Author Topic: Need help understanding Mega Back-Door Roth IRA  (Read 2035 times)

ReP

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Need help understanding Mega Back-Door Roth IRA
« on: March 10, 2016, 10:26:33 AM »
I posted about whether to max out my 401k before throwing extra at student loans. Got a resounding "yes"; people were also very excited about my prospects for doing this magical something about a back-door? ;-)

First - here's what my employer says -

401(k) plan. We match $0.50 for every regular pre-tax or Roth dollar that you save. So if you reach the pre-tax/Roth contribution limit (equal to $18,000 in 2016), we will give you an additional $9,000 in matching contributions! For additional tax-advantaged savings, contribute up to $20,000 on an after-tax basis each year and convert to Roth.


Second - here's what I DO understand (which is not much)
  • I'm super lucky that I can contribute anything after-tax (in my case 20K)
  • D'um....that's about it.

Questions!
  • I would first need to convert to a traditional IRA and THEN a Roth IRA, correct? I can't just convert straight from a 401k to a Roth IRA?
  • Um, what IS conversion, exactly? Selling the shares from my 401k and then buying new shares in the IRA account(s)?
  • Does anyone know if I HAVE to convert to Roth if I want to make the extra 20k contributions? If say, my 401k already offers good options like low cost index funds?
« Last Edit: March 10, 2016, 10:28:55 AM by ReP »

ZiziPB

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Re: Need help understanding Mega Back-Door Roth IRA
« Reply #1 on: March 10, 2016, 11:13:30 AM »
Hi ReP, please get a copy of the actual Summary Plan Description for your 401k and read it. 

For a successful Mega Backdoor Roth, your plan needs to allow both an after-tax contribution AND in-service withdrawals (conversion is an option, but does not give you the same flexibility). 

Generally, here are the steps for Mega Backdoor Roth:
-  contribute your after tax dollars
- as soon as you can, do a direct rollover of the after-tax contribution to a Roth IRA
- to the extent your after-tax contributions have any earnings, rollover those earnings to a traditional IRA at the same time

Alternatively, you can do an in-plan conversion of the after-tax contributions to Roth, as long as your plan has investment options that you want to invest in.

Again, the wording below seems to be an over-simplification of the process.  You need to look at the actual plan document to understand how it would work in your particular 401k.

ReP

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Re: Need help understanding Mega Back-Door Roth IRA
« Reply #2 on: March 10, 2016, 11:44:06 AM »
Thanks! I had completely forgotten to check the actual plan doc and also have an appt with HR scheduled.

Paul der Krake

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Re: Need help understanding Mega Back-Door Roth IRA
« Reply #3 on: March 10, 2016, 11:53:25 AM »
Since you are at MSFT, your plan is administered by Fidelity. Call their NetBenefits number, these guys really know their stuff and will be able to walk you through hypothetical scenarios.

Brilliantine

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Re: Need help understanding Mega Back-Door Roth IRA
« Reply #4 on: March 10, 2016, 12:35:58 PM »
Yes, our plan allows in-service distributions. Once/quarter.

vhalros

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Re: Need help understanding Mega Back-Door Roth IRA
« Reply #5 on: March 12, 2016, 05:30:06 AM »

Generally, here are the steps for Mega Backdoor Roth:
-  contribute your after tax dollars
- as soon as you can, do a direct rollover of the after-tax contribution to a Roth IRA
- to the extent your after-tax contributions have any earnings, rollover those earnings to a traditional IRA at the same time


So, one thing I don't understand: What does "as soon as you can" mean? Do you just do a small roll over each pay period?