after tax and leave it in the workplace until I retire @ 50 or 55. He says it does not matter if it is in the Roth or the after-tax IRA it will make no difference in the end
------------------------------

My thoughts of why I wanted to use the Roth
1.   It will allow me to balance my taxable / nontaxable income in ER and beyond, with the ACA and other situations it might be good to be able to control the amount of taxable income you have coming in and adjust when needed.
2.   I am 45 and shooting for 50 as a target for early retirement so that would satisfy the 5 year period for the Roth to sit there.
3.   If I do not need to touch that money I am not required to take minimum required distributions.
4.   Anything left over is easier to transfer to heirs without the tax liability.
5.   If I understand it properly once the money is in the Roth I do not have to pay ANY taxes on it in the future (according to current rules)
6.   Call me a pessimist but with the way our economy is going I can only see taxes going up 

Looking for some guidance here to see what option is best or if I am missing something? When I look at it the way he is recommending I am going to pay taxes on the gains in the future VS the backdoor Roth I avoid paying taxes on the gains?

Goal: partially retire in 5 years @ age 50 and travel cheaply part of the year and work for part of the year to cover expenses, wife is an engineer in consulting and 5 years younger than me so we are thinking that she can work projects a few times a year starting in 5 years go into full retirement at age 55 and 50.

 Projected combined income this year for wife and I without raises or bonuses
$210k

Pre-tax
401K funding for the year
$18000 Wife $5750 company match
$18000 myself $840 Company match (guaranteed 1% match even if I do not put anything in)
$2500 FSA

Wife
Trowe price IRA that was rolled over from a workplace 401K
Old 401K with fidelity
401K with her current company

Me
401k with Fidelity one account from old employeer and one @ new workplace
Small pension from old work place
Pension from new workplace they put in about 12K per year and vests @ 5 years



StreetCat

  • 5 O'Clock Shadow
  • *
  • Posts: 81
Re: Backdoor Roth OR after tax IRA
« Reply #1 on: February 24, 2017, 05:45:47 PM »
My workplace Fidelity 401k allows after tax contributions up to 75% of base pay and they also allow in service rollovers / distributions. I called fidelity and verified this.
That's good so you can do a mega backdoor Roth with your work plan.

My understanding is I will pay taxes on any gains that happen between the time I put it in the after tax and roll it over to the Roth but with such a short time it should not be that much.
Yes, that's correct.  I am usually in a similar situation.  Last year I ended up paying taxes on $8 worth of "growth".  Negligible.

He says it does not matter if it is in the Roth or the after-tax IRA it will make no difference in the end
That makes no sense.  How will it not make a difference?  Consider two scenarios:
Scenario 1: You contribute 10,000 to after-tax and immediately roll over to Roth.  In 5 years, let's say it grows to 25k.  So you now have contributions=10k, and growth=15k.  Your tax liability (assuming that you withdraw without penalty) is Z-E-R-O dollars since it's a Roth IRA.
Scenario 2: You contribute 10,000 to after-tax and leave it in there for 5 years, and it grows to 25k.  So you now have contributions=10k, and growth=15k.  If you withdraw all of it without penalty, you have tax liability on 15k of growth.

How does this not make a difference?

My thoughts of why I wanted to use the Roth
Points 1, 2, 3, 5 are correct.  4 - I don't know.  6 - can't predict the future, but seems like a reasonable assumption.

Looking for some guidance here to see what option is best or if I am missing something? When I look at it the way he is recommending I am going to pay taxes on the gains in the future VS the backdoor Roth I avoid paying taxes on the gains?
I'm confused with the above.  Earlier you mentioned that the advisor said that after-tax vs roth doesn't make difference.  But in the above paragraph you are saying that he's recommending that you'll pay taxes on future gains.  I'm not sure what your advisor is saying in the above paragraph.

There are two kinds of rollovers you can do:
Rollover 1: Since your employer allows mega backdoor roth, you can contribute to after-tax 401k and immediately (or after a quarter like you said) you can roll over to a Roth IRA.
Rollover 2: Since you are ineligible to directly contribute to Roth IRA due to your income, you can open a non-tax-deductible traditional IRA and contribute to that (5,500$ per year per person) and then immediately roll that over to a Roth IRA (can be the same Roth IRA account as Rollover1 or a different Roth IRA account - makes no difference).

The 2 rollovers are independent of each other and you can do both if you have enough savings.  Rollover1 is mega-backdoor-roth and Rollover2 is backdoor-roth.  And rollovers do not have any income restrictions on them.

I hope that helps.

the_fixer

  • Bristles
  • ***
  • Posts: 476
  • Location: Colorado
  • mind on my money money on my mind
Re: Backdoor Roth OR after tax IRA
« Reply #2 on: February 24, 2017, 07:07:36 PM »
Looking for some guidance here to see what option is best or if I am missing something? When I look at it the way he is recommending I am going to pay taxes on the gains in the future VS the backdoor Roth I avoid paying taxes on the gains?
I'm confused with the above.  Earlier you mentioned that the advisor said that after-tax vs roth doesn't make difference.  But in the above paragraph you are saying that he's recommending that you'll pay taxes on future gains.  I'm not sure what your advisor is saying in the above paragraph.


Correct he said that it did not make any difference the explanation was my thoughts he simply said it does not make a difference.

That is what confused me as my research was saying that i would pay taxes on gains if I did it the way he said VS the way I was planning to use IE mega backdoor roth.

He is a nice guy and I think he can help most people in the company with the standard questions I will just have to make sure I do my research as well. It really is unfortunate that he does not understand what a great benefit this is to the employees at my work. 

Thanks for the response I really appreciate it I have been going around in circles for the last month re reading everything thinking my 6 months of planning and research were incorrect.