Author Topic: Mega Backdoor Roth (First Time)  (Read 3522 times)

Gatzbie

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Mega Backdoor Roth (First Time)
« on: June 05, 2019, 06:44:42 PM »
Hello all!

2019 is my first year of having a full-time job. I am adding 401k contributions & Mega Backdoor Roth to my investment order & wanted to make sure I am doing everything right.

My investment order:

0.) Emergency Fund established
1.) 401k pre-tax up to company match (FSKAX)
2.) Traditional IRA (6k)  —> with my salary of 49k, this is fully-deductible
3.) Max out rest of 401k pre-tax (19k total) (FSKAX)
4.) Mega Backdoor Roth (see below)

With my Fidelity 401k, I will be utilizing the  “Automatic After-tax Roth In-Plan Conversion” feature, activated by calling them. With this feature, After-tax Contributions are automatically converted to Roth contributions on a daily basis (i.e., before those contributions accrue any taxable earnings). This feature means no rollover fees, limits, check/letter writing, or need to roll over after-tax earnings into a Traditional IRA as none will exist.

I will call Fidelity to enable this feature then adjust my 401k contribution % on the Fidelity website to begin my after-tax contributions which will now be automatically rolled over to my Fidelity Roth IRA (I believe having this all under one roof will keep the process simple).

Overall: With this feature enabled & having the process done under one roof (Fidelity). I believe I have all things covered to be ready to go once I am ready to start contributing after-tax dollars.

Anything seem missing or things I should maybe look out for so I don’t botch anything?

Would appreciate any input. Thank you very very very much!!!!!!!!
« Last Edit: June 05, 2019, 08:58:40 PM by Gatzbie »

Paul der Krake

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Re: Mega Backdoor Roth (First Time)
« Reply #1 on: June 05, 2019, 07:44:01 PM »
You've got it. Have fun!

seattlecyclone

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Re: Mega Backdoor Roth (First Time)
« Reply #2 on: June 05, 2019, 08:46:51 PM »
Sounds like a good plan! Impressive that you're able to make it all the way down the list to the Mega Backdoor with a $49k salary. Good work!

2.) Traditional Roth (6k)  —> with my salary of 49k, this is fully-deductible

Minor nitpick: no such thing as a "traditional Roth." Traditional and Roth are the two flavors of IRAs; using the two words together is contradictory. I think you mean "traditional IRA."

Gatzbie

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Re: Mega Backdoor Roth (First Time)
« Reply #3 on: June 05, 2019, 09:00:00 PM »
Sounds like a good plan! Impressive that you're able to make it all the way down the list to the Mega Backdoor with a $49k salary. Good work!

2.) Traditional Roth (6k)  —> with my salary of 49k, this is fully-deductible

Minor nitpick: no such thing as a "traditional Roth." Traditional and Roth are the two flavors of IRAs; using the two words together is contradictory. I think you mean "traditional IRA."

Typo corrected. Yes this is what I meant ;)

Financial.Velociraptor

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Re: Mega Backdoor Roth (First Time)
« Reply #4 on: June 06, 2019, 01:46:43 PM »
Is anyone else amazed that a thread titled "Mega Backdoor Roth (First Time)" doesn't trigger Google's "safe search" protection?

Aggie1999

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Re: Mega Backdoor Roth (First Time)
« Reply #5 on: June 06, 2019, 02:09:14 PM »
Hello all!

2019 is my first year of having a full-time job. I am adding 401k contributions & Mega Backdoor Roth to my investment order & wanted to make sure I am doing everything right.

My investment order:

0.) Emergency Fund established
1.) 401k pre-tax up to company match (FSKAX)
2.) Traditional IRA (6k)  —> with my salary of 49k, this is fully-deductible
3.) Max out rest of 401k pre-tax (19k total) (FSKAX)
4.) Mega Backdoor Roth (see below)

With my Fidelity 401k, I will be utilizing the  “Automatic After-tax Roth In-Plan Conversion” feature, activated by calling them. With this feature, After-tax Contributions are automatically converted to Roth contributions on a daily basis (i.e., before those contributions accrue any taxable earnings). This feature means no rollover fees, limits, check/letter writing, or need to roll over after-tax earnings into a Traditional IRA as none will exist.

I will call Fidelity to enable this feature then adjust my 401k contribution % on the Fidelity website to begin my after-tax contributions which will now be automatically rolled over to my Fidelity Roth IRA (I believe having this all under one roof will keep the process simple).

Overall: With this feature enabled & having the process done under one roof (Fidelity). I believe I have all things covered to be ready to go once I am ready to start contributing after-tax dollars.

Anything seem missing or things I should maybe look out for so I don’t botch anything?

