Author Topic: A few Questions on Backdoor Roth  (Read 3138 times)

slowplod

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A few Questions on Backdoor Roth
« on: February 02, 2015, 07:44:47 AM »
My wife and I both have 401k plans at work, and would not qualify for a Roth, so I've been looking into a backdoor.  I have a few questions on the process:

Total Contribution Limit
1)Since we both work, is this essentially $106,000 per year? (53,000*2) 
http://www.madfientist.com/after-tax-contributions/
2) We get an employer match that is subject to vesting.  Do unvested employer matches count toward the contribution limit?

Tax Implications

I rolled over my 401k's from previous employers about a year ago, before I knew about a back door roth.  If I convert to a Roth, what cost basis will I be taxed at?  Will it be the gains from the point in time I created the IRA, or will I pay taxes on all gains since I started the 401ks.  If it's the latter, how would I even be able to determine that amount since this was years ago in an account I no longer own?

Thanks for your help


MDM

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Re: A few Questions on Backdoor Roth
« Reply #1 on: February 02, 2015, 12:00:32 PM »
My wife and I both have 401k plans at work, and would not qualify for a Roth, so I've been looking into a backdoor.  I have a few questions on the process:

Total Contribution Limit
1)Since we both work, is this essentially $106,000 per year? (53,000*2) 
http://www.madfientist.com/after-tax-contributions/
2) We get an employer match that is subject to vesting.  Do unvested employer matches count toward the contribution limit?

Tax Implications

I rolled over my 401k's from previous employers about a year ago, before I knew about a back door roth.  If I convert to a Roth, what cost basis will I be taxed at?  Will it be the gains from the point in time I created the IRA, or will I pay taxes on all gains since I started the 401ks.  If it's the latter, how would I even be able to determine that amount since this was years ago in an account I no longer own?

Thanks for your help

Small but crucial difference: are you talking "backdoor Roth" or "mega backdoor Roth"?  For the former you contribute to an IRA, then convert to a Roth IRA.  For the latter you make after-tax contributions to a 401k then take an in-service distribution to a Roth IRA (if your employer allows this in your plan).

The cost basis on traditional IRAs and 401ks is easy: it's $0 because you never paid any taxes on that money.  Also, conversions are treated as ordinary income, not capital gains.  Probably not what you wanted to hear....

slowplod

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Re: A few Questions on Backdoor Roth
« Reply #2 on: February 02, 2015, 04:32:34 PM »


Small but crucial difference: are you talking "backdoor Roth" or "mega backdoor Roth"?  For the former you contribute to an IRA, then convert to a Roth IRA.  For the latter you make after-tax contributions to a 401k then take an in-service distribution to a Roth IRA (if your employer allows this in your plan).

The cost basis on traditional IRAs and 401ks is easy: it's $0 because you never paid any taxes on that money.  Also, conversions are treated as ordinary income, not capital gains.  Probably not what you wanted to hear....

I guess I had less of a grasp on this than I thought. I essentially thought I could contribute after tax money into a non-deductible IRA, then convert to a Roth and only pay taxes on the capital appreciation.  I'm deducing from your above that what I'm describing can only be done from an employer after tax 401k account?


skyrefuge

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Re: A few Questions on Backdoor Roth
« Reply #3 on: February 02, 2015, 05:02:43 PM »
I guess I had less of a grasp on this than I thought. I essentially thought I could contribute after tax money into a non-deductible IRA, then convert to a Roth and only pay taxes on the capital appreciation.  I'm deducing from your above that what I'm describing can only be done from an employer after tax 401k account?

The "mega backdoor Roth conversion" (which is described in the link you posted and relates to the $53,000 contribution amount) can only be done from an employer after-tax 401(k) account.

The (standard) "backdoor Roth conversion" is done from an after-tax (non-deductible) Traditional IRA, where the contribution amount is limited to $5500 per person per year. So unlike the "mega backdoor Roth conversion", it's available to everyone, but the amount that can be stuffed into a Roth is lower.

MidWestLove

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Re: A few Questions on Backdoor Roth
« Reply #4 on: February 02, 2015, 05:04:39 PM »
Traditional -> Roth conversion (res-characterization) was described above

After Tax 401k contribution (or 'Mega Backdoor Roth') -best option I know of, but...
- your plan needs to allow after tax , non-Roth contributions. this is covered in Summary Plan Description available from HR/plan administrator
- your plan determines the limit (Feds set upper limit, your plan may have very different limit)
- your plan determines when you can rollover the money (whether in service rollovers are allowed, if yes - under what conditions and how often).