Starting "back door Roth" and nervous about screwing up: On the right track?

[Trudie]

Our new 401K plan (Fidelity administers it) allows after-tax contributions and contains an in-service withdrawal provision for those contributions.  We may withdraw all or part of after tax contributions plus earnings effective as of the beginning of a calendar quarter.  So, I'm exploring the "back door Roth" option.  I already contribute the 401K max on a pre-tax basis and I'm maxing out my Roth IRA (held with TIAA-CREF).

I've read on this site and elsewhere.  I've talked with Fidelity and am hopefully going to talk soon with my TIAA-CREF rep as well.

In sum, because I am the payroll accountant, I know how the funds will be deducted from my check and how they will get to Fidelity.

Because I've talked to Fidelity I know how the funds will be segregated in my account and how I can request a distribution of them for TIAA-CREF/Roth IRA.

It is from here that I get nervous about something going wrong.  At the point I request the distribution how will I segregate earnings from contributions, do the appropriate conversion paperwork for TIAA-CREF, and not muck things up so I have bad unintended long-term consequences???  I assume I will pay tax on any earnings (which will hopefully be minimal)??

Just a little background on my Roth -- I started it over 15 years ago.  Some of the initial funds were from IRA conversions, but I haven't done any conversions since then.  I understand that since all Roths are treated as one that I automatically meet the 5 year test, but things get murkier for me with respect to the five year rule and also penalties with early withdrawals when you start bringing over converted funds.

Of course, I would think my TIAA-CREF rep could help me sort this out, but I don't expect that he deals with it quite often...

[MDM]

Is http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/basis-recovery-from-employer-plans/ helpful?

That is one link among many in http://www.bogleheads.org/forum/viewtopic.php?f=2&t=137366.

See also http://forum.mrmoneymustache.com/investor-alley/401k-pro-rata-rule-for-mega-backdoor-roth-ira-%28vanguard%29/.

[Trudie]

Is http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/basis-recovery-from-employer-plans/ helpful?

That is one link among many in http://www.bogleheads.org/forum/viewtopic.php?f=2&t=137366.

See also http://forum.mrmoneymustache.com/investor-alley/401k-pro-rata-rule-for-mega-backdoor-roth-ira-%28vanguard%29/.

Some follow up questions:

(1)  Will I pay a 10% early withdrawal penalty when I do the conversion?
(2)  I assume I will pay taxes on the earnings, unless I put my earnings in a traditional IRA?
(3)  How do you instruct the recipient trustee (in this case TIAA-CREF) to put your earnings in your traditional IRA and the original contributions in the Roth?

For every "this was easy peasy" story I hear I also hear nightmares about screw ups and unintended consequences...

[MDM]

(1)  Will I pay a 10% early withdrawal penalty when I do the conversion?

No.

(2)  I assume I will pay taxes on the earnings, unless I put my earnings in a traditional IRA?

Yes.

(3)  How do you instruct the recipient trustee (in this case TIAA-CREF) to put your earnings in your traditional IRA and the original contributions in the Roth?

Perhaps asking this question to TIAA-CREF would be best.  One might guess that saying "TIAA-CREF, please put X (my earnings) into a tIRA and Y (my contributions) into a Roth" would work, but the actual mechanics (online form? notarized letter? ...?) may be specific to each broker.

See  Example #6 in https://www.irahelp.com/slottreport/backdoor-roth-conversion for discussion about a situation that seems similar to yours.

[Trudie]

(1)  Will I pay a 10% early withdrawal penalty when I do the conversion?

No.

(2)  I assume I will pay taxes on the earnings, unless I put my earnings in a traditional IRA?

Yes.

(3)  How do you instruct the recipient trustee (in this case TIAA-CREF) to put your earnings in your traditional IRA and the original contributions in the Roth?

Perhaps asking this question to TIAA-CREF would be best.  One might guess that saying "TIAA-CREF, please put X (my earnings) into a tIRA and Y (my contributions) into a Roth" would work, but the actual mechanics (online form? notarized letter? ...?) may be specific to each broker.

See  Example #6 in https://www.irahelp.com/slottreport/backdoor-roth-conversion for discussion about a situation that seems similar to yours.

Yes - that example was helpful.  That's exactly what I want to do.  But the recipient (TIAA-CREF in this situation) seems totally flummoxed.  I contacted my individual wealth advisor and explained the situation and have asked him for a little extra service should I choose to do this.  The information I received from the 1-800 number was blatently wrong...

