Author Topic: Efficacy of a Megabackdoor Roth  (Read 1378 times)

aumcderm

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Efficacy of a Megabackdoor Roth
« on: June 03, 2020, 05:57:39 PM »
I'm currently maxing out my 401k, HSA, IRA, and Employee Stock Purchase Plan.  I reviewed my company's 401k information, and I believe I can setup a megabackdoor Roth IRA (in-service withdrawals and after-tax contributions are allowed).  It's my understanding that I would have to transfer the after-tax contribution out each paycheck before there are any gains on it.  This seems to be a relative pain, but I would do it if it was going to save me money.  Which leads to my main question: does tax free growth even matter?

The current capital gains rate is 0% up to $39,376 of income.  Assuming this increases with inflation, I don't expect to need/earn anything above this after retiring.  Therefore, wouldn't I be avoiding taxes on my gains even if I were to simply put my extra savings into a brokerage account?  Furthermore, I could access these gains prior to age 59.5 without a penalty.

I only see two potential problems:
  1)  Tax laws change, increasing the minimum capital gains tax above 0%.
  2)  I end up spending/earning more money than I anticipated, putting me into the larger tax bracket.

The first situation would be pretty awful, but hopefully relatively unlikely.  The second is more likely, but in this event, I could just bite the bullet and pay a little more tax on any additional funds.  Overall, it might be worth setting up just from these two issues, but I'm wondering if I'm missing something. 

TIA!


Anniemaygo

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Re: Efficacy of a Megabackdoor Roth
« Reply #1 on: June 03, 2020, 09:37:25 PM »
My company allows mega-backdoor Roth but I can only do one withdrawal per calendar year. 

I put in as much as allowed (25% per paycheck) so it’s maxed by May.  This theoretically minimizes some gains given the short amount of time.

I then roll the contributions into a Roth IRA and the gains go into a traditional IRA- this is them rolled back into the 401k allowing me to keep doing backdoor Roth’s!

ixtap

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Re: Efficacy of a Megabackdoor Roth
« Reply #2 on: June 03, 2020, 10:11:20 PM »
How long until you retire? That is, won't you have tax free growth during the accumulation phase?

This tax free money can also be useful if you plan on making any conversions in retirement.

terran

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Re: Efficacy of a Megabackdoor Roth
« Reply #3 on: June 03, 2020, 10:43:38 PM »
If you're in the 0% capital gains bracket now (for dividends) and in retirement (for capital gains) then no, it probably doesn't matter. I would still max out a mega backdoor Roth before investing in taxable because 1) it seems less likely to me that Roth would be taxed in the future than that the capital gains tax rate would increase and 2) having money that will never be taxed no matter how much I withdraw seems easier than money I can withdraw without paying tax as long as gains stay under a certain amount.

MDM

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Re: Efficacy of a Megabackdoor Roth
« Reply #4 on: June 04, 2020, 02:19:37 AM »
Your qualified dividends and capital gains may not be taxed if your overall taxable income is low enough, but they are counted when determining how much of your SS benefit is taxable.  Roth withdrawals do not affect SS benefit taxation.

terran

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Re: Efficacy of a Megabackdoor Roth
« Reply #5 on: June 04, 2020, 07:07:08 AM »
Your qualified dividends and capital gains may not be taxed if your overall taxable income is low enough, but they are counted when determining how much of your SS benefit is taxable.  Roth withdrawals do not affect SS benefit taxation.

Good point that could also be extended to ACA subsidies if that's still the health insurance system we have in place once you retire.

des999

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Re: Efficacy of a Megabackdoor Roth
« Reply #6 on: June 04, 2020, 07:31:45 AM »
my workplace allows for it, thru Fidelity, and they also allow me as many transfers as I need/want.  I called Fidelity, they set it up for me in about 5 minutes.   I think I had .30 of gains the first paycheck, and none ever since.

as others have said, I would recommend it, things can always change.

The_Big_H

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Re: Efficacy of a Megabackdoor Roth
« Reply #7 on: June 14, 2020, 11:18:19 PM »
Yes, you WANT your money in the ROTH not just because of the tax advantages but other things make it so that I would hihgly encourage filling up your backdoor roth before 1 cent goes into taxable
1) its flexible to take it out, 5 year seasoning rule means you can ladder it out, its not locked up like a 401k.
2) you can invest in tax-inefficent stuff here, and tax-efficent stuff in your taxable account
3) the ROTH is much more protected (say you get sued, its pretty untouchable) as its a retirement account
4) getting your assets into ROTH and 401k as much as possible allows you to pass for poor when it comes time for applying for anything that is means tested.  Im thinking specifically FAFSA Hacking, money in the bank and after-tax accounts are counted against you, but NOT your ROTH and 401k!
5) you don't generate a big pile of tax paperwork by buying and selling inside your ROTH.  Matter of fact you don't file any tax paperwork on your ROTH until you take money out.

I park my after tax 401k in money market until it gets backdoored into the roth, then it gets properly invested (youll pay tax on about $100-200 in gains from that, no big deal)

I can make as many withdrawals as I want, so I could theoretically do the backdooring every paycheck, but the paperwork (it must be done by snail mail) is a hassle and takes almost 2 weeks to process, so my general procedure is to:

1) fill up ROTHs in winter
2) keep the pre tax 401k steady through the year, because in order to get the most matching you must not max it out until paycheck #26.
3) save a little bit of 'float' money in the spring.
4) in the summer I go full out contributing to the after tax (nearly the rest of my paycheck) as my expenses in the summer are lower (no preschool, no family travel, my big semi annual and annual expenses hit, like property tax and HOI avoid summer)
5) halfway I do one rollover, and another rollover at the end, the whole process typically takes 9-10 biweekly paychecks to completely fill up the backdoor space.
6) any money in fall goes into after tax (ie all other tax advantaged accounts exhausted, even my HSA... I treat it solely as an investment vehicle, not for medical expenses!)
« Last Edit: June 14, 2020, 11:23:46 PM by The_Big_H »

Paul der Krake

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Re: Efficacy of a Megabackdoor Roth
« Reply #8 on: June 14, 2020, 11:39:58 PM »
Almost nobody retires early and then makes 0 money until they die. That "side income" will severely reduce your tax-free allowance. It appears opportunities are fickle creatures who tend to show up more often when people have time on their hands.