Author Topic: Mega Back door roth strategy  (Read 932 times)

ericbonabike

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Mega Back door roth strategy
« on: October 05, 2018, 07:46:55 AM »
Hey all, question for you about mega back door roth conversion:

My company MIGHT be adding the after-tax non-roth category to our 401k.  I'm pretty stoked, but am wondering about how to maximize my investments / minimize my taxes.

We have about 200k saved in a after-tax brokerage account.   It's mostly invested in FSTVX and SPY but due to life events (selling a house) it's only been there between 6 months to a year.

Here's my question:
We max out our 401k already, roth IRA also.  I don't think we make enough money to fully fund the megabackdoor roth.  But, we have at least 4 years of living expenses in non-tax advantaged account.  So, I could theoretically gradually sell off my 200k of stock, live off of that, and plow most of my income into my 401k, roth IRAs, an megabackdoor roth. 

Advantage: I could get an extra 70k into Roth IRA a year.   Disadvantage:  I would probably pay long term capital gains on the selling of my stock. 

Or should I just keep the non-tax advantaged accounts as they are, and instead of putting more money into those, plow all extra money into megabackdoor?

Advantage:  Taxes on the stock would be deferred until my income was reduced in retirement.  Disadvantage: I could probably only put $15-20k into megabackdoor a year.   

PizzaSteve

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Re: Mega Back door roth strategy
« Reply #1 on: October 05, 2018, 08:07:40 AM »
Go mega as hard as you can.

Might need to confirm the plan supports in plan partial distributions in addition to after tax contributions, otherwise one cant convert.  Also, make sure no money is in traditional IRAs, but those are mega basics you likely know.

I never knew about the mega when i maybe had a chance...very sad.

ixtap

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Re: Mega Back door roth strategy
« Reply #2 on: October 05, 2018, 10:12:56 AM »
How are you getting an extra $70k into Roth a year? Does your spouse work for the same company? Does your company not have any matching for your contributions up to $18.5k?

Go mega as hard as you can.

Might need to confirm the plan supports in plan partial distributions in addition to after tax contributions, otherwise one cant convert.

OR you may have the option to roll into an in plan Roth.

Quote
Also, make sure no money is in traditional IRAs, but those are mega basics you likely know.


Not really necessary. If you do have existing tIRAs you can:
-make your conversions regularly to avoid growth
-pay taxes on growth
-roll your growth into an after tax tIRA, to be converted when your financial situation changes

terran

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Re: Mega Back door roth strategy
« Reply #3 on: October 05, 2018, 11:10:11 AM »
We're doing exactly what you're thinking about (filling mega backdoor while withdrawing from taxable when needed). I certainly wouldn't suggest contributing to taxable only to then withdraw, so max tax deferred, spend what you need, and if you don't have enough withdraw from taxable.

As @ixtap says, you won't be able to contribute $70k unless both you and your spouse have plans that will allow mega backdoor Roth contributions. The overall limit for all contributions is $55k ($56k in 2019) and includes mandatory contributions, employer contributions, and $18.5k ($19k in 2019) employee salary deferral contributions. If you're over 50 there are catchup contributions too, which I'm pretty sure are in addition to this limit (but I'm not certain).

Since you mention after tax, not Roth contributons, but not in service withdrawal, you'll need to make sure your plan will allow you to either roll over to a Roth IRA or convert to the Roth source of your 401(k) while still working for this to work.

ericbonabike

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Re: Mega Back door roth strategy
« Reply #4 on: October 05, 2018, 12:17:29 PM »
We're doing exactly what you're thinking about (filling mega backdoor while withdrawing from taxable when needed). I certainly wouldn't suggest contributing to taxable only to then withdraw, so max tax deferred, spend what you need, and if you don't have enough withdraw from taxable.

