Help me not mess up a Mega Backdoor Roth

[snuggler]

Hey mustaches!

I recently started a job, and I discovered that the Mega Backdoor Roth may be possible. I have never done this before, so I wanted to run it by all of you smart folks to make sure I'm not going to mess anything up and have the IRS after me :).

My retirement plan states that it allows pre-tax 401K contributions, Roth 401K contributions, and "voluntary after-tax contributions." It expressly states that we can put up to a maximum of $53,000 total, $18,000 to the 401K, and $35,000 of voluntary after-tax contributions.

It also allows in-service withdrawals. However, I can only do an in-service withdrawal once every 12 months.

So, this means I can do the Mega Backdoor Roth, correct? I should max out the after-tax contributions, then do an in-service withdrawal and convert it into a Roth IRA, correct? When I do the in-service withdrawal, do I keep it at the same bank, or would I be allowed to convert it into a Roth IRA at Vanguard?

When I make my voluntary after-tax contribution, should I put it in a money market account? Or should I put it in the type of account I want it to be after the in-service withdrawal and conversion? I would eventually want it to be in a Target Retirement fund.

[MDM]

So, this means I can do the Mega Backdoor Roth, correct?

Yes.

I should max out the after-tax contributions, then do an in-service withdrawal and convert it into a Roth IRA, correct?

Contribution to a Roth, earnings to a tIRA.

When I do the in-service withdrawal, do I keep it at the same bank, or would I be allowed to convert it into a Roth IRA at Vanguard?

Up to you - once in an IRA, you are allowed to move that money to other IRA providers.

When I make my voluntary after-tax contribution, should I put it in a money market account? Or should I put it in the type of account I want it to be after the in-service withdrawal and conversion? I would eventually want it to be in a Target Retirement fund.

Up to you.

See http://www.madfientist.com/after-tax-contributions/.  Enjoy!

[seattlecyclone]

Be aware that the $53k limit includes any employer matching funds as well. If your employer does do a match, you won't be able to put a full $35k of after-tax contributions.

[Paul der Krake]

When I do the in-service withdrawal, do I keep it at the same bank, or would I be allowed to convert it into a Roth IRA at Vanguard?

I have elected to keep the rollover funds at the same institution (Fidelity), at least for now. My thinking was that if something were to go wrong, it would be easier to deal with one firm instead of two. These maneuvers are still in infancy, so that's something to keep in mind. That being said I have done two in-service distributions so far and haven't had any surprises. YMMV.

Now, I actually like Fidelity a lot, so keeping my funds there was an easy choice. Had my company's 401(k) been at some shoddy brokerage house, I would have been more adventurous in getting the funds out of there.

[snuggler]

Thanks for the advice! A few follow-up questions:

Is the strategy behind converting the after-tax earnings into a traditional IRA, and the after-tax contributions to a Roth IRA, that the after-tax earnings aren't subject to taxes during your working (and thus likely highest income) years?

Would I have to worry about any limits if I convert the after-tax earnings into a traditional IRA, and the after-tax contributions to a Roth IRA? Specifically, the traditional and Roth IRA limits of $5500? I was under the impression that this doesn't apply to conversion events, but please correct me if that is wrong.

Can you just do an in-service withdrawal of the after-tax portion of your 401k, and leave the pre-tax 401k where it is? I noticed Madfientist's example rolled everything over. I could always do that, I suppose, but would like to know if that is necessary.

[MDM]

Is the strategy behind converting the after-tax earnings into a traditional IRA, and the after-tax contributions to a Roth IRA, that the after-tax earnings aren't subject to taxes during your working (and thus likely highest income) years?

Yes.

Would I have to worry about any limits if I convert the after-tax earnings into a traditional IRA, and the after-tax contributions to a Roth IRA? Specifically, the traditional and Roth IRA limits of $5500? I was under the impression that this doesn't apply to conversion events, but please correct me if that is wrong.

You are not wrong.

Can you just do an in-service withdrawal of the after-tax portion of your 401k, and leave the pre-tax 401k where it is? I noticed Madfientist's example rolled everything over. I could always do that, I suppose, but would like to know if that is necessary.

I believe that can vary based on your plan's specific rules.  Check with your benefits department.

[snuggler]

Awesome, thanks so much, MDM, Paul der Krake, and seattlecyclone!

I don't have any employer contributions to worry about, but I am much more confident about making this happen after your very helpful advice.