Author Topic: Mega Backdoor Roth Contribution Question (Principal 401k)  (Read 877 times)

El Cheapo

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Mega Backdoor Roth Contribution Question (Principal 401k)
« on: August 06, 2018, 02:13:33 AM »
I'm interested in doing a mega backdoor Roth, and the terminology used on my 401k web page is confusing me.  On the page where I can set my contribution amounts, there is a box for 'pre-tax' (aka normal 401k), and another box for 'Roth (after-tax)'.  It's the Roth part that's throwing me off.  Isn't a 401k 'normal' or 'Roth' but not both?  Everything I've read about 401ks and mega backdoor says there's pre-tax contributions, Roth contributions (for a Roth 401k), and plain old after-tax contributions.  The latter is the only type that can be used for a mega backdoor, right?  I already have a Roth IRA with Vanguard, so wouldn't I be ineligible for a Roth 401k?   

If I click on the info icon for the Roth contributions, this is what it says:
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Roth Contribution Amount

If you already have significant pre-tax contribution savings and expect your retirement income to be higher than your current pay, you may benefit by making after-tax Roth Elective Contributions. Unlike regular pre-tax contributions, Roth Elective Contributions are made on an after-tax basis so they and applicable earnings may generally be withdrawn tax-free assuming specific distribution requirements are met. *
* Distributions are tax-free after a participant reaches 59 1/2, disability, or death and must be taken at least five years after the first Roth Elective Contribution is made.

What is a Roth (after-tax) contribution?

You're probably most familiar with a traditional pre-tax contribution, which you may have also heard referred to as a salary deferral or elective deferral contribution. When you make a pre-tax contribution, the amount you invest generally comes out of your paycheck before your income is taxed. A Roth or after-tax contribution, is basically the opposite. Here's a quick comparison:

Pre-tax contributions

    You typically don't pay income taxes on the money when you contribute.
    You do pay income tax when you withdraw it.
    May be better if you think your tax rate or taxable income will go down when you retire.

Roth (after-tax) contributions

    You do pay income tax on the money right when you contribute it.
    You don't pay income tax on it or potential earnings when you withdraw it, as long as you're at least age 59 , and the money has been in your account for at least five years.
    May be better if you think your tax rate will be higher when you retire.

I've sent an email to my HR department asking for clarification, but they haven't gotten back to me yet.

Bird In Hand

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #1 on: August 06, 2018, 08:48:21 AM »
I'm interested in doing a mega backdoor Roth, and the terminology used on my 401k web page is confusing me.  On the page where I can set my contribution amounts, there is a box for 'pre-tax' (aka normal 401k), and another box for 'Roth (after-tax)'.  It's the Roth part that's throwing me off.  Isn't a 401k 'normal' or 'Roth' but not both?  Everything I've read about 401ks and mega backdoor says there's pre-tax contributions, Roth contributions (for a Roth 401k), and plain old after-tax contributions.  The latter is the only type that can be used for a mega backdoor, right?  I already have a Roth IRA with Vanguard, so wouldn't I be ineligible for a Roth 401k?

If your 401(k) plan has a Roth provision -- which it apparently does -- then you can generally choose how to allocate your contributions between the pre-tax side and the Roth side.  Both are part of your 401(k), but there is/should be accounting in place to keep the balances separate.  Your total 401(k) contributions to pre-tax and post-tax combined can't exceed the yearly limit, currently $18,500 (plus catch-up ).

Yes, you can only do the MBDR if your plan additionally has provisions for (non-Roth) after-tax contributions.

Scortius

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #2 on: August 06, 2018, 01:46:51 PM »
FYI - My 401k account does allow for the Mega Backdoor. It has three options, not two. Traditional, Roth, and After-Tax. It also allows for in-service withdrawals.

