Author Topic: Mega Backdoor questions...  (Read 4585 times)

bigstack

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Mega Backdoor questions...
« on: November 04, 2015, 01:51:20 PM »
so ... I was intrigued by this in another thread and read up on some of it ... then went to my "plan summary" that my employer puts out via fidelity...

this is what i found :
Quote
Plan Contributions
The contributions discussed in this section are determined based on the definition of “Compensation”
described in the “Glossary” section.
You may make Pre-Tax Contributions and/or Roth After-Tax Contributions to the Plan. Your
Compensation will be reduced each pay period by the whole percentage(s) you elect. If you elect to
contribute on both a Pre-Tax and Roth After-Tax basis, your Pre-Tax Contribution amount will be withheld
first. Rules regarding how and when you may elect to contribute are located in the “Eligibility” and
“Enrollment” sections.
The Company will make a Matching Contribution to your account equal to 100% of your Pre-Tax and/or
Roth After-Tax Contributions, not to exceed 5% of your Compensation.
In addition to the contributions identified above, you or the Company may make additional contributions to
the Plan.
Refer to the “Your Contributions” and “Company Contributions” sections for information about
additional contributions that may be made and whether you are eligible for those contributions.

so that looked promising cause it mentioned additional contributions(i bolded that)...

but when i go to the "your contributions" section... it does not mention making additional contributions... it talks about the regular 401k and roth 401k contributions...and then talks about contributions by rolling over existing 401k from previous employers etc...


So does that mean I am out of luck ?  or that i just have to ask the right person? I online chatted with a representative today and they didnt even know what I was talking about...

Also I talked to another friend that mentioned that the loophole was getting closed anyway so dont worry about it....

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4982
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: Mega Backdoor questions...
« Reply #1 on: November 04, 2015, 02:09:59 PM »
Every plan is different; the best you can do is ask around with your company's HR and 401(k) administrator to see if anyone knows what you're talking about.

The rumors of this loophole being closed are greatly exaggerated. President Obama put a recommendation to ban the conversion of traditional after-tax retirement accounts to Roth as part of his budget proposal, but Congress has not passed any legislation to do so, and the mere fact that President Obama recommended it is probably enough to prevent its passage through the House.

Vilgan

  • Bristles
  • ***
  • Posts: 452
  • Location: Seattle, WA
Re: Mega Backdoor questions...
« Reply #2 on: November 04, 2015, 02:17:10 PM »
Loophole getting closed was proposed by Obama but hasn't actually made it into a law anywhere.

To know if you can make traditional after-tax contributions to the plan, go to the contributions tab where you'd select a % of income for Roth and/or pretax. If mega backdoor roth is set up, there will be a 3rd line for after-tax (not mentioning roth).

Most (90% as of this Spring) Fidelity plans do not have the traditional after-tax option turned on. When I first spoke to Fidelity people about it, I had to go way up the food chain to hit people who knew what I was talking about. We eventually set it up for my employer, but it took a while. Most of the effort was plowing through the lack of awareness of our direct Fidelity rep and getting someone who knew what I was talking about and also 401k boards tend to move really slowly.

Unfortunately, shortly after this went online and I was able to leverage this tactic - I left the company :P Getting it into a self employed 401k is a whole nother ball of wax and is less pressing due to profit sharing.

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4608
  • Age: 11
  • Location: USA
Re: Mega Backdoor questions...
« Reply #3 on: November 04, 2015, 02:37:01 PM »
Protip: you can ask to speak to the same Fideliy rep for particular transactions. When I did my first mega backdoor roth rollover, the rep I spoke to wasn't giving me a super confident vibe, so I asked nicely if I could speak with the previous rep I had run hypotheticals by a few weeks before. They are very happy to look up your call history and either transfer you to the rep of your liking, or have him call back if he's busy.

I intend on going through "my guy" every time from now on.

President Obama put a recommendation to ban the conversion of traditional after-tax retirement accounts to Roth as part of his budget proposal, but Congress has not passed any legislation to do so, and the mere fact that President Obama recommended it is probably enough to prevent its passage through the House.
Pfew! Thanks, Obama! I wonder how many people are taking advantage of this for it to even appear on the President's advisors' radar...

