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Learning, Sharing, and Teaching => Investor Alley => Topic started by: PJC74 on February 20, 2018, 12:13:11 PM

Title: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: PJC74 on February 20, 2018, 12:13:11 PM
Hey guys,

I've heard about the backdoor Roth mentioned on here. MY 401k contribution options look like this:
 
Contribution Amount
 
PRE-TAX
Current Election    %
Desired Election   %


(0% to 50% in increments of 1%)
 
ROTH
Current Election   0 %
Desired Election   0%

(0% to 50% in increments of 1%)

Pre-tax and Roth Subtotal
Current Election   %
Desired Election   %
(0% to 50%)

AFTER-TAX
Current Election   0 %
Desired Election   0%
0% to 50% in increments of 1%)
After-tax Subtotal
Current Election   0 %
Desired Election   0%

I'm assuming the Roth is Roth 401k and the after-tax option is the backdoor Roth opportunity?

Thanks for any help and guidance :)

Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: DeltaT on February 20, 2018, 12:22:41 PM
Yes.

For all sources you have listed (and also your employer match if applicable), the totals for this year must not exceed $55,000. Also, you have a limit of $18,500 between the categories of Roth and Pretax.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: boarder42 on February 20, 2018, 12:28:24 PM
its half of the battle the after tax is the line you need to make contributions - the other half of the battle is the ability to make inservice withdrawal ie roll it out to a roth IRA hense the back door roth - so we'd need a bit more info to completely answer the question but you've shown 50% of a back door roth.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: Bird In Hand on February 20, 2018, 12:57:26 PM
OP, technically you're talking 'Mega Backdoor Roth'.  Regular 'Backdoor Roth' is just converting traditional IRAs to Roth.

As boarder42 points out, you're all set if you have the ability to take in-service withdrawals from the after-tax sub-account of your 401k.  Ideally you can do this whenever you want without any limits -- that would give you the most control when it comes to managing gains on in-plan conversions or withdrawal/rollover into Roth IRAs.  But some plans only allow periodic withdrawals, or limit the # of withdrawals per year, etc.

I alluded above to in-plan conversions (to a Roth sub-account in your employer's 401k) or withdrawal/rollover into Roth IRAs.  If your plan offers both, you'll need to decide which you're most comfortable with.

Generally speaking, in-plan conversions have a couple advantages:

1) possible access to funds you won't have access to in your Roth IRA (e.g., Vanguard Institutional class shares)
2) protection from lawsuits (IRAs are more vulnerable here)
3) could be easier to set up automatic periodic conversions -- but this depends a lot on your plan/employer.

The huge disadvantage of in-plan conversions is if your employer does not allow in-service withdrawals (from your pre-tax or Roth parts of your 401k) before 59 1/2.  In that case if you need access to the funds while you're still working there, you're out of luck (except for hardship conditions, etc.).
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: terran on February 20, 2018, 01:53:36 PM
An alternative to in-service withdrawals is in-service in-plan rollovers where the after-tax is rolled over to Roth within the plan. Some plans allow rollovers even if they don't allow withdrawals. Either is a good option, with the withdrawal being slightly better since you can roll earnings on the after-tax portion into a traditional IRA and defer those taxes even while you roll the contributions to a Roth IRA.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: PJC74 on February 20, 2018, 03:58:32 PM
Thanks everyone for all the great info. I will call Fidelity tomorrow and see if I can perform in-service withdrawals to complete the loop.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: PJC74 on February 21, 2018, 11:07:26 AM
so good news...,my plan allows for the after-tax contribution to be converted to Roth up to 54500 including employer match.
My plan doesn't have the ability to manage it myself so I need to call them to have the $$ converted.
The rep also suggested that I convert the $$ as soon as it hits the account to minimize taxable gains paid.

