Author Topic: Am I eligible for mega back door roth?  (Read 4416 times)

mozar

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Am I eligible for mega back door roth?
« on: February 15, 2016, 02:14:33 PM »
I was starting to understand and now after reading the whitecoat investor article about it I'm confused again, but it might not even apply to me.
Per year
« Last Edit: May 10, 2018, 01:35:38 PM by mozar »

MDM

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Re: Am I eligible for mega back door roth?
« Reply #1 on: February 15, 2016, 02:49:49 PM »
So 94k-18k-6k (standard deduction)-4k (personal exemption)=66k. I think max for traditional is 61k? Should I fill up my traditional IRA bucket? Should I split the 5.5k into roth and traditional? Then what?
The math is correct but nothing on the back side of form 1040 (e.g., standard deduction and personal exemption) affects your MAGI.  You will have 94k-18k=76k, so no deductible tIRA for you.  Roth IRA is fine.

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My understanding is that I have to liquidate my traditional IRA in order to do mega backdoor Roth?
There is an after tax option to put money into my 401k. My plan is ADP for those familiar.
For a regular ol' backdoor Roth, having money in a tIRA can be an issue.  See https://www.bogleheads.org/wiki/Backdoor_Roth_IRA.  For a mega backdoor Roth, however, the amount of funds in your tIRAs is irrelevant.  When you take the in-service distribution from your after-tax (but non-Roth) 401k, any earnings may go into a tIRA.

seattlecyclone

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Re: Am I eligible for mega back door roth?
« Reply #2 on: February 15, 2016, 03:01:08 PM »
So 94k-18k-6k (standard deduction)-4k (personal exemption)=66k. I think max for traditional is 61k? Should I fill up my traditional IRA bucket? Should I split the 5.5k into roth and traditional? Then what?

You'll probably be past the IRA deduction phase-out range, as MDM points out. You may as well just contribute directly to a Roth IRA in this situation.

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My understanding is that I have to liquidate my traditional IRA in order to do mega backdoor Roth?

Nope. The "regular" backdoor Roth relies on having zero pre-tax IRA balance. You don't need to worry about this right now because your income is low enough that you don't need to use the backdoor to make Roth IRA contributions.

The mega backdoor Roth is completely separate; pre-tax IRA balances are irrelevant.

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There is an after tax option to put money into my 401k. My plan is ADP for those familiar.

This is the first requirement for the "mega backdoor Roth." The second is that your 401(k) plan should offer non-hardship in-service withdrawals and/or in-plan Roth conversions from the after-tax bucket. This allows you to convert the money to Roth while you're still working with the company, meaning the money starts growing post-tax right away.

If your plan doesn't offer one of these options for dealing with the after-tax funds and you plan to remain with the company for several years, this changes things a bit. You'll still be able to contribute money to the after-tax account but the growth will then be pre-tax instead of post-tax until you leave the company and have the opportunity to make Roth conversions. Also there have been proposals to eliminate the backdoor by prohibiting Roth conversions of after-tax funds, so you may not want to bank on the backdoor being open a decade from now.

mozar

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Re: Am I eligible for mega back door roth?
« Reply #3 on: February 15, 2016, 03:08:24 PM »
OK, after 401k, hsa, then put in 5.5k into Roth.
Then put in after tax money into 401k plan through work, then withdraw money and out it into my traditional IRA in Vanguard, then convert it to Roth? Assuming I can do non-hardship withdrawals? I'm still not clear on the difference between a regular ol' backdoor roth and a mega backdoor roth?

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any earnings may go into a tIRA.
earnings, but not contributions?

I will find out about non-hardship withdrawals/in-plan roth conversions.

dandarc

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Re: Am I eligible for mega back door roth?
« Reply #4 on: February 15, 2016, 03:17:11 PM »
A regular backdoor Roth IRA gets you around the income limits for contributions to a Roth IRA.  So you put $5500 into traditional, do not deduct it since you are ineligible, then fairly immediately convert it to Roth.  For this one, it is best if your tIRA is empty before you start.  From the income you've posted, you don't need to do this.