As @ixtap says, you won't be able to contribute $70k unless both you and your spouse have plans that will allow mega backdoor Roth contributions. The overall limit for all contributions is $55k ($56k in 2019) and includes mandatory contributions, employer contributions, and $18.5k ($19k in 2019) employee salary deferral contributions. If you're over 50 there are catchup contributions too, which I'm pretty sure are in addition to this limit (but I'm not certain).

Since you mention after tax, not Roth contributons, but not in service withdrawal, you'll need to make sure your plan will allow you to either roll over to a Roth IRA or convert to the Roth source of your 401(k) while still working for this to work.


Sorry, yeah.  My wife and I both work for the same company, but in different groups.  If company makes these changes then we'll both be able to take advantage.   I was guessing we could put in between 35 k each to stay below that 55k limit.   Didn't know that employer contributions would count, so that's maybe closer to 28k each.   

I talked to my CFO and CEO yesterday and the CFO was super knowledgeable and very geeked up about the idea.  We talked briefly about the inkind distributions needed to be allowed, etc.   

I have zero idea if this will ever see the light of day, but I was trying to think about strategies for maximizing this if it comes to fruition. 

ericbonabike

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Re: Mega Back door roth strategy
« Reply #5 on: October 05, 2018, 12:20:49 PM »
Follow up question:

somebody mentioned that if I have a traditional IRA it might screw me up?

I knew this was the case for a backdoor roth IRA conversion, but was unaware that it would affect the Megabackdoor conversion.
About 10 years ago, I rolled over a good bit of money from an old 401k into a rollover IRA.

Do I need to think about undoing that?  I think I can move the rollover IRA back into my current employer's 401k.



terran

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Re: Mega Back door roth strategy
« Reply #6 on: October 05, 2018, 12:30:26 PM »
Follow up question:

somebody mentioned that if I have a traditional IRA it might screw me up?

I knew this was the case for a backdoor roth IRA conversion, but was unaware that it would affect the Megabackdoor conversion.
About 10 years ago, I rolled over a good bit of money from an old 401k into a rollover IRA.

Do I need to think about undoing that?  I think I can move the rollover IRA back into my current employer's 401k.

No, it shouldn't be an issue for the mega backdoor Roth. This is only an issue when converting IRA to Roth IRA which you won't be doing.

ixtap

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Re: Mega Back door roth strategy
« Reply #7 on: October 05, 2018, 01:06:30 PM »
Follow up question:

somebody mentioned that if I have a traditional IRA it might screw me up?

I knew this was the case for a backdoor roth IRA conversion, but was unaware that it would affect the Megabackdoor conversion.
About 10 years ago, I rolled over a good bit of money from an old 401k into a rollover IRA.

Do I need to think about undoing that?  I think I can move the rollover IRA back into my current employer's 401k.

The traditional way to make a megabackdoor Roth was to move the earnings into a tIRA, thus pushing the taxes down the road. It is not the only way, however.

jacoavluha

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Re: Mega Back door roth strategy
« Reply #8 on: October 05, 2018, 08:25:55 PM »
Follow up question:

somebody mentioned that if I have a traditional IRA it might screw me up?

I knew this was the case for a backdoor roth IRA conversion, but was unaware that it would affect the Megabackdoor conversion.
About 10 years ago, I rolled over a good bit of money from an old 401k into a rollover IRA.

Do I need to think about undoing that?

No. Your plan should direct the rollover of you distributable after tax contributions directly to a Roth IRA. Don't let them do otherwise.

The earnings on your after tax contributions could go along with the contributions to your Roth, in which case you would pay tax on the amount of earnings at your marginal rate this year, alternatively the earnings could separately go to a traditional IRA and remain pre-tax.

Do you have a choice?

Goldy

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Re: Mega Back door roth strategy
« Reply #9 on: October 16, 2018, 07:55:42 PM »
We are also both maxing our mega backdoor space by setting our contributions as high as possible and living off our EF in order to draw that down.  I realized that with all that money in my Roth I donít really need to be that concerned with having 6 months expenses on hand.