Author Topic: In-Plan Roth Conversion same as Mega Backdoor Roth?  (Read 2007 times)

ysette9

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In-Plan Roth Conversion same as Mega Backdoor Roth?
« on: January 09, 2018, 08:49:18 AM »
I am trying to parse a new option available to me in my 401(k) plan. This is called an In-Plan Roth Conversion. To quote some of our communication material that came out:

Quote
In-Plan Roth Conversion
An in-plan Roth conversion allows you to transfer certain non-Roth balances in your savings plan into a designated Roth account within the same plan. COMPANY has enhanced the in-plan Roth conversion feature of the SSP, OSSP and PSP to allow you to take advantage of the tax-free conversion of After-Tax contributions to Roth.
 
A new After-Tax In-Plan Roth Conversion option was added to the plans effective Nov. 3, 2017. Using this feature allows you to convert only amounts from your After-Tax balance. Additionally, only converted After-Tax investment earnings are subject to income tax in the year of conversion. No income tax is owed for the conversion of your After-Tax contributions.

Reading about this more, it sounds like a mega backdoor Roth to me with the exception that the money is kept in the 401(k) plan instead of being transferred out to a Roth IRA. Can anyone help me parse this out? I'd love to take advantage up to the "highly compensated employee" limits (which I need to look up for this year). It appears that I can do one such Roth conversion per year, I will be charged a $100 fee for doing so, and I will be "taxed on the amount of investment earnings that are converted, since they have not previously been taxed".

Thanks in advance for the help.

Scortius

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #1 on: January 09, 2018, 10:02:05 AM »
It sure sounds like it.  I think the key question here is are you allowed to go up to $56k with your After-Tax contributions or are you still limited to $18,500?

ysette9

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #2 on: January 09, 2018, 02:31:20 PM »
I am limited to 21% of my salary because of the highly compensated employee business, but that still leaves me some nice space to contribute more.

Any suggestions on how to confirm this?

MDM

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #3 on: January 09, 2018, 02:59:40 PM »
Any suggestions on how to confirm this?
Ask your company whether it can be done online, or using paper forms, or however.  Then do it.

It's not quite as good as a full mega backdoor Roth (in which you could roll the after-tax earnings into a tIRA while rolling the after-tax contributions into a Roth IRA).  Also, the $100 fee would be prohibitive if you were moving, say, $200.

But aside from those nitpicks, if you put a large chunk into a Roth that likely beats having it in a taxable account.  Enjoy!

seattlecyclone

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #4 on: January 09, 2018, 03:45:55 PM »
An in-plan Roth conversion is the option to convert non-Roth balances to Roth while keeping the whole sum in your 401(k). This feature could be used to convert pre-tax contributions to Roth, which would not be the mega backdoor. But when you can make after-tax contributions and convert them to Roth within your plan, that is exactly the mega backdoor Roth.

ixtap

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #5 on: January 09, 2018, 03:52:21 PM »
An in-plan Roth conversion is the option to convert non-Roth balances to Roth while keeping the whole sum in your 401(k). This feature could be used to convert pre-tax contributions to Roth, which would not be the mega backdoor. But when you can make after-tax contributions and convert them to Roth within your plan, that is exactly the mega backdoor Roth.

It is still different, as most people refer to a mega backdoor Roth IRA and there are different rules for Roth 401k and Roth IRA. You don't have access to the contributions, and you will have to take RMDs when the time comes, for example.

ysette9

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #6 on: January 09, 2018, 04:00:41 PM »
Is here a catchy term for this akin to “mega backdoor Roth” that would make it easy to search for more info online? I’ve taken it upon myself to be an informal advisor for my friends at work, interpreting these new announcements and letting them know what I think and how I am responding. I would like to provide educational references in all cases, as well as making sure I know what I am doing for my own sake!

MDM

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #7 on: January 09, 2018, 04:03:17 PM »
Is here a catchy term for this akin to “mega backdoor Roth” that would make it easy to search for more info online?
Don't know how catchy, but After-tax 401(k) might work for you.

seattlecyclone

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #8 on: January 09, 2018, 04:28:48 PM »
An in-plan Roth conversion is the option to convert non-Roth balances to Roth while keeping the whole sum in your 401(k). This feature could be used to convert pre-tax contributions to Roth, which would not be the mega backdoor. But when you can make after-tax contributions and convert them to Roth within your plan, that is exactly the mega backdoor Roth.

It is still different, as most people refer to a mega backdoor Roth IRA and there are different rules for Roth 401k and Roth IRA. You don't have access to the contributions, and you will have to take RMDs when the time comes, for example.

These differences are rather minor when you consider that you can move the Roth 401(k) into a Roth IRA at any time after leaving your jobs to get free access to the contributions and lack of RMDs.

ysette9

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #9 on: January 09, 2018, 07:22:22 PM »
Thanks for the input, all. I’ll revamp my budget at our next money date to fill up the after-tax space I have and decrease my Vanguard accordingly. Exciting stuff.

ixtap

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #10 on: January 09, 2018, 09:45:11 PM »
Thanks for the input, all. I’ll revamp my budget at our next money date to fill up the after-tax space I have and decrease my Vanguard accordingly. Exciting stuff.

DH didn't really even want to hear about it until a benefits brochure came out and I was able to tell him exactly why anyone would tie up their money in after tax. He then got very excited and maxed that out as soon as possible. He still has to initiate the rollovers, though.

ysette9

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #11 on: January 10, 2018, 09:02:01 AM »
How often do you plan on doing those rollovers? I assumed once a year would be reasonable, but I am sure there are nuances there I am missing. For example, if the market has been going up like crazy as it did last year, I can see wanting to do the rollover as quickly as possible to not pay too much tax on the gains. In a down market though, perhaps it makes sense to ride it out for a while and save the $100 conversion fee?

seattlecyclone

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #12 on: January 10, 2018, 09:35:55 AM »
How often do you plan on doing those rollovers? I assumed once a year would be reasonable, but I am sure there are nuances there I am missing. For example, if the market has been going up like crazy as it did last year, I can see wanting to do the rollover as quickly as possible to not pay too much tax on the gains. In a down market though, perhaps it makes sense to ride it out for a while and save the $100 conversion fee?

My 401(k) has neither the conversion fee nor the limit on frequency of conversions, so I try to do them shortly after each paycheck to minimize gains. Sometimes I forget and do two paychecks' worth at once. I end up realizing perhaps $100 in taxable gains in a typical year.

Are you allowed to contribute your full 21% in the first quarter of the year, or is there a limitation placed per paycheck? If the former, in your situation I might try and max out that after-tax contribution space as quickly as possible and do the conversion right afterwards. Or perhaps fill up the contribution space at the end of the year this year and at the beginning of the year next year to do two years of conversions at once.

Michael in ABQ

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Re: In-Plan Roth Conversion same as Mega Backdoor Roth?
« Reply #13 on: January 12, 2018, 03:36:57 PM »
I've been doing a $10,000 annual in-plan Roth conversion for each of the last two years and should do another one here shortly. That $20,000 I've converted to Roth ($10k January 2016, another $10k January 2017) have now grown to almost $27,000 with zero additional contributions (at least to that particular part of my 401k which gets categorized separately for my normal Roth contributions). I end up paying an additional $1,500 in taxes to make the conversion but the growth over the year that's now completely tax free more than makes up for that extra tax. This year it will only be another $1,200 in taxes - woohoo tax cuts.