A mega backdoor Roth involves your 401K - after you have deferred your $18K, and any employer match, you can make after-tax (not Roth) contributions to bring the total up to the $53K limit.  Then you rollover this portion to your Roth IRA.  The money never goes to your tIRA.  Note that your 401K has to allow after-tax contributions - that is not a given.  And for this to work best, it also needs to allow in-service rollovers, so you can get the after-tax money out of the 401K regularly to keep taxes on any gains low.

mozar

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Re: Am I eligible for mega back door roth?
« Reply #5 on: February 15, 2016, 04:42:15 PM »
ok, i'm understanding better.

Ursus Major

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Re: Am I eligible for mega back door roth?
« Reply #6 on: February 15, 2016, 05:47:44 PM »
A mega backdoor Roth involves your 401K - after you have deferred your $18K, and any employer match, you can make after-tax (not Roth) contributions to bring the total up to the $53K limit.

In my company's 401k I can make after-tax contributions, before exhausting the pre-tax limit. So that's worth checking into well with your company in case you don't want to defer all or some of your own contributions.

And I even get the company match on my after-tax contributions, of course the match is always considered pre-tax.

mozar

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Re: Am I eligible for mega back door roth?
« Reply #7 on: February 15, 2016, 07:55:56 PM »
I'm putting 90% of my income in the 401k now, so I won't have any extra to defer after tax. No company match.

mozar

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Re: Am I eligible for mega back door roth?
« Reply #8 on: February 25, 2016, 10:30:30 AM »
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in-plan Roth conversions from the after-tax bucket.
I realized that right there in my account it says that I can contribute post tax to a "Roth 401k" so I'm assuming that means I don't have to withdraw money to put it in a roth ira? Or should I to avoid RMDs?
I called the plan and they didn't really understand my questions. She said that I couldn't withdraw from my roth 401k and roll into roth ira while i worked there or before 59.5. Isn't that allowable under irs rules?
« Last Edit: February 25, 2016, 11:03:19 AM by mozar »

dandarc

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Re: Am I eligible for mega back door roth?
« Reply #9 on: February 25, 2016, 12:16:14 PM »
Straight-up withdrawing from a Roth 401K is not the same thing as withdrawing from a Roth IRA.  It is always pro-rated between basis and earnings.

As far as in-service rollovers, the plan has to allow it.  Doesn't matter that the IRS allows this, which it obviously does or this thread wouldn't exist - only if your employer's plan allows for in-service rollovers.


Let's break down what you might be able to do with regards to the 401K - maybe that will help clear things up.  Simpler, since you get no match from your employer, and you've got a Roth option.

1.  You can contribute up to 18K per year in salary deferrals.  Less if your plan limits you.  This 18K can split between your Traditional 401K and Roth 401K however you see fit.

2.  If your plan allows for after-tax contributions, you can bring your total contribution up to 53K this year - so that's 35K more if you go with the full 18K between traditional and Roth, even more if you don't max out the traditional / roth bucket.


#2 is most useful only if your plan not only allows for these after-tax contributions, but also allows for in-service rollovers.  Based on your recent conversation, your plan may not allow for either of these things.  Or the person you talked to didn't know.  The fact that there is no match makes me think this very well may not be a feature-rich 401K.  All of this will be in your plan documents - so get a copy of those, and read them to know for sure.

mozar

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Re: Am I eligible for mega back door roth?
« Reply #10 on: February 25, 2016, 02:43:53 PM »
What is an in service rollover? Is that the 401k roth withdrawal?
My company decided to do a match starting in April. Probably  3%.
 I am able to do the 18k. They do have an after tax roth 401k. It sounds like I should do the roth 401k and then wait until I terminate with the company  (hopefully not soon, would like to stay at least 5 years) to convert to roth ira? So I will have to pay taxes on earnings when I convert. Does anyone think its not worth it to do roth 401k (i can't do tIRA and time horizon is 9+ years).
Or should i do regular 401k 18k, 5500 vanguard roth bucket, then vanguard taxable account for rest?

MDM

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Re: Am I eligible for mega back door roth?
« Reply #11 on: February 25, 2016, 08:29:57 PM »
What is an in service rollover? Is that the 401k roth withdrawal?

Google   non-hardship in-service withdrawal   and pick from among the hits.

Then see https://www.bogleheads.org/forum/viewtopic.php?t=137366.

