Author Topic: 401k After Tax Rollover (Make Sure I'm Understanding This)  (Read 3712 times)

beastykato

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401k After Tax Rollover (Make Sure I'm Understanding This)
« on: January 23, 2017, 05:06:29 PM »
Ok, so I've read about the backdoor Roth stuff and I'm gonna start trying it this year.  I've read so much that it gets kinda confusing having not went through the process before.  So, just please help me out and make sure I'm not overlooking something. 

1.)  I called my employer 401k provider, Merrill Lynch, and they said that I am allowed to roll over after-tax monies to a Roth.  So, that's the first step, they will allow it while I am still employed with the company I work for.  It's my understanding that not all 401k plans allow this unless you separate from the employer? 

2.)  I max out my 401k and TIRA each year, and then I will start contributing after-tax money.  I don't currently have an HSA available to me.  So, this is the next logical step, yes?

3.) So, I've already contributed the $5500 IRA to my TIRA at this point.  Now, I just roll the after-tax 401k money over into my Roth and it allows me to exceed the maximum amount for the year, because it's a rollover?   This seems too simple lol? 

4.)  I'll be contributing this money throughout the year as a percentage of my income.  So, how often do I roll the money over?  Because, any interest earned in the 401k while it sits will be taxable, correct?
« Last Edit: January 23, 2017, 07:05:22 PM by beastykato »

seattlecyclone

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #1 on: January 23, 2017, 05:31:51 PM »
Ok, so I've read about the backdoor Roth stuff and I'm gonna start trying it this year.  I've read so much that it gets kinda confusing having not went through the process before.  So, just please help me out and make sure I'm not overlooking something. 

1.)  I called my employer 401k provider, Merrill Lynch, and they said that I am allowed to roll over after-tax monies to a Roth.  So, that's the first step, they will allow it while I am still employed with the company I work for.  It's my understanding that not all 401k plans allow this unless you separate from the employer?

Yep, sounds like your plan will work for the mega backdoor Roth.

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2.)  I max out my 401k and TIRA each year, and then I will start contributing after-tax money.  I don't currently have an HSA available to me.  So, this is the next logical step yes?

Yes, after-tax contributions are a good next step after you max out all of the pre-tax options available to you.

Quote
3.) So, I've already contributed the $5500 IRA to my TIRA at this point.  Now I just roll the after-tax 401k money over into my Roth and it allows me to exceed the maximum amount for the year because it's a rollover?   This seems too simple lol? 

Yes it does, doesn't it? :-)

The key thing is that you're not exceeding the limits, not really. There's a $5,500 limit for IRAs. You're maxing that out. There's an $18,000 limit for pre-tax 401(k) contributions. You're maxing that out. There's a final, lesser-known $53,000 limit for the total amount contributed to a 401(k) between your own pre-tax/Roth contributions, your employer matching, and your after-tax contributions. Now you'll start to max this third limit out.

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4.)  I'll be contributing this money throughout the year as a percentage of my income.  So, how often do I roll the money over?  Because any interest earned in the 401k while it sits will be taxable correct?

Yes, any gains between contribution and conversion will be taxed at conversion time. Doing the conversion shortly after each paycheck would then lead to the lowest tax, but at the cost of whatever time you have to spend performing the transaction. If it's just a few clicks on a website you might as well do it every payday. If you have to call a person and mail in a form or something else that takes some time, you might decide that it's worth paying a few extra dollars of tax if it means you only need to go through that process once or twice per year.

beastykato

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #2 on: January 23, 2017, 05:40:49 PM »
Ok, thanks a bunch it sounds like I'm on the right track.  I clipped this off the IRS website: 

"Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?

No, you canít take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesnít change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:
pretax amounts to a traditional IRA or another eligible retirement plan, and
after-tax amounts to a Roth IRA. "

This is a little confusing to me?  I thought I was just rolling after-tax dollars.  According to this question and answer it seems like that's a no.

