Author Topic: Mega Backdoor Roth IRA Questions  (Read 1542 times)

the_grillman

  • 5 O'Clock Shadow
  • *
  • Posts: 16
  • Location: USA
Mega Backdoor Roth IRA Questions
« on: February 27, 2017, 05:40:22 PM »
I have recently learned the mega version of the backdoor Roth and had a couple of questions at it seemed attractive to my situation.  I am a Canadian in the US am and unsure if I will be here permanently.  As a result, I have been cautious to contribute too much to my 401k as it looks to be a mess to deal with if I end up back in Canada.  However thanks to the TFSA in Canada, it seems there is legislation that says a Roth IRA is equivalent and keeps it's tax-free status in Canada as long as a person doesn't play with it (withdraw/contribute).  Thus this seems attractive to me to have my money in a Roth IRA than a 401k and getting extra contribution room is a big plus.

My Company seems to allow post-tax contributions to my 401k (without having to max out my pre-tax contributions).  It also seems that they allow a once per calendar year in-service withdrawal (according to Fidelity).  So if I understand correctly, I'd then contribute x amount post-tax and then once per year roll it over into my IRA?  Seems almost too simple and thus I am having doubts and looking for confirmation.

Risk I see is that this loophole gets closed but as long as I can rollover before it takes effect I should be good.  Also have to realize any gains & pay taxes on dividends earned when it gets rolled over correct?  Or if I keep it at Fidelity can I transfer shares an not realize gains?

Thanks

Mother Fussbudget

  • Pencil Stache
  • ****
  • Posts: 831
  • Age: 57
  • Location: Indianapolis, IN
Re: Mega Backdoor Roth IRA Questions
« Reply #1 on: February 28, 2017, 04:29:27 PM »
Your assumptions are basically correct. 

It's a common question - essentially, "If I have after-tax contributions in my 401K, when I take a distribution, can I take the after-tax cash and convert it to a Roth IRA, with no tax consequence?” 
The IRS provides some clarity on the issue,  ultimately answering “yes” to that question.

I would also read this document on After-Tax 401K rollovers:
https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans


engineerjourney

  • Bristles
  • ***
  • Posts: 277
  • Age: 32
Re: Mega Backdoor Roth IRA Questions
« Reply #2 on: March 01, 2017, 01:48:29 PM »
So you plan on leaving this job at some point?  When you leave a job, you can roll your 401K into an IRA.  So I think you could just contribute to your 401K as much as possible and not have to deal with the backdoor Roth IRA?  For Canada does it matter if its a Roth or Traditional IRA or just that its an IRA?  If Roth only, you might just want to contribute to a Roth 401K if that is also an option at your workplace and not have to deal with the complications of the mega backdoor.  Just some thoughts that might help!

cockersx3

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: Mega Backdoor Roth IRA Questions
« Reply #3 on: March 03, 2017, 06:34:01 PM »
You pretty much have it.  Direct your servicer to transfer your after-tax contributions to a Roth IRA.  For my servicer (Fidelity), it's a phone call once a year - they have done this many, many times and they'll know exactly what to do.  Very easy, only takes a few minutes.

Any earnings on the money are taxable at your marginal tax rate, but not subject to the 10% early withdrawal penalty.  At the end of the year they'll send you a 1099-R showing the distribution and also the taxable amount.  I think it's also possible (and legal) for them to separate out the earnings on the after-tax contributions, so you can transfer to an IRA and not pay taxes up-front on the distribution.  I've always just paid the tax on the (relatively small) amount rather than roll it over, but that may be something that's an option as well.