New Job w/Mega Backdoor Roth Option

[alexpkeaton]

I started a new job today. I haven't been able to enroll in the 401k yet as it seems to take a few business days, but I was able to read the plan summary. The good news is I can make non-Roth after-tax contributions and make up to four in-service withdrawals per year.

Here's my problem: I have a medium-term need for lots of money outside of retirement accounts.

I live in a tiny 1 bedroom apartment in Manhattan with my wife and our 10-month-old son. This will continue to work for a few more years, but eventually my son is going to need more space. Manhattan co-ops usually require downpayment of 20% or more (not so different than a bank) and also might require one to have two years worth of liquid assets after making the downpayment (way more than a bank).

One solution is to borrow $50k from my 401k (and from my wife's 401k is when she goes back to work), show the liquid assets, then immediately repay the loan(s). I could also withdraw principal from our Roth IRAs.

But if I'm just going to withdraw from the Roths, why not just continue to save in a taxable account rather than do the mega backdoor Roth? Or should I do the backdoor Roth to make sure I keep my Roth IRA topped up in case I do withdraw the ~$50k principal I have in there? And, maybe I wouldn't need to touch the Roth at all?

[Scortius]

You can look at the investment order for more guidance, but it's also a personal call.  I see the mega-backdoor as the final bucket to dump extra cash into.  I certainly wouldn't use it if it's going to lead to a 401k loan, although I get your idea about the quick nature of it.  I actually have the mega option too and I currently don't use it. I'm just not there yet, and I may never be as I also have a growing family.  You just started your job so I'd say slow down and take things one step at a time.  Investments mature over decades, so do your investment distributions. Holding a bit too much cash for a year or two while you find your bearings will have a pretty small overall impact on your trajectory assuming it allows you to settle into a solid plan afterwards.

[alexpkeaton]

I was able to login to my new 401k today and make my elections. All the funds are garbage except...wait for it...four Vanguard funds. (Well, and a bunch of Vanguard target retirement date accounts, but I don't like those.) Seriously, even the non-Vanguard bond funds charge fees of 0.4% or higher.

I went ahead and set my after-tax contribution to 5%. There are two reasons:

• That should get me at least $8,750/year to convert into my Roth IRA every year (could be more, It's not yet clear if bonus income counts). Since I make too much I have to do it the backdoor way and this eliminates the step of contributing to my traditional IRA first and allow me to convert more than I otherwise could.
• My 5% match applies on any contribution. So I don't have to worry about maxing my $18k out early in the year and missing out on matches later if I'm always putting at least 5% in. I might just contribute 50% pre-tax next year and try to hit $18k early. At my last job I had to be careful of not hitting the cap early after they stopped doing true-up contributions.

The other thing I've been meaning to do is fine-tune my asset allocation across accounts. This job offers a cash balance pension with a fixed return. The floor on the return is 4.52%, so I figure that's basically a bond. So I'll need to allocate extra to stocks in the 401k, IRA, or taxable accounts.

[sisto]

Congratulations on having a Mega Backdoor Roth Option, my company does not offer it even though we are administered by Fidelity and they do offer it. We are trying hard to get the company to do it, but until then no go.

You may want to check and see if your company offers a true up option. If they do you don't need to worry about setting the percentage lower to make sure to get the match and you'll get the money in faster.

[alexpkeaton]

Congratulations on having a Mega Backdoor Roth Option, my company does not offer it even though we are administered by Fidelity and they do offer it. We are trying hard to get the company to do it, but until then no go.

You may want to check and see if your company offers a true up option. If they do you don't need to worry about setting the percentage lower to make sure to get the match and you'll get the money in faster.

I saw no mention of it in the plan documents, so I assume they don't. Also, annoyingly, they didn't ask how much I'd already contributed this year to my previous employer's plan, so I do need to be careful about going over $18k for this year.

Fun fact: I now work for a company that runs 401k plans. Some of them have terrible options which people have complained about on this very forum! :D

[sisto]

Congratulations on having a Mega Backdoor Roth Option, my company does not offer it even though we are administered by Fidelity and they do offer it. We are trying hard to get the company to do it, but until then no go.

You may want to check and see if your company offers a true up option. If they do you don't need to worry about setting the percentage lower to make sure to get the match and you'll get the money in faster.

I saw no mention of it in the plan documents, so I assume they don't. Also, annoyingly, they didn't ask how much I'd already contributed this year to my previous employer's plan, so I do need to be careful about going over $18k for this year.

Fun fact: I now work for a company that runs 401k plans. Some of them have terrible options which people have complained about on this very forum! :D

Bummer
My plan has very limited options in the core offerings and the Target funds are very expensive. Thankfully we have Brokerage Link as an option so 80% of my contributions go there. I'm amazed how the options vary so much across different companies, I work for a Fortune 50 company so I sort of expect better.