Also I talked to another friend that mentioned that the loophole was getting closed anyway so dont worry about it....
Where do you find friends that even know about stuff like this? Most of my friends don't even look at their 401(k) statements, let alone look for loopholes in them.

bigstack

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: Mega Backdoor questions...
« Reply #4 on: November 04, 2015, 02:43:10 PM »

To know if you can make traditional after-tax contributions to the plan, go to the contributions tab where you'd select a % of income for Roth and/or pretax. If mega backdoor roth is set up, there will be a 3rd line for after-tax (not mentioning roth).


:( ... no such luck... only 401k and roth 401k lines (fidelity website)
is there any reason that a company would not allow this? ... seems like it does not impact them/cost them anything ...

therethere

  • Pencil Stache
  • ****
  • Posts: 732
Re: Mega Backdoor questions...
« Reply #5 on: November 04, 2015, 02:50:20 PM »
Hum... My Vanguard Account has a "Roth IRA Brokerage" apparently opened by my employer with $0. Is there any benefit to using this one other than my "Roth IRA" also with Vanguard? I don't believe the contributions come out of your paycheck. I'm thinking maybe they automatically set it up to encourage saving in an IRA also. But its called brokerage....

bigstack

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: Mega Backdoor questions...
« Reply #6 on: November 04, 2015, 02:53:41 PM »


Also I talked to another friend that mentioned that the loophole was getting closed anyway so dont worry about it....
Where do you find friends that even know about stuff like this? Most of my friends don't even look at their 401(k) statements, let alone look for loopholes in them.

he is a rarity.... but he was not for sure about things cause he has never been at a company that allowed it... thus never had experience doing it.

most of the time when i talk to people they just look at me with blank faces... what do you mean you max out your 401k? they often think maxing it out is doing the min to get the max employer contribution.

bigstack

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: Mega Backdoor questions...
« Reply #7 on: November 04, 2015, 02:55:10 PM »
Hum... My Vanguard Account has a "Roth IRA Brokerage" apparently opened by my employer with $0. Is there any benefit to using this one other than my "Roth IRA" also with Vanguard? I don't believe the contributions come out of your paycheck. I'm thinking maybe they automatically set it up to encourage saving in an IRA also. But its called brokerage....

might have different fee schedules/terms?

bigstack

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: Mega Backdoor questions...
« Reply #8 on: November 04, 2015, 02:56:45 PM »
BTW guys... thanks for the help in quickly answering those questions...

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4608
  • Age: 11
  • Location: USA
Re: Mega Backdoor questions...
« Reply #9 on: November 04, 2015, 03:19:46 PM »
In case this helps someone make sense of their Fidelity plan, you should be looking for contribution options that look like this:


Vilgan

  • Bristles
  • ***
  • Posts: 452
  • Location: Seattle, WA
Re: Mega Backdoor questions...
« Reply #10 on: November 04, 2015, 03:59:08 PM »

To know if you can make traditional after-tax contributions to the plan, go to the contributions tab where you'd select a % of income for Roth and/or pretax. If mega backdoor roth is set up, there will be a 3rd line for after-tax (not mentioning roth).


:( ... no such luck... only 401k and roth 401k lines (fidelity website)
is there any reason that a company would not allow this? ... seems like it does not impact them/cost them anything ...

There are a few reasons, and #1 is pretty legit:

1) Concerns about passing ACP testing. Any company that is a bit close on their testing is not going to consider enabling traditional after-tax which is necessary for the mega backdoor. Typically only high earners are going to take advantage of it and passing the ACP test can already be a problem for some companies such that they don't want to add to their problems. When I was talking to the Fidelity expert on this he said most demand was coming from Silicon Valley, I assume at least part of that is due to the high salaries there.
2) Awareness and concern on this is very low. I would talk to a variety of people making 250k+ salary and they'd be blown away that someone could save 18k let alone be interested in ways to save beyond that.
3) Its a fairly new concept

Many 401k committees struggle with basic things and just getting decent index funds can be a challenge. If this is really important to you, you'll want to interact directly with your 401k committee (and maybe ask to join) in order to see forward progress.
« Last Edit: November 04, 2015, 04:02:40 PM by Vilgan »

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4982
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: Mega Backdoor questions...
« Reply #11 on: November 04, 2015, 06:24:20 PM »
President Obama put a recommendation to ban the conversion of traditional after-tax retirement accounts to Roth as part of his budget proposal, but Congress has not passed any legislation to do so, and the mere fact that President Obama recommended it is probably enough to prevent its passage through the House.
Pfew! Thanks, Obama! I wonder how many people are taking advantage of this for it to even appear on the President's advisors' radar...