Would appreciate any input. Thank you very very very much!!!!!!!!

You sure they are rolling the 401k after tax contributions to a Roth IRA? If I had to guess what they mean by "Automatic After-tax Roth In-Plan Conversion" is they will move the after tax funds into the Roth 401k bucket. No real disadvantage to this that I know of.

BTW, that is awesome your plan has this. My 401k plan only allows after tax bucket withdraws via a check sent to me over snail mail. Then I have to mail the check to my IRA provider.

Telecaster

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Re: Mega Backdoor Roth (First Time)
« Reply #6 on: June 06, 2019, 03:02:52 PM »
With my Fidelity 401k, I will be utilizing the  “Automatic After-tax Roth In-Plan Conversion” feature, activated by calling them. With this feature, After-tax Contributions are automatically converted to Roth contributions on a daily basis (i.e., before those contributions accrue any taxable earnings). This feature means no rollover fees, limits, check/letter writing, or need to roll over after-tax earnings into a Traditional IRA as none will exist.

I will call Fidelity to enable this feature then adjust my 401k contribution % on the Fidelity website to begin my after-tax contributions which will now be automatically rolled over to my Fidelity Roth IRA (I believe having this all under one roof will keep the process simple).

Is your 401(k) through your employer?  This sounds amazing.   

MDM

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Re: Mega Backdoor Roth (First Time)
« Reply #7 on: June 06, 2019, 06:45:15 PM »
2019 is my first year of having a full-time job.

1.) 401k pre-tax up to company match (FSKAX)
2.) Traditional IRA (6k)  —> with my salary of 49k, this is fully-deductible
3.) Max out rest of 401k pre-tax (19k total) (FSKAX)
4.) Mega Backdoor Roth (see below)

Anything seem missing or things I should maybe look out for so I don’t botch anything?
At $49K gross, you will be saving 12% (13% cumulative when you just reach the first saver's credit tier) on your traditional contributions.

Depending on what you expect for your income trajectory in your career, you might want to put 100% of 2019 contributions into Roth.

Paul der Krake

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Re: Mega Backdoor Roth (First Time)
« Reply #8 on: June 06, 2019, 07:31:13 PM »
MDM makes a good point, however to determine exactly how much to put in each bucket we'd need to know how much OP intends on living on, and any state taxes that may tilt the balance further towards the traditional bucket.

2019 is a bit of a special case since it's a partial year, but for 2020 onwards, I'd try to put as much in traditional up until the point where total income taxes are close to 0, then the rest in roth, then whatever is leftover in after-tax.

Gatzbie

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Re: Mega Backdoor Roth (First Time)
« Reply #9 on: June 07, 2019, 10:38:43 PM »
Is anyone else amazed that a thread titled "Mega Backdoor Roth (First Time)" doesn't trigger Google's "safe search" protection?
Hahaha.

You sure they are rolling the 401k after tax contributions to a Roth IRA? If I had to guess what they mean by "Automatic After-tax Roth In-Plan Conversion" is they will move the after tax funds into the Roth 401k bucket. No real disadvantage to this that I know of.
Yes, I have called & confirmed with Fidelity!

Is your 401(k) through your employer?  This sounds amazing.   
It is. I love that its self directed too so we can choose our own investments instead of relying not he not-so-good pre-picked ones. Loving it & want to utilize this as much as I can!

At $49K gross, you will be saving 12% (13% cumulative when you just reach the first saver's credit tier) on your traditional contributions.

Depending on what you expect for your income trajectory in your career, you might want to put 100% of 2019 contributions into Roth.
Interesting, I did not know about the savers credit. Making me rethink on where IRA contributions are going. With annual raises of 3%, my 5-year pay would be:

2020: $50,614
2021: $52,132
2022: $53,696
2023: $55,307
2024: $56,966

MDM makes a good point, however to determine exactly how much to put in each bucket we'd need to know how much OP intends on living on, and any state taxes that may tilt the balance further towards the traditional bucket.

2019 is a bit of a special case since it's a partial year, but for 2020 onwards, I'd try to put as much in traditional up until the point where total income taxes are close to 0, then the rest in roth, then whatever is leftover in after-tax.

Sorry Paul, should of explained better. I started July 2018. This year, 2019, will be my first full year of full-time employment at 49k salary. I goofed last year & did Traditional Contribution when I should have done Roth IRA due to my low Income in this partial 2018 year. Looking to learn from that

Income tax in Nebraska *looking at my 2018 return* They took Federal AGI - $6,750 standard deduction & charge income tax on the remaining:

2.46%: 0-$3,150
3.51%: $3,151-$18,880
5.01%: $18,880- $30,420

Expenses are minimal as I am living at home this year. Will change when I move out 1-2 years.
« Last Edit: June 07, 2019, 10:40:42 PM by Gatzbie »

MDM

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Re: Mega Backdoor Roth (First Time)
« Reply #10 on: June 07, 2019, 11:00:22 PM »
At $49K gross, you will be saving 12% (13% cumulative when you just reach the first saver's credit tier) on your traditional contributions.

