Author Topic: Mega Backdoor Roth -- Income limitations?  (Read 4098 times)

Trifele

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Mega Backdoor Roth -- Income limitations?
« on: January 06, 2017, 04:41:30 PM »
Hello investment experts!

I have a very good problem, which is that I am maxing out all pretax space available to me (457, 401k, HSA). I don't think I can deduct any IRA contributions because my income is too high. 

I have been reading about the Mega Backdoor Roth.  I understand that my 401k plan has to have certain features for that to work.  Not sure yet if it does.  But my first question is -- are there income limits on who can do a Mega Backdoor Roth?  Are those the same income limits that prohibit the IRA deduction?  The articles I've read don't seem to answer this question.

Thanks for the info! 

« Last Edit: August 11, 2017, 02:19:57 PM by Trifele »

prognastat

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #1 on: January 06, 2017, 05:17:20 PM »
The Backdoor Roth Contributions do not count towards your IRA limit.

The way it works is if your work retirement plans offers non roth-ira after tax contributions and supports rollovers of these contributions you can roll them over to a Roth IRA which as a rollover instead of contribution does not count towards the Roth IRA limits.

seattlecyclone

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #2 on: January 06, 2017, 05:30:14 PM »
No income limits for the mega backdoor Roth.

Trifele

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #3 on: January 06, 2017, 07:51:40 PM »
Fantastic!   Thank you so much, both of you.  I will call the 401k administrator on Monday to see if the plan has those two features . . . I feel like this is too good to be true, though.  Like there must be something I am missing?? 


financiallypossible

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #4 on: January 09, 2017, 01:25:45 PM »
Fantastic!   Thank you so much, both of you.  I will call the 401k administrator on Monday to see if the plan has those two features . . . I feel like this is too good to be true, though.  Like there must be something I am missing??

I found this article helpful:
http://news.morningstar.com/articlenet/article.aspx?id=682209

The IRS has very specific rules on the rollover procedure.

If your employer & 401k administrator currently do not offer the after tax contribution option, then ask for it and convince your coworkers to ask for it too!

robartsd

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #5 on: January 09, 2017, 01:37:11 PM »
You probably already know about ordinary backdoor Roth IRA in which you make non-deductible traditional IRA contributions then immediately rollover from traditional to Roth IRA. This is subject to IRA contribution limits and is tainted by any pre-tax funds you have in traditional IRAs (you're forced to roll over pre-tax and after-tax funds proportional to your aggregate pre-tax and after-tax IRA balances). Mega backdoor Roth has the advantage of contribution limits based on the employer sponsored plan (and leaves traditional IRA funds from prior your deductible contributions alone).

Trifele

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #6 on: January 10, 2017, 02:57:42 AM »
Update -- I talked to the plan administrator yesterday and struck out at Step 1. No after-tax contributions allowed.  Too bad -- it would have been fun to try this.   I read more about it, including all the articles on Mad Fientist.  I'm gathering that few plans have the two required features, maybe only 20% of the plans out there, or fewer?  Those are some lucky people who have it, though. 

I like the idea of trying to get the plan to change, except (1) Employer is gigantic (probably a heavy lift to get anything to change) and (2) I only have two years left to FIRE. I think I'll just ride it out as is, and put the extra into taxable accounts. Like I said, definitely a good problem to have. :)  And I'm lucky in a different way.  I have both a 401 and a 457, so I can double up on the contributions.  And I turn 50 this year, so my limits just bumped up to $24k per plan.  Happy birthday to me!

Thanks, Robart!  Yes, I had read about the regular backdoor Roth, but have been too chicken to try it because of the effect on my existing pre-tax IRA funds. 

Last question -- part of my income is a consulting side hustle for which I'm paid as a contractor.   Does that fact open up any doors for me to get into either pre-tax or Roth space?  I'm assuming I am still income-limited, but thought I'd ask.     

Thanks everyone!  Hope you have a good day.