[MDM]

But the recipient (TIAA-CREF in this situation) seems totally flummoxed.

Time to call Fidelity and/or Schwab and/or Vanguard to check who is most un-flummoxed?

[TXScout2]

Why do you want to do your backdoor conversion through your 401(k) plan? 

Probably be less fees to just open a personal IRA and Roth IRA with someone like Vanguard, put 5k in the IRA, then convert it to the Roth. 

Maybe your 401(k) is better than mine but mine takes a % of all the assets they are managing. 

[Rein1987]

Why do you want to do your backdoor conversion through your 401(k) plan? 

Probably be less fees to just open a personal IRA and Roth IRA with someone like Vanguard, put 5k in the IRA, then convert it to the Roth. 

Maybe your 401(k) is better than mine but mine takes a % of all the assets they are managing.

I think OP is doing mega back door roth. The total amount can be 53000-18000(401k-pretax)-XX(employer match)

[Trudie]

Why do you want to do your backdoor conversion through your 401(k) plan? 

Probably be less fees to just open a personal IRA and Roth IRA with someone like Vanguard, put 5k in the IRA, then convert it to the Roth. 

Maybe your 401(k) is better than mine but mine takes a % of all the assets they are managing.

I think OP is doing mega back door roth. The total amount can be 53000-18000(401k-pretax)-XX(employer match)

Correct, I want to initiate it through my 401k plan which allows after-tax contributions.  For the sake of seamlessness, I'd like to have everything with TIAA-CREF.  I would certainly hope that my advisor could step in and get them unflummoxed.  After all, it's more money in their coffers.  I'll give it a bit of time anyway... this is not something that I would probably need to do until 1st quarter of next year.

[ShoulderThingThatGoesUp]

In my experience Schwab will bend over backwards to help you if it means getting an f-ton of money in their hands, so if TIAA-CREF remains flummoxed I'd give them a call.

Specific example: I had the title company wire $300,000 to the wrong account of theirs when I sold a house. I called them, explained the situation, and they said "so, what are you going to do with the money?" "Use half of it to pay of my current house, then invest the rest with you."

Next day, there it was in my account.

[Krnten]

What about starting a second Roth with fidelity?  It seems like they understand the mechanics of the mega backdoor and it might make the conversion simpler for you.  I'm about to do the same thing for my husband with his Schwab 401k even though he has a Vanguard Roth.  I've always had bad luck trying to get two providers to work with each other for rollovers. Eventually we'll roll his new Schwab Roth into his existing Vanguard one.

[DeepEllumStache]

I'm doing the MegaBackdoor Roth strategy with Fidelity this year too and started a new Roth through Fidelity just for the purpose. I also plan on starting a regular IRA through them when I do the conversion to avoid tax implications. My plan will charge $20 per roll over, so I'll only be doing it once in December.

[Trudie]

I had kind of a "duh" moment, but I think you're right on -- maybe just opening a Roth and a Trad IRA specifically with Fidelity for this purpose would be the way to go.  It keeps the money in house, probably makes the transition faster, and I can segregate the mega back door money from all my other IRAs.  This could be helpful if I ever have a recordkeeping or tax issue.  Fidelity will be more likely to help, I'm sure.

When I retire and am no longer making contributions I can roll it over to TIAA-CREF.

[Krnten]

Instead of segregating the principal and earnings into Roth and tIRAS, why not just do the conversions directly to the Roth regularly, like 3x per year?  Some people do it every pay period although I think that could be a hassle.  The gains (if any!) will be minimal every few months so your extra tax bill should be too.

If you ever find yourself wanting to do a regular backdoor Roth move, having traditional iras out there complicates things.  Someone please correct me if I'm wrong about that.

[Trudie]

Instead of segregating the principal and earnings into Roth and tIRAS, why not just do the conversions directly to the Roth regularly, like 3x per year?  Some people do it every pay period although I think that could be a hassle.  The gains (if any!) will be minimal every few months so your extra tax bill should be too.

If you ever find yourself wanting to do a regular backdoor Roth move, having traditional iras out there complicates things.  Someone please correct me if I'm wrong about that.

You're right about this... and unless I discover there are fees for each rollover, I will do it quarterly.  I can minimize gains by parking it in a cash or bond fund on the 401K side.