Also added this year is to our account is true up so I won't have to time my pretax contributions. I think I will try to max the regular 401k by mid year then try to focus on some after-tax contributions.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: boarder42 on February 22, 2018, 06:34:48 AM
so good news...,my plan allows for the after-tax contribution to be converted to Roth up to 54500 including employer match.
My plan doesn't have the ability to manage it myself so I need to call them to have the $$ converted.
The rep also suggested that I convert the $$ as soon as it hits the account to minimize taxable gains paid.

Also added this year is to our account is true up so I won't have to time my pretax contributions. I think I will try to max the regular 401k by mid year then try to focus on some after-tax contributions.

thats awesome lucky you!
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: Bird In Hand on February 22, 2018, 07:32:20 AM
so good news...,my plan allows for the after-tax contribution to be converted to Roth up to 54500 including employer match.

Cool!  To be clear, are you talking about in-plan conversions to a Roth subaccount within your 401k, or withdrawal/rollover into a personal Roth IRA?

Quote
My plan doesn't have the ability to manage it myself so I need to call them to have the $$ converted.

Bummer, but probably not that uncommon.  For in-plan conversions I'm able to log onto Vanguard and convert with a few clicks.  For withdrawl/rollover I have to call up Vanguard.  Sounds like kind of a pain to remember to do this every 2 weeks when I get paid, but I'm not complaining too much -- it's just nice to have the option.

Quote
The rep also suggested that I convert the $$ as soon as it hits the account to minimize taxable gains paid.

I see this talked about a lot, and I understand it.  However, in almost every case the amount of taxable gains are likely to be very small.  The exception would be if you have an enormous salary and/or bonus early in the year, dump a ton into the after-tax account all at once, then let it sit for many months during a strong bull market.

More typically, you could convert quarterly and still have miniscule taxable gains.  Some plans are more limited than others.  If yours allows conversions at any time and without limit, and you don't mind making a phone call every 2 weeks (or whenever your paycheck is issued), then you might as well optimize and limit those taxable gains.

The less-discussed aspect is the potential for locking in losses when converting.  At least the losses will be on the same miniscule scale as the potential taxable gains.  Still, I'm tempted to do the analysis to discover whether it's better to leave the money in the taxable portion until it breaks even or posts a small gain, before converting.  Why is this tempting, when I know it's not worth the mental bandwidth?  I have no idea.  :D
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: ysette9 on February 22, 2018, 07:41:26 AM
Be sure to ask how many in-plan Roth conversions you are allowed to do each hear and how much they cost. My employer just added this options but I can only do one a year and it costs me $100 to do so. Still a great option, but I wouldn’t be converting every week at that price even if I could
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: PJC74 on February 22, 2018, 10:50:09 AM
Thanks for all the info and suggestions, guys! 

BIH:I was planning to role it over to my personal R-IRA.

Ysette: good to know! The rep never mentioned anything about fees for performing this activity. I will definitely check on this.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: afuera on February 22, 2018, 11:06:28 AM
I roll the After-Tax contributions into Roth within a subaccount of my 401K.  My company allows to either keep the money in the 401K as Roth or move it to an IRA as Roth.  Is there any reason that you want to roll it into an IRA instead of keeping it in the 401K?  I find its much quicker to do the conversions within my 401K.  The day the contributions are available (the day after my paycheck) I call Fidelity and ask to do a Roth in-plan conversion.  The next day the money has moved from After-Tax source into "Roth-In Plan Conversion" source.  The whole process takes 2-3 days.  I'm not sure if rolling the contributions to a rIRA would take longer or not due to having to go in between two different financial institutions.  I also have Fidelity and it sounds like we have the same plan allowances so just something to think about.
 
