Author Topic: Mega Backdoor Roth Help  (Read 337 times)

Tdub

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Mega Backdoor Roth Help
« on: September 08, 2017, 10:43:15 AM »
My employer allows in-service non hardship withdrawals and uses after-tax terminology that makes it pretty clear a Mega Backdoor Roth is possible.

I started the Mega Backdoor Roth process recently, and wanted to do the first roll over of ~$2000 now to see how smooth it is.  Well, it's not going so smoothly.

Details:
- I contribute maximum allowed percentage of my paycheck in after-tax dollars (on top of 18k traditional 401k max)
- My 401k provider (Empower) puts my 401k money into my self-directed brokerage account (SDA) in Schwab
- My 401k provider shows me how much money I've accumulated in after-tax dollars (~2k at this point)
- My 401k provider shows around $40 after-tax dollars available to pull out of my schwab SDA and roll over into a roth, instead of the full $2k
- Schwab has no clue what is before tax or after tax dollars.  They just get a lump deposit every paycheck.  I cannot specify to sell only funds purchased with after-tax dollars.  They told me they can't help me.

So, how do I pull out only the after-tax dollars that are sitting in invested funds in my SDA? Or do I just sell any funds, and "a dollar is a dollar" and I can pull out an amount equal to my after-tax contributions?

How will Empower or Schwab know which gains are attributable to the after tax money? I plan to roll those gains over to the roth as well, and pay taxes on them upon roll over.
« Last Edit: September 22, 2017, 05:51:17 PM by Tdub »

Paul der Krake

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Re: Mega Backdoor Roth Help
« Reply #1 on: September 08, 2017, 10:48:30 AM »
Okay, so it sounds like there's a disconnect between what Empower knows and what Schwab knows. I would reach out to Empower directly and explain what you're trying to do.

Tdub

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Re: Mega Backdoor Roth Help
« Reply #2 on: September 08, 2017, 02:24:35 PM »
Okay, so it sounds like there's a disconnect between what Empower knows and what Schwab knows. I would reach out to Empower directly and explain what you're trying to do.

When I reached out to Empower, all they said is they'd have to submit a research case. Maybe I'll hear back, but I'm not holding my breath.

Paul der Krake

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Re: Mega Backdoor Roth Help
« Reply #3 on: September 08, 2017, 02:35:32 PM »
Yeah, I'm sorry to hear that.

When I did mine, Fidelity was both the provider and broker, and it was super smooth. I've never heard of Empower, but they definitely required to keep track of which monies are pre-tax and which are not. If you work for a large company with a real benefits department, you could also reach out to them so they can light the fire under everyone's butts. You don't need to tell them about the mega backdoor Roth and your retirement plans.

MDM

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Re: Mega Backdoor Roth Help
« Reply #4 on: September 08, 2017, 03:45:33 PM »
Perhaps surprising but true: customer reps for national brokerages and Megacorp HR folks sometimes don't know the laws regarding retirement accounts.  We have personally encountered this regarding HSAs and withholding procedures.

If you haven't already, you might want to arm yourself with more knowledge, e.g., Isolating Basis for a Roth Conversion - Fairmark.com Fairmark.com and Analyst_Notices_2014-54-74_0315.pdf and links therein.

Good luck!

Tdub

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Re: Mega Backdoor Roth Help
« Reply #5 on: September 22, 2017, 05:50:57 PM »
OP here following up:

I heard back from Empower.  The rep explained it as follows:

- Aftertax and before tax money was being deposited as one lump sum into Schwab, and Schwab has no way of knowing the difference

- To extract the aftertax dollars, I need to sweep my entire 401k account back into Empower, extract the after-tax only, then I can put the before tax dollars back into Schwab.  It would take a few days for each transaction to happen.  I didn't get enough detail on what this means for my funds.  I'm guessing that since it's in a tax-protected account, I don't really need to worry about cost basis repercussions?  All of the funds are no-fee transactions as well.

- Going forward, I can have the after-tax portion of my contribution stay inside Empower so I can easily roll it over into a roth as I wish.  No interactions with Schwab necessary.  The rep helped me set this up.

So, going forward the mega backdoor should be pretty easy.  I don't really feel like going through the hassle of extracting the ~2k already sitting inside schwab though.  I might as well get it over with, since the sooner it's in a roth, the sooner I'm making tax-free gains.

I hope this post will be useful for anyone else who uses a self-directed brokerage (SDB) and is thinking about doing a MB Roth.  Talk to your provider first to keep the after-tax portion from getting mixed in with your pre-tax money in the SDB.