Author Topic: Mega Backdoor Roth IRA  (Read 826 times)

aalferez

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Mega Backdoor Roth IRA
« on: February 07, 2019, 01:34:01 PM »
Hi fellow mustachians,

I'm in a spot where I am comfortable enough to start looking into investing/saving more money, and from the sticky thread about "Investment Order" from this forum, I see that my next step is the called: "Mega Backdoor Roth IRA"

I tried to find out the details about the process, found madfientist example (https://www.madfientist.com/after-tax-contributions/)
But I still have questions.

As I understand, I have to set up my employer 401K to, not only withdraw pretax, but also after tax.
My current setup (contributions) in my Vanguard account are:
     401(K) PRE-TAX BASIC -> 20%
     401(K) ROTH BASIC -> 10%


For the sake of the argument I will add exactly the values of my last paycheck (2 weeks)
-> Roth Rewards $348.00
-> Reward 401k  $696.00

And so far into this year:
Your contributions            Amount
401(K) PRE-TAX BASIC   $1,392.00
401(K) ROTH BASIC           $1,044.00
Total                                   $2,436.00
Employer contributions   Amount
401(K) MATCH                   $278.40
Total                                   $278.40


Now, I understand that the 19K limit is for 401K and ROTH, so my Roth contributions are taking a chunk of this amount, so I don't understand how this is going to let me put more than the 19K a year.

I also don't understand the next step which I guess is the most important one. Do I have to transfer the Roth contributions into a Roth IRA right away?

Please be super detailed in your comments, so I can follow.

Thank you



DeepEllumStache

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Re: Mega Backdoor Roth IRA
« Reply #1 on: February 07, 2019, 02:27:41 PM »
I have done the Mega Backdoor Roth for the past few years. I contribute to my 401k through payroll deduction, and the payroll system automatically shifts from pre tax to post tax contributions after crossing the $19k pretax limit. Once a year I call my MegaCorp's 401k provider (Fidelity) and they will shift the post tax amount over to my a separate Roth account that is not under my company's 401k plan (technically it could be executed within the same plan but that's not my preference), with any gains going to a separate regular IRA  to avoid triggering a tax bill. This shift happens once a year because the 401k provider charges $20 a transfer.

What it sounds like you are doing is using your pretax $19k space as both regular 401k and Roth contributions. That's not a MegaBackdoor Roth. You don't get the tax benefit on any of the first $19k that goes to your Roth.

Your 401k plan has to have 2 features for the backdoor strategy to be executed - it has to allow contributions after hitting the pre-tax $19k limit and it has to allow in plan rollovers. Do not assume that your plan automatically will qualify, these features are not as common as the article makes it appear. If the plan's online portal or documents are not obvious, then talk to your HR department or call your 401k provider.

Bird In Hand

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Re: Mega Backdoor Roth IRA
« Reply #2 on: February 08, 2019, 06:16:03 AM »
@aalferez the first step is to find out whether your employer's plan even has an after-tax provision that is separate from the Roth 401(k).  This is very important -- the MBD Roth is only possible if you can contribute to a non-Roth after-tax part of your employer's plan.  You'll have to review your benefits information, 401(k) plan documents, or call HR to find out this information.

FYI these after-tax provisions are not super common.  I wouldn't call them "rare", but in my experience the majority of plans do not support (non-Roth) after-tax contributions.  So don't be too surprised if the MBD Roth is not available to you.

An aside: IMO, in most cases it probably makes sense to max out the pre-tax portion of your 401(k) before thinking about MBD Roth.  For that matter, I wouldn't bother with the hassle of a MBD Roth unless I had already maxed out my regular Roth IRA for the year.

Stamag

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Re: Mega Backdoor Roth IRA
« Reply #3 on: February 09, 2019, 01:05:22 PM »
It sounds like you're saying that you're on track to max out the $19,000 401k / Roth 401k limit this year and you want to save more in a tax advantaged way.  The next logical step would be to simply put money in a personal Traditional IRA (if you're below the deductible limit) or Roth IRA which a yearly limit of $6,000.  This is MBD Roth minus 1 step (front door roth if you will).  This is as simple as opening an IRA on Vanguard.com, then transferring your earnings from your bank.  If it's a Traditional IRA, deduct those earnings from your taxes, if it's a Roth IRA, you're done.  If you're married your spouse can also open an IRA and contribute. 

The reasons you would want to use mega-backdoor roth:
You want to save more than this $25,000 in a retirement fund
Your employer offers after-tax non-roth 401k contributions after you reach the limit of $19,000 (like @Bird In Hand mentions)
Your employer offers "in-service distributions" of after-tax non-roth 401k contributions

I found this video helpful to understand Mega backdoor roth and also tax advantaged accounts in general: https://youtu.be/f64xPe_mLz8

Another thing to keep in mind that your Roth IRA contributions (mega-backdoor or not) have an added benefit that you can withdraw the principal (not the gains) 5 years after making them.

This is what I have found from researching the past couple months but as my profile shows I am junior mustachian so I defer to the more experienced people on this forum.  Hope that helps!

aalferez

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Re: Mega Backdoor Roth IRA
« Reply #4 on: February 12, 2019, 03:52:52 PM »
So I spend some time calling vanguard in regards to the specific plan sponsored by my company.
Seems like I can only contribute up to that yearly max of 19k for 2019 (Pre or After tax)
I always max my Roth IRA too and my HSA. I was just looking into ways of putting more money into savings before I go to the personal investment route.