The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: the_grillman on February 27, 2017, 05:40:22 PM
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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
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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 (https://www.irs.gov/pub/irs-drop/n-14-54.pdf) 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 (https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans)
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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!
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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.