Depending on what you expect for your income trajectory in your career, you might want to put 100% of 2019 contributions into Roth.
Interesting, I did not know about the savers credit. Making me rethink on where IRA contributions are going. With annual raises of 3%, my 5-year pay would be:

2020: $50,614
2021: $52,132
2022: $53,696
2023: $55,307
2024: $56,966

MDM makes a good point, however to determine exactly how much to put in each bucket we'd need to know how much OP intends on living on, and any state taxes that may tilt the balance further towards the traditional bucket.

2019 is a bit of a special case since it's a partial year, but for 2020 onwards, I'd try to put as much in traditional up until the point where total income taxes are close to 0, then the rest in roth, then whatever is leftover in after-tax.

Sorry Paul, should of explained better. I started July 2018. This year, 2019, will be my first full year of full-time employment at 49k salary. I goofed last year & did Traditional Contribution when I should have done Roth IRA due to my low Income in this partial 2018 year. Looking to learn from that
Now that you know about the saver's credit: were you eligible but did not take it in 2018?

You can still change your mind about that 2018 contribution.  See IRA recharacterization - Bogleheads.

Saving 22% for you seems a clear indication to use traditional.  Saving 12% is less clear.  You might go through the Investment Order post and do your own back-of-the-envelope projections of your withdrawal tax rates.

Gatzbie

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Re: Mega Backdoor Roth (First Time)
« Reply #11 on: June 07, 2019, 11:17:25 PM »
Now that you know about the saver's credit: were you eligible but did not take it in 2018?

You can still change your mind about that 2018 contribution.  See IRA recharacterization - Bogleheads.

Saving 22% for you seems a clear indication to use traditional.  Saving 12% is less clear.  You might go through the Investment Order post and do your own back-of-the-envelope projections of your withdrawal tax rates.


1.) My AGI for 2018 was $10,184. I owed $0 for Federal or state taxes after the standard deductions & state exemption credit was applied. Because of this, I don't think the savers credit could of been utilized as its unrefundable.

2.) The recharacterization would be amazing!!!! I am looking into this immediately. Should have no problem getting done before October 15th.

3.) Yes I just realized this third thing is something I need to look into more here that I had previously thought. Thank you so much for your input!!!!!!!

Gatzbie

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Re: Mega Backdoor Roth (First Time)
« Reply #12 on: June 28, 2019, 07:08:12 PM »
Saving 22% for you seems a clear indication to use traditional.  Saving 12% is less clear.  You might go through the Investment Order post and do your own back-of-the-envelope projections of your withdrawal tax rates.

After doing withdrawal rate calculations, I ended up at 10%. This would lean towards using traditional as my retirement tax rate would be lower BUT….

I feel some things in my calculation/assumptions are off and would really like to double check here. from the investment order list, I am applying only steps 2 & 3 as no guaranteed income & not so sure on SS.

Newb Calculations:

Assuming I don’t contribute 6k to traditional IRA and instead Roth IRA

Step 2:) 
FV of current Pre-tax 401k Balance: $33,897
17 year work period
3% return rate
19k yearly contribution (401k limit)
PMT made at end:
FV:$469,645.50  x .04 annual withdraw = $18,785 ordinary income 

Step 3:)
FV of current Taxable Account Balance: $42,110
17 year work period
3% return rate
15k yearly contribution
PMT made at end:
FV:$396,025.23  x .02 qualified dividends = $7,920 qualified dividends <—tax free under 2018 changes where taxable income under $38,600 single & $77,200 MFJ = tax free. My taxable income seems to be whats above —$18,785

$18,779 - 12,000 standard deduction = $6,770 taxable income —> 10% withdrawal rate?

Not sure why but feels like I could be missing something here…

MDM

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Re: Mega Backdoor Roth (First Time)
« Reply #13 on: June 28, 2019, 07:30:27 PM »
Step 2:) 
FV of current Pre-tax 401k Balance: $33,897
17 year work period
3% return rate
19k yearly contribution (401k limit)
PMT made at end:
FV:$469,645.50  x .04 annual withdraw = $18,785 ordinary income 
...
Not sure why but feels like I could be missing something here…
Redo it without the $19K/yr.  By including that, you are assuming traditional contributions will be made.  Not so bad for the result you reached, but if it had suggested Roth....

 

Wow, a phone plan for fifteen bucks!