Author Topic: Mega Backdoor Roth IRA Question  (Read 2992 times)

YTProphet

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Mega Backdoor Roth IRA Question
« on: January 20, 2015, 12:31:17 PM »
So I came across this article from the Madfientist: http://www.madfientist.com/after-tax-contributions/

After reading it, it's clear that the key to making this work is being able to make in-service withdrawals to move post-tax 401k contributions into your Roth IRA before it starts growing so that upon withdrawal you don't pay taxes.

Here's my situation - I'll make my $18,000 contribution to the 401(k), I'll get a $5,000 employer match, and I can contribute an extra $30,000 thousand post-tax to my 401(k) since the current limit is $53,000.

Here's where my question arises - I read the FAQ's on my employer's intranet and it says I may receive a distribution on up to 50% of my account balance at any time. Obviously, a 100% distribution would be easiest since I'd just move all my post-tax 401k contributions into my Roth IRA. Since I can't do that, should I just do a series of 50% distributions of the $30,000 of post-tax 401k contributions (i.e. take a $15,000 distribution on Monday, a $7,500 distribution on Tuesday, $3,750 on Wednesday, $1,825 on Thursday, and $912.50 on Friday)?

MDM

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Re: Mega Backdoor Roth IRA Question
« Reply #1 on: January 20, 2015, 12:40:51 PM »
...I may receive a distribution on up to 50% of my account balance at any time.
Just checking: what is the definition of "account balance"?  If it is "your total 401k amount" then you may be all set...unless the distribution must come proportionally from the pre- and post-tax portions.  As the details can differ from company to company, a brass tacks discussion with your HR department seems in order - hope things have been established to be employee-friendly.

Shade00

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Re: Mega Backdoor Roth IRA Question
« Reply #2 on: January 20, 2015, 12:41:58 PM »
Contact your plan administrator to make sure the FAQ accurately reflects the processes in the plan document. The plan administrator should be able to answer these questions, though I wouldn't be surprised if they withheld taxes from any distribution by default.

On this topic (and only slightly off-topic), but my understanding of the 401k post-tax contribution to Roth "pipeline" is that you could leave it all in your 401k until you separate from service, then you'd get two checks from your administrator - one for the pre-tax contributions plus all gains on all amounts, and then one for just the post-tax contributions. You would then put the pre-tax amounts and earnings into a traditional IRA and the post-tax contributions into the Roth, incurring no tax liability. At least this is how I understand it to work. If your 401k offers miserable options (or perhaps the contribution seasoning needs to begin earlier?) then I could see the allure of the rolling rollovers.

MrMoogle

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Re: Mega Backdoor Roth IRA Question
« Reply #3 on: January 20, 2015, 02:10:39 PM »
That's a very weird limit, and I really don't understand it.  I would agree HR is a good place to start.  Your investment company (Vanguard, Fidelity, etc.) would also be another good place to have a conversation, since they are the ones that actually implement these rules.

In-service distribution make the Mega Backdoor Roth awesome.  Even if you don't have it, but plan on leaving in the next 5 years, it still may be worth it.  I saw a non-mustachian calculation on it that said it was worth it, but that may be different for mustachians. 

I recently stumbled upon this tactic, and will be trying my first in-service distribution tomorrow with Vanguard.

shuffler

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Re: Mega Backdoor Roth IRA Question
« Reply #4 on: January 20, 2015, 07:48:38 PM »
Here's my situation - I'll make my $18,000 contribution to the 401(k), I'll get a $5,000 employer match, and I can contribute an extra $30,000 thousand post-tax to my 401(k) since the current limit is $53,000.
Does your plan specifically say you can go up to the $53k limit?
I ask because my own plan is limited to $20k in after-tax contributions, and sometimes people don't realize there are employer-plan-defined limitations like that.