Author Topic: First Mega Backdoor Roth Rollover Question  (Read 881 times)

therethere

  • Pencil Stache
  • ****
  • Posts: 712
First Mega Backdoor Roth Rollover Question
« on: March 03, 2017, 01:37:43 PM »
I have a 401k with both after tax and pre-tax 401k available to me. I believe I have all the tools for a Mega Backdoor Roth. Right now the after tax portion has ~15000 with about 1500 in gains (taxable). I just noticed the servicer has an online form to do the rollovers. The way I understand it, I'll have to pay taxes on the gains at my regular income rate to withdraw or roll it over. I'm okay with that. I just want to get the after tax separated so it stops creating taxable gains.

I thought I could roll directly from the 401k to an open Roth IRA. But on one of the last pages of the online form it says. "Rollovers processed on this Web site must be to a qualified plan or to a traditional IRA."

Now I'm confused. I thought the entire point was to roll it into a Roth IRA. Is this just a typo/error? I'm afraid to just try it out and get everything messed up come tax time.

Also, I think of my Roth as an emergency fund. Will rolling over my after tax 401k affect my ability to pull "contributions" from my Roth IRA? Would opening a second Roth IRA (potentially outside of Vanguard) in order to keep the money separate and cleaner have any advantage?

cockersx3

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: First Mega Backdoor Roth Rollover Question
« Reply #1 on: March 03, 2017, 06:03:05 PM »
Can you just call your servicer?  I did my first "mega-backdoor Roth" last year, and my servicer (Fidelity) only allowed rollovers to another IRA on the web site.  So I just called them up, and they did it for me over the phone.  This is something they do all of the time, they knew exactly how to handle it.

And yes, you're right about the $1500 being taxable income if rolled over directly to the Roth.  At the end of the year they'll mail you a 1099-R form with the taxable distribution amount listed, so you'll have to pay normal income taxes on it but not the 10% penalty.  I think it's possible to also roll over the $1500 gain to a traditional (or rollover) IRA so you don't pay taxes on it at the time of distribution.  In my case, I didn't accumulate much growth on the amount I rolled over, so I decided it was much easier to just roll over everything to a Roth and eat the taxes on it.  But for $1500 growth I'd at least consider it - worth asking your servicer if they can do that.

Good luck!