   
« Last Edit: January 10, 2017, 03:02:44 AM by Trifele »

robartsd

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #7 on: January 10, 2017, 02:26:27 PM »
Thanks, Robart!  Yes, I had read about the regular backdoor Roth, but have been too chicken to try it because of the effect on my existing pre-tax IRA funds. 
You might find out if you could transfer your traditional IRA funds into the employer sponsored account to clear the way for backdoor Roth IRA contributions.

You can probably shelter a significant portion of your self-employment income regardless of total income. I'd research Retirement Plans for Self Employed People then talk to an accountant about setting something up. I think you can shelter all of your self-employment income up to $12,875 ($12,500 + 3% match) in a SIMPLE IRA or 25% of your self-employment income up to $54,000 in a SEP or self-employed 401k.

Trifele

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #8 on: January 10, 2017, 03:27:54 PM »
Thank you!  I will look into that.

bada bing

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #9 on: January 11, 2017, 06:50:28 AM »
Open a solo 401k  for your side hustle and then roll your deductible IRA(s) into it. That
shields the pretax IRA money from being added into the pro-rata calculations for a backdoor
Roth conversion. You could then do $6500 per year in backdoor Roth contributions without
tax implications. A solo 401k will also have the "employer" portion of the annual contribution
space available even if you use your $24k personal 401k contribution limit in your employer's plan.

Trifele

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #10 on: January 11, 2017, 07:32:31 AM »
Great!  So the "employer" portion of the solo 401k contributions would be $54,000 - $24,000 - $4800 (employer contribution) = $25,200?  You mean I can put that amount into the solo account, and I can take a deduction for that??

Also -- I have been saying "401k" here in the thread . . . but it is actually a 403.  Does that make any difference for this? 

Thank you!!
« Last Edit: January 11, 2017, 07:36:21 AM by Trifele »

bada bing

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #11 on: January 11, 2017, 04:30:40 PM »
Great!  So the "employer" portion of the solo 401k contributions would be $54,000 - $24,000 - $4800 (employer contribution) = $25,200?  You mean I can put that amount into the solo account, and I can take a deduction for that??

Also -- I have been saying "401k" here in the thread . . . but it is actually a 403.  Does that make any difference for this? 

Thank you!!

The "employer" portion of solo (individual) 401K contributions are typically capped at 20% of your net self employed income. Also called "profit sharing".
The $54K figure you quoted I'm guessing is the all sources contribution limit for a 401K account, which doesn't include the catch up $6K allowed = total $60K.
That $54K ($60K) limit isn't a global limitation. The $18K ($24K) personal contribution deductible limit is a global limit.

I have maybe a similar situation. I have a regular wage job where I max out my 401K account: $59K this year including the employer match.
I also have a small side gig, sole proprietor with ~$15K schedule C income. I have an individual 401K account opened at Schwab as a retirement
account for my side gig. It has a couple IRA's I rolled into it to facilitate backdoor Roth conversions and I usually put ~$1K per year of "profit sharing"
into it from my side business, but I have never made an employee contribution to it. I always use up my full deductible limit on my regular job 401K
contributions.

Do your own due diligence and don't rely on any internet posts. There is a small bit of paperwork hassle initially opening a Solo 401K and once
the balance exceeds $250K there is an annual reporting requirement. There are easier small business retirement plans and also ones that allow
more room for contributions. I settled on the individual 401K because it met my level for sheltering income and facilitating backdoor Roths. Your
needs might be different.

Trifele

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #12 on: January 12, 2017, 04:00:36 AM »
Thanks, Bada Bing! Understood.  More homework to do. 

robartsd

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Re: Mega Backdoor Roth -- Income limitations?
« Reply #13 on: January 17, 2017, 09:25:52 AM »
The "employer" portion of solo (individual) 401K contributions are typically capped at 20% of your net self employed income. Also called "profit sharing".
My understanding is that the cap for a Solo 401K is 25% of the "earned income" your business pays you (there is also a fixed dollar cap that you cannot exceed). Employee FICA taxes come from the "earned income", but employer FICA taxes are paid from the business. Solo 401K limit of 20% of earnings is approximate and based on the assumption that all your compensation from your side hustle business will be either "earned income" or Solo 401K contributions.