So, if I roll an after-tax amount of money say $1000, I must also roll a "proportional" amount of my pre-tax contributions to the TIRA as well?
« Last Edit: January 23, 2017, 06:33:59 PM by beastykato »

Brilliantine

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #3 on: January 23, 2017, 06:30:02 PM »
But you won't be doing a rollover. It will be a conversion.

beastykato

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #4 on: January 23, 2017, 06:38:55 PM »
Ok, so it really is just as simple as I said in my original thread. 

I'm just mixing up the terminology used apparently between "conversion" and "roll-over".

seattlecyclone

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #5 on: January 23, 2017, 09:16:38 PM »
Ok, thanks a bunch it sounds like I'm on the right track.  I clipped this off the IRS website: 

"Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?

No, you canít take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesnít change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:
pretax amounts to a traditional IRA or another eligible retirement plan, and
after-tax amounts to a Roth IRA. "

This is a little confusing to me?  I thought I was just rolling after-tax dollars.  According to this question and answer it seems like that's a no.

So, if I roll an after-tax amount of money say $1000, I must also roll a "proportional" amount of my pre-tax contributions to the TIRA as well?

This bit can be confusing. Many 401(k) plans are structured to track pre-tax contributions, Roth contributions, and after-tax contributions in separate sub-accounts. The pro-rata treatment only considers the sub-account that you're withdrawing from. So, for example, if you contributed $18k to your after-tax sub-account and it grew by $2k, that means your after-tax sub-account is now 90% after-tax funds and 10% pre-tax funds. If you were to withdraw only part of the $20k balance, 90% of that withdrawal would be considered after-tax principal, and the remaining 10% would be considered pre-tax earnings. You wouldn't be able to designate the entire withdrawal to be from the $18k of after-tax funds and leave the $2k of pre-tax funds behind.

beastykato

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #6 on: January 23, 2017, 09:37:22 PM »
Thanks very much!  That explanation makes much more sense.  It's only referring to the money in that "sub account"  of the 401k.  The way that I read it I thought it was referring to the entire 401k, including all of my previous pre-tax contributions. 

And if for some reason I did a partial withdraw it would have to maintain that 90/10 split that you used in your example.

I think I got it as long as I'm comprehending your explanation the right way.  Pretty simple, some of the IRS wording is difficult to follow though.

bada bing

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #7 on: January 24, 2017, 05:52:01 AM »
The after tax contributions are in a separate 401k subaccount along with the earnings of the after tax.
When you do a mega-backdoor, you roll out the entire subaccount; after tax + earnings *but* you
direct the funds to separate destinations. The after tax contributions go to a Roth IRA and the earnings
to a tIRA. No tax is due at the time of the roll out and the earnings become just more pre-tax tIRA
balance.

I'm sure Merrill Lynch CSR's have done it many times and know the drill. It will do you no good to
use the term "mega-backdoor" when you request the roll over, avoid referring to it using that term.
Ask for an "In plan rollover of the aftertax contributions". They will have to roll out the entire sub
account, both contributions and earnings. The CSR will most likely know you probably want to
segregate the contributions from the earnings, but be sure to instruct them to do that.

One issue that it sounds like doesn't apply to your situation is the new tIRA you create is pretax
funds that would have to be included in tax calculations of a "regular" backdoor Roth conversion. That
is where you convert aftertax tIRA contributions to Roth - after tax because your income is too high
to get the deduction for a tIRA contribution.  For people that wish to do both "regular" and "mega"
backdoor Roth conversion, it is advantageous to shield any pre-tax money in tIRA's from pro-rata
tax calculations. One way to this is to roll all pretax tIRA money into a 401K, including the tIRA
created by the mega backdoor.