Very few people are doing this, but the president employs a bunch of people to look at things and try to propose changes for various reasons.

You can see the projections for how this would affect the budget on Page 121 of the budget summary tables. You can see that it would have no effect the first year, because people would be paying tax on their salary and just investing it in taxable investments instead of their backdoor Roth accounts. As these balances that might have gone into backdoor Roth accounts grow, the amount of projected revenue grows, as people would be paying dividend and capital gains taxes on these sums. Eliminating backdoor Roth contributions is expected to bring in a grand total of $395 million over ten years. It's a completely insignificant amount for a government that spends about $3,500,000 million dollars each year.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3196
    • My Blog
Re: Mega Backdoor questions...
« Reply #12 on: November 04, 2015, 06:28:12 PM »
Hum... My Vanguard Account has a "Roth IRA Brokerage" apparently opened by my employer with $0. Is there any benefit to using this one other than my "Roth IRA" also with Vanguard? I don't believe the contributions come out of your paycheck. I'm thinking maybe they automatically set it up to encourage saving in an IRA also. But its called brokerage....

might have different fee schedules/terms?

The brokerage account is for stocks and ETFs.
The "regular" account is for Vanguard mutual funds.

This is true for tIRAs and taxable accounts at Vanguard as well.

bigstack

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: Mega Backdoor questions...
« Reply #13 on: November 09, 2015, 01:22:14 PM »
you know what is funny.... a couple of weeks ago... I didn't even realize that this existed ... now I am pissed that it doesn't apply to me cause of my company...

lol... I feel like a 3 year old. :)

mizchief

  • 5 O'Clock Shadow
  • *
  • Posts: 46
Re: Mega Backdoor questions...
« Reply #14 on: November 09, 2015, 02:03:53 PM »
I have been reading about these.  I thought the way it worked, though, was that you opened an IRA (perhaps at Fidelity) and put post-tax earnings in it, and then rolled it over into a Roth IRA (perhaps also at Fidelity). 

Limit is $5,500 per person (could be $11,000 with a spouse). The $5,500 would already be taxed but the earnings could grow tax-fee.   But are you saying that the Roth has to be set up at your employers?   

See these link:  http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html
http://whitecoatinvestor.com/backdoor-roth-ira-tutorial/

Am I confused?

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4982
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: Mega Backdoor questions...
« Reply #15 on: November 09, 2015, 02:27:33 PM »
I have been reading about these.  I thought the way it worked, though, was that you opened an IRA (perhaps at Fidelity) and put post-tax earnings in it, and then rolled it over into a Roth IRA (perhaps also at Fidelity). 

Limit is $5,500 per person (could be $11,000 with a spouse). The $5,500 would already be taxed but the earnings could grow tax-fee.   But are you saying that the Roth has to be set up at your employers?   

See these link:  http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html
http://whitecoatinvestor.com/backdoor-roth-ira-tutorial/

Am I confused?

You're thinking of the "regular" backdoor Roth IRA: make non-deductible contributions to a traditional IRA and convert the balance to a Roth IRA. No employer needed there.

What we're discussing is the "mega" backdoor Roth IRA: make non-deductible contributions to a traditional 401(k) and convert the balance to a Roth IRA. The word "mega" applies because the limit can be much higher ($53k - $18k pre-tax limit - employer match). Your employer needs to allow non-deductible 401(k) contributions for this to be an option.

mizchief

  • 5 O'Clock Shadow
  • *
  • Posts: 46
Re: Mega Backdoor questions...
« Reply #16 on: November 09, 2015, 02:37:47 PM »
Got it.  Thanks for the explanation!