Author Topic: Reader Case Study: New job, new retirement savings options, new strategy?  (Read 1856 times)

AshStash

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Please help me figure out how to maximize my tax-efficient savings!

Life Situation: I started a new job this year and have realized that my 401k plan lets me make after tax contributions AND non-hardship in service distributions every 6 months, which has me thinking of using the Mega Back Door Roth strategy. I called Schwab to confirm that I read the plan documents correctly. The person I spoke with didn't recognize the terminology but understood the process and said they are familiar with it.

Modified Adjusted Gross Income: Over the tIRA and Roth IRA deduction/contribution limits for a Single filer, thanks to secondary income streams. My main job (which I love) doesn't pay enough to put me over the top otherwise and I am not considered a highly compensated employee.

Debts: none!

Current investment accounts: traditional 401k (Schwab) , Roth IRA (Vanguard), taxable account.

Annual savings: I have about $38000/year that I want to put into long-term savings for eventual FIRE. Currently putting $18000 into my 401k and the rest is going to my taxable account. Other savings for near-term goals like home purchase go into my taxable account.

FIRE progress: About 65% of the way to FI, no strong desire to retire in the next 15 years because I like my work but want to hit FI in case that changes :)

Specific Questions:
1. Since it seems like the Mega Backdoor Roth process is allowed through my 401k plan, is there any reason not to do this? It genuinely seems almost too good to be true. At this late point in the year, I can probably get about $4000 in after-tax contributions made through payroll deductions. Next year, I can set my contributions higher and make more after-tax contributions

2. In 2017, I will get $18,000 + $4000 into my 401k, then a non-deductible $5500 into a tIRA, with the intention of mega back door/back door Roth-ing the after-tax contributions. Does doing both the Mega and the regular back door processes screw up anything for tax purposes in terms of a basis or the pro-rata rules, etc? Again, it all kind of feels too good to be true, so I am looking for the catch.

3. I am about 90% clear on the process. I contribute $4k after-tax (2017) or ~$10k (2018) to my 401k and then every 6 months I roll that into my Roth IRA. Do I need to roll it over first to a tIRA and then transfer to the Roth? The gains on the after-tax 401k contributions are going to be taxed as ordinary income?

Thanks for any advice--I feel like there has to be some sort of catch that I'm missing :)


MDM

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1. Since it seems like the Mega Backdoor Roth process is allowed through my 401k plan, is there any reason not to do this?
No.

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2. Does doing both the Mega and the regular back door processes screw up anything for tax purposes in terms of a basis or the pro-rata rules, etc?
No.  Done correctly, they don't interact at all.

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3a. Do I need to roll it over first to a tIRA and then transfer to the Roth?
3b.The gains on the after-tax 401k contributions are going to be taxed as ordinary income?
a. No.  Not only do you not need to do this, you should not.
b. Yes

See Investment Order and Backdoor Roth IRA - Bogleheads for more.

AshStash

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Awesome, thank you! I really felt like I was missing something because everything I was reading on the forum and Bogleheads just sounded too good to be true. I didn't have earned income for a while during a period of unemployment, so I'm excited to get my tax-advantaged savings back on track for FIRE.