MDM

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #3 on: August 06, 2018, 08:26:27 PM »
I already have a Roth IRA with Vanguard, so wouldn't I be ineligible for a Roth 401k?   
No.  Having a Roth IRA has no effect on Roth 401k eligibility.

El Cheapo

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #4 on: August 07, 2018, 06:28:09 AM »
Ok, I understand now.  Thanks for the info everyone.  There is no apparent way on the webpage to make after-tax contributions - only traditional and roth.  I'll have to get with HR to see if there is a way to do this, or if mega backdoor is not an option for me.

dkb140

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #5 on: August 13, 2018, 01:51:18 PM »
Looks like you're on the right track. In order to mega-backdoor, your 401k needs to allow after-tax contributions and in-service non-hardship withdraws.

If they do, your limit for 2018 is: $55,000 - $[Your Pre-Tax and/or Roth Contributions up to $18,500/24,500] - $[Company Match]

They will likely require you to distribute the earnings on the after-tax contributions as well. If your earnings are significant, ask if those can be distributed separately to a tIRA or rolled back into your 401k. If the earnings are relatively small I might just convert them to roth and pay tax on the conversion.
« Last Edit: August 13, 2018, 02:16:56 PM by dkb140 »

MDM

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #6 on: August 13, 2018, 02:06:50 PM »

dkb140

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #7 on: August 13, 2018, 02:24:27 PM »
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Or in-plan Roth rollovers.

The OP mentioned his Vanguard Roth IRA. It sounded like he intended to mega-backdoor into that account.

There would be some significant benefits of doing so (like being able to withdraw the contribution after 5 years & avoiding RMDs at 70.5) so that would seem preferable to an in-plan conversion inside the 401k.

MDM

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #8 on: August 13, 2018, 03:28:20 PM »
...that would seem preferable to an in-plan conversion inside the 401k.
Yes, it would be.

It's just that having a plan that allows in-service non-hardship withdrawals is a sufficient but not necessary condition for a good mega-backdoor.  Having a good in-plan Roth rollover option also works.

jacoavluha

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #9 on: August 14, 2018, 10:42:00 PM »
Plus and minus to rollover to IRA vs in plan Roth rollover.

If in service withdrawal to IRA, earnings on the after tax contributions may have to go to the Roth IRA and would be subject to taxation. Or they may go to tIRA in a split rollover and in this case you would want to rollover the tIRA back into the 401k so as not to have a tIRA balance subject to pro rata tax on a backdoor Roth IRA. Make sense? All doable but could be a hassle depending on frequency of in service withdrawal.

With in plan Roth rollover earnings on the after tax contributions are also subject to taxation if rolled over to Roth sub account.

Unique User

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #10 on: August 20, 2018, 06:52:02 AM »
FYI - My 401k account does allow for the Mega Backdoor. It has three options, not two. Traditional, Roth, and After-Tax. It also allows for in-service withdrawals.

Spouse's 401k allows for the mega backdoor, but only has two options, pre-tax and post 86 after tax.  I called Fidelity and talked to a rep to determine eligibility and whether in-service, non hardship withdrawals were allowed, HR had no clue. 

PizzaSteve

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #11 on: August 20, 2018, 07:01:00 AM »
It seems to me that your 401k does not support a mega backdoor (most dont because paperwork and costs of managing after tax non roth contributions and distributions are expensive and a pain for HR and Payroll staff...one needs a saavy exec who demands it for themselves).
« Last Edit: August 20, 2018, 07:04:00 AM by PizzaSteve »

Civex

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Re: Mega Backdoor Roth Contribution Question (Principal 401k)
« Reply #12 on: August 24, 2018, 08:26:07 PM »
My Principal 401k doesn't support the mega backdoor Roth-I was able to execute with a previous employer and there were 3 options-pretax 401k, Roth 401k, and aftertax "savings account" within the plan. I messaged Principal shortly after starting about the option and I'm pretty sure they had no idea what I was talking about.

Overall, I've been pretty disappointed with Principal's options.