Author Topic: Mega Backdoor Roth implementation question  (Read 2638 times)

Mister Fancypants

  • Bristles
  • ***
  • Posts: 296
  • Age: 42
  • Location: New York
Mega Backdoor Roth implementation question
« on: November 14, 2014, 08:30:14 AM »
So my company allows "Employee Voluntary Contributions" of up to 10% of your salary with a cap of $25k. They allow in-service distributions as frequently as daily and since the money is after tax it is 100% vested upon contribution.

My 401(k) is managed by Fidelity and my Roth IRA is also at Fidelity, I spoke with Fidelity, they can't automate the transfer from the "After Tax Account" to my Roth it requires a phone call.

So here are my questions, first since the "After Tax Account" will look just like my 401(k) the deposit will have to be invested it can't remain in cash, so there will be at least a single days change in value Gain/Lose between the pay day when it id deposited and assuming I call Fidelity every pay day and instruct them to transfer the funds, how are those G/L going to impact the rollover? And there will times it takes longer than a day vacations, business trips... Just life getting in the way etc..

My second question, since the Fidelity website restricts the percent to 10% and they only see net pay the amount that can actually get contributed gets skewed by other withholdings like medical deductions, 401(k) and taxes etc... Now taxes is the only one that is really controllable lets say for argument sake a gross pay check is $5,000 and after all deductions net pay becomes $3,500 the after tax contribution allowable would only be $350, Could you adjust your withholdings so your net paycheck is now $4,000 you can contribute $400 and pay an additional $500 per paycheck quarterly to prevent the IRS from penalizing you. Would that work?

I have to look at the Fidelity interface and see if there is a flat dollar amount per paycheck that can be contributed, that would solve problem number 2, then the employer payroll would cut it off at 10% of gross is my guess which would be higher and most bang for your buck. I need to speak to HR/Payroll about that. The difference between 10% of net vs. 10% of gross is a lot.

Thanks in advance,
-Mister FancyPants

MDM

  • Walrus Stache
  • *******
  • Posts: 9243
Re: Mega Backdoor Roth implementation question
« Reply #1 on: January 25, 2015, 06:29:44 PM »
Did you ever get clear guidance on this?  Seems the mega backdoor Roth guidelines are still somewhat ambiguous...?

YTProphet

  • Stubble
  • **
  • Posts: 196
Re: Mega Backdoor Roth implementation question
« Reply #2 on: January 26, 2015, 06:13:43 AM »
So here are my questions, first since the "After Tax Account" will look just like my 401(k) the deposit will have to be invested it can't remain in cash, so there will be at least a single days change in value Gain/Lose between the pay day when it id deposited and assuming I call Fidelity every pay day and instruct them to transfer the funds, how are those G/L going to impact the rollover? And there will times it takes longer than a day vacations, business trips... Just life getting in the way etc..

As to this question, I don't think minimal gains really matter. Let's say your employer contribution is $5,000 and you've contributed the $18,000 max. You'd be allowed to contribute an additional $30,000. Let's say you contribute that $30,000 and the next day it's worth $30,200. Well, you'd roll the entire $30,200 over and at the end of the year you'd pay $0 taxes on the $30,000 and whatever applicable taxes on the $200.

teen persuasion

  • Handlebar Stache
  • *****
  • Posts: 1047
Re: Mega Backdoor Roth implementation question
« Reply #3 on: January 26, 2015, 07:09:40 AM »
So here are my questions, first since the "After Tax Account" will look just like my 401(k) the deposit will have to be invested it can't remain in cash, so there will be at least a single days change in value Gain/Lose between the pay day when it id deposited and assuming I call Fidelity every pay day and instruct them to transfer the funds, how are those G/L going to impact the rollover? And there will times it takes longer than a day vacations, business trips... Just life getting in the way etc..

As to this question, I don't think minimal gains really matter. Let's say your employer contribution is $5,000 and you've contributed the $18,000 max. You'd be allowed to contribute an additional $30,000. Let's say you contribute that $30,000 and the next day it's worth $30,200. Well, you'd roll the entire $30,200 over and at the end of the year you'd pay $0 taxes on the $30,000 and whatever applicable taxes on the $200.

Agree with YTProphet, but don't you have some sort of Stable Value or Money Market fund option?

dodojojo

  • Pencil Stache
  • ****
  • Posts: 539
Re: Mega Backdoor Roth implementation question
« Reply #4 on: January 26, 2015, 07:54:25 AM »
Mr Fancypants, I have the same setup you do...I wonder if we are with the same megacorp.

I just recently started this process and so far have contributed to 2 pay periods.  I have not yet rolled over my post-tax 401K funds to the Roth IRA.  I plan to rollover every 2-4 pay period.  I'm not sure yet on the frequency.  I keep the post-tax 401K funds in a inflation-protected bond fund.  After 2 pay periods, it looks like I've gained about $7.  I'll call in the rollover early next week and let's see what happens.

I was pleasantly surprised to see that my 10% is taken off my gross income rather than the AGI/after-tax income.  I was told by Fidelity that it was to be the latter.  So either they're wrong or the payroll department is messing up my check...

My 401K plan as far as I know, doesn't allow for dollar amount contributions--everything is done by percentages.  It's a moot point for me as I max out whatever options are available to me.  My income isn't high enough for me to worry about the total 401k max of 53k(?). 

Mister Fancypants

  • Bristles
  • ***
  • Posts: 296
  • Age: 42
  • Location: New York
Re: Mega Backdoor Roth implementation question
« Reply #5 on: January 26, 2015, 09:31:23 AM »
So I am on vacation now and my first contribution was made on my 1/15 paycheck.

Here is what I have done...

I direct all of my contributions to the 401(k) Money Market Fund, I am not able to do online rollovers as I have a BrokerageLink account set up for my normal 401(k) contributions, I don't like the fund selection and my company allows us to own any mutual fund available through Fidelity in the BrokerageLink so I rollover the regular contributions and treat the BrokerageLink as another IRA and manage it with my other Fidelity IRA's.

So now I exchange my pre-tax contributions to the BrokerageLink and invest them accordingly, I exchange my vested matched contributions along with my contributions, I exchange my non vested match contributions to a target date fund in the 401(k) until they are vested.

I am leaving the after tax contributions in the Money Market Fund right now so they will have minimal gains as it turns out my plan as a $25 per in-service distribution fee which eats into returns. That just sucks.... no way around it, so instead of doing it every pay check I have to decide how frequently I want to rollover the funds to my Roth. I will most likely do it when I have a rebalancing need that requires cash in the Roth account which would justifiy the fee or do it once annually. I will leave the minimal interest earned in the account and roll that to an IRA when I switch jobs.