BayIslandSaver

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Re: Am I eligible for mega back door roth?
« Reply #12 on: February 26, 2016, 12:09:03 AM »
in a similar situation as OP.

Has anyone done a mega backdoor roth through Fidelity?  A had a few questions that my HR and Fidelity (customer service) could not answer.

I can't contribute the whole after tax ($53k-$18k = $35k) all at once, and I don't want to accumulate significant earnings that would have to be converted to a tIRA.  Can I rollover the after tax portion multiple times in the same year to avoid this? 

Is it possible to funnel these after tax funds to something that'll earn nothing until it's rolled over?
Can I perform the rollover from Fidelity (401k) to Vanguard (roth)?

Thanks!

terran

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Re: Am I eligible for mega back door roth?
« Reply #13 on: February 26, 2016, 12:29:15 AM »
My company decided to do a match starting in April. Probably  3%.

You should check on how this works. Some employers only match while you are contributing in which case you should stop contributing so much and try to even it out over the year.

I am able to do the 18k. They do have an after tax roth 401k. It sounds like I should do the roth 401k and then wait until I terminate with the company  (hopefully not soon, would like to stay at least 5 years) to convert to roth ira? So I will have to pay taxes on earnings when I convert. Does anyone think its not worth it to do roth 401k (i can't do tIRA and time horizon is 9+ years).
Or should i do regular 401k 18k, 5500 vanguard roth bucket, then vanguard taxable account for rest?

What you are describing is not a mega backdoor roth. Some plans allow after tax contributions (NOT Roth) and in service withdrawals meaning you can remove funds while still employed. This allows you to contribute large amounts of non-deductible contributions that would also be taxed on withdrawal, but since you do it right away, so no taxes. When you withdraw you roll over into a roth IRA -- tada, mega backdoor roth (in addition to your regular $18k of deductible contributions. The ability to do this is kind of rare because you need a plan that allows after tax contributions (again, not the same as Roth), and in-service withdrawals (you can withdraw funds while still employed).

What you are describing is simply contributing to a Roth 401k and rolling over to a Roth IRA when you leave employment. I wouldn't do it in your tax bracket as I'd prefer making deductible contributions.

dandarc

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Re: Am I eligible for mega back door roth?
« Reply #14 on: February 26, 2016, 07:27:13 AM »
Not sure you've got this part yet mozar:

If you put your maximum 18K salary deferral into traditional, you cannot put anything into the Roth 401K.  You can split this 18K between traditional and Roth however you want, but the total must be 18K or less at the end of the year or you've over contributed.



It sounds like your plan does not allow after-tax (NOT ROTH) contributions, so after you've had your 18K withheld, you're done with the 401K.  No more you can do.

mozar

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Re: Am I eligible for mega back door roth?
« Reply #15 on: February 26, 2016, 08:48:39 AM »
Getting closer to understanding...I will call again and try to get someone else who can tell me if i can make after tax non roth contributions which i can withdraw while employed. Unlikely though. So the answer to my question is probably no, but i can do a vanguard roth of 5500, then do the rest in a regular after tax investment?

seattlecyclone

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Re: Am I eligible for mega back door roth?
« Reply #16 on: February 26, 2016, 09:22:13 AM »
I can't contribute the whole after tax ($53k-$18k = $35k) all at once, and I don't want to accumulate significant earnings that would have to be converted to a tIRA.  Can I rollover the after tax portion multiple times in the same year to avoid this?

There's no law against it. Your plan may or may not limit the number of withdrawals in a year. Mine does not, but that has nothing to do with yours.

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Is it possible to funnel these after tax funds to something that'll earn nothing until it's rolled over?

Sure. Look for a "money market fund" or similar in your 401(k). You probably have one. Why would you want to do this though? I'd rather earn a dollar and pay tax on it than earn nothing and owe no tax.

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Can I perform the rollover from Fidelity (401k) to Vanguard (roth)?

Sure, no reason why not. The withdrawals can be made to straight cash if you want, or you can convert it to a Roth IRA at the company of your choice. Moving it to a different brokerage may or may not involve more paperwork than transferring it within Fidelity. You'll have to decide whether that's worthwhile to you, especially if you do several such transactions in a year.