Author Topic: Mega-Backdoor Roth (with a new twist?)  (Read 1750 times)


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Mega-Backdoor Roth (with a new twist?)
« on: August 20, 2016, 01:25:15 PM »

Hi All,

I recently started a new job that allows me to contribute additional after tax money to my 401k and am trying to figure out if I can actually take advantage of a mega backdoor Roth. There are a few issues with my plan details that will make this more difficult. I haven't seen this specific issue worked out on the site (or anywhere else on the internet) so I hope this scenario hasn't actually been answered over-and-over again. If it has, please link me to a relevant thread!

401k details:
  • I can contribute up to the IRS limit in after-tax contributions.
  • I can take cash-disbursements from the after-tax as often as I like but I cannot do a direct rollover from the account to a Roth IRA (per my specific plan rules). Fidelity will cut a check but it would be sent to my home address with my name on it.
  • I spoke with a rep at Vanguard and they told me that I could then send on the check to Vanguard and have it deposited into my Roth, but the IRS considers this an "indirect rollover" and there is a 1x/year limit on indirect rollovers.
  • I can do an in-plan conversion of the after-tax contributions to a Roth 401k as often as I want with no penalties or limits. So, in theory I can call up Fidelity after every paycheck and ask them to convert my after-tax balance into a Roth 401k. I do have Vanguard options to invest in so it wouldn't be tied up in a high fee account

Other relevant details:
  • Life is a bit up in the air but there is a decent chance I will only be at this employer for ~1 year as my spouse and I are trying to relocate to a different part of the country. This would open up rollover possibilities sooner.
  • If we don't move then I will likely stay at this company for a while. But - I will be classified as a HCE as soon as I've been hear more than a year based on the plan criteria. Therefore, I'd like to contribute as much as possible before I hit that point. I do plan to FIRE so even if we stay here, I'll probably leave the company within the next 5-7 years and would be able to rollover funds at that time.
  • This year, my household income will be too high to contribute to a Roth IRA (woohoo!) so my spouse and I are planning to do a backdoor Roth at the end of the year (TIRA --> Roth IRA). Until one or both of use retires, we'll need to do this every year so I'd like to avoid invoking pro-rata rules in the future by keeping a $0 balance in TIRA.

Ok, onto my questions:
  • If I do the in-plan conversion to a Roth 401k each month, I will have money in a 401k and a Roth 401k. When I separate from my employer, can I roll over just the Roth 401k into a Roth IRA and keep the rest of the money in the 401k account?
  • If not, what are the options for accessing this money during FIRE? If I set up a 401k conversion ladder for the funds in the traditional 401k, could I rollover Roth 401k funds each year as well? I don't want this money stuck until I'm a traditional retirement age since I plan on needing some of it sooner than that.
  • Would it be better to just let the after-tax funds sit in the account and do an indirect rollover 1x/year, pay taxes on the growth, and get them into my Roth? Are there any IRS issues with doing an indirect rollover from my after-tax --> Roth and also doing a direct rollover from a TIRA --> Roth IRA?
  • Should I just avoid the whole thing and stick to my previous plan of investing this money in a normal taxable vanguard account? I have ~$2000/month that I can either put into the 401k additional after-tax or just get in my paycheck and invest it normally. We're maxing out all other tax advantaged accounts ($18,000 401k with $10,000 match, $5500 Roth IRA for myself and spouse, $3350 HSA, etc.).


Wow, a phone plan for fifteen bucks!