I personally do both mega and regular backdoor conversions. Because of the extra step to roll the
earnings back into the 401K, I only do the Mega conversion once a year. If pro-rata taxes on a regular
backdoor Roth are an issue for your situation, the important date is Dec 31, the last day of the year. That
is the date you have to report the total balances in all iIRA's and the tax status of the funds, so that is the
date you want your pretax tIRA balance to be zero.
« Last Edit: January 24, 2017, 05:55:20 AM by bada bing »

beastykato

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #8 on: January 24, 2017, 01:27:39 PM »
Yeah, i typically never make more than 100k/year.  So, i dont have to worry about anything except the TIRA phase out.  Because of my income that brings me to another question.

Should I just use my Roth IRA as my emergency fund?  Instead of holding my money in taxable accounts that require me to pay taxes on all my interest, I could funnel all my money into the Roth and never pay tax on the earnings of my emergency money.  Then of course all this contributed after-tax money is still liquid in the event I ever did need to utilize it.

Aggie1999

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #9 on: January 24, 2017, 01:48:18 PM »
So when one rolls over/converts after tax contributions from a 401k to an Roth IRA there also needs to be a traditional IRA somewhere that the earnings on the after tax contributions can go into. Is that correct?

beastykato

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #10 on: January 24, 2017, 02:31:05 PM »
That seems like one option to my understanding.   

I'm very new to this to take it all with a grain of salt until someone confirms I'm correct. 

I believe you can also choose to pay tax the interest that was accumulated and put that in the Roth IRA as well, instead of putting it into the TIRA.

seattlecyclone

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #11 on: January 24, 2017, 03:11:29 PM »
So when one rolls over/converts after tax contributions from a 401k to an Roth IRA there also needs to be a traditional IRA somewhere that the earnings on the after tax contributions can go into. Is that correct?

No, that is not a requirement. You may move the earnings to either a traditional or a Roth IRA. If you choose Roth you have to pay taxes on the earnings this year, but the earnings amount is typically pretty negligible if you don't leave the money in the after-tax 401(k) for very long. I choose this option because it's a small cost for much less hassle, especially since I also do the non-mega backdoor Roth IRA and would then need to perform a separate step of rolling the earnings back into a pre-tax 401(k).

therethere

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #12 on: January 24, 2017, 03:20:34 PM »
Posting to follow... I started contributing to After Tax 401k mid-last year and have procrastinated on figuring out the detailed process to get it into a Roth.

To clarify, would it make any sense to make a separate Roth IRA made only for these After Tax 401k contributions? I'm thinking of it being nice having a hard line, as I plan to utilize my regular Roth IRA as downpayment fund and might need to follow the 5-year rule.

seattlecyclone

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #13 on: January 24, 2017, 04:40:56 PM »
Posting to follow... I started contributing to After Tax 401k mid-last year and have procrastinated on figuring out the detailed process to get it into a Roth.

To clarify, would it make any sense to make a separate Roth IRA made only for these After Tax 401k contributions? I'm thinking of it being nice having a hard line, as I plan to utilize my regular Roth IRA as downpayment fund and might need to follow the 5-year rule.

It really doesn't matter whether you have one Roth IRA account or a dozen. The IRS considers it all to be one big pile of money when calculating the tax due (if any) on an early withdrawal. Keep your records on when you contributed directly to the IRA vs. conversions from traditional so that you can report it correctly when you make your first withdrawal.

beastykato

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #14 on: January 24, 2017, 08:48:07 PM »
I read, while researching this topic, that I can also roll over all of my company contributions and matches in a similar fashion?

Are there additional rules for the company added funds, or do I just pull them out and transfer to the Roth IRA right along with my after-tax contributions?

seattlecyclone

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Re: 401k After Tax Rollover (Make Sure I'm Understanding This)
« Reply #15 on: January 24, 2017, 09:30:59 PM »
Company matches are pre-tax, so you would have to pay tax on them right away if you move them to a Roth IRA. Probably not the best idea. Furthermore you probably can't make this transfer from your current employer's plan until you leave your job.