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: jim555 on February 22, 2018, 12:25:31 PM
OP - You need to check with your Administrator.  My plan never permitted backdoor Roths even though it could have.  They decided not to allow it.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: terran on February 22, 2018, 01:20:40 PM
I roll the After-Tax contributions into Roth within a subaccount of my 401K.  My company allows to either keep the money in the 401K as Roth or move it to an IRA as Roth.  Is there any reason that you want to roll it into an IRA instead of keeping it in the 401K?  I find its much quicker to do the conversions within my 401K.  The day the contributions are available (the day after my paycheck) I call Fidelity and ask to do a Roth in-plan conversion.  The next day the money has moved from After-Tax source into "Roth-In Plan Conversion" source.  The whole process takes 2-3 days.  I'm not sure if rolling the contributions to a rIRA would take longer or not due to having to go in between two different financial institutions.  I also have Fidelity and it sounds like we have the same plan allowances so just something to think about.

The reason you might consider rolling over to an IRA is that in that case you can roll your after-tax contributions to a Roth and your the earnings on your after-tax contributions to traditional, thereby deferring the taxes on the earnings instead of paying the tax in the year of the rollover. You may not have much in earnings if you do the in plan conversion regularly soon after you contribute.

You could consider opening IRAs at the same institution that runs your 401k which might speed the process up.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: tjrssibelle on February 22, 2018, 11:11:23 PM
I roll the After-Tax contributions into Roth within a subaccount of my 401K.  My company allows to either keep the money in the 401K as Roth or move it to an IRA as Roth.  Is there any reason that you want to roll it into an IRA instead of keeping it in the 401K?  I find its much quicker to do the conversions within my 401K.  The day the contributions are available (the day after my paycheck) I call Fidelity and ask to do a Roth in-plan conversion.  The next day the money has moved from After-Tax source into "Roth-In Plan Conversion" source.  The whole process takes 2-3 days.  I'm not sure if rolling the contributions to a rIRA would take longer or not due to having to go in between two different financial institutions.  I also have Fidelity and it sounds like we have the same plan allowances so just something to think about.
Rollover of the fund to a fidelity Roth IRA has been a 2 to 3 days process for me also. The only inconvenience is that I have to call customer service for the rollover.

Sent from my SM-N920V using Tapatalk

Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: Bird In Hand on February 23, 2018, 06:39:26 AM
Is there any reason that you want to roll it into an IRA instead of keeping it in the 401K?  I find its much quicker to do the conversions within my 401K.

The huge, glaring issue with leaving it in the 401k is if in-service withdrawals are not allowed under the employer's plan.  With the exception of hardship withdrawals and loans in some plans, I think the norm is to not allow any other kind of in-service withdrawals.

This might not be an issue for some.  For me, having access to my Roth contributions might be part of my ER strategy.  I may choose to downshift to 1/2 time, and supplement my income from time to time with Roth and/or after-tax accounts.  That's the one and only reason I favor rolling over vs in-plan conversions.

Quote
The day the contributions are available (the day after my paycheck) I call Fidelity and ask to do a Roth in-plan conversion.  The next day the money has moved from After-Tax source into "Roth-In Plan Conversion" source.  The whole process takes 2-3 days.

That sounds more like a 1-day process, unless you start counting on payday.  Regardless, in your situation do you know/recall whether the fund price you get on the conversion is locked in as of COB on the day you make the call?  That seems to be how it works with Vanguard, so the potential taxable gains are limited to whatever the market does in 1 day.
Title: Re: Pardon my ignorance: Does my 401k have a backdoor Roth possibility?
Post by: afuera on March 22, 2018, 10:06:31 AM
Is there any reason that you want to roll it into an IRA instead of keeping it in the 401K?  I find its much quicker to do the conversions within my 401K.

The huge, glaring issue with leaving it in the 401k is if in-service withdrawals are not allowed under the employer's plan.  With the exception of hardship withdrawals and loans in some plans, I think the norm is to not allow any other kind of in-service withdrawals.

This might not be an issue for some.  For me, having access to my Roth contributions might be part of my ER strategy.  I may choose to downshift to 1/2 time, and supplement my income from time to time with Roth and/or after-tax accounts.  That's the one and only reason I favor rolling over vs in-plan conversions.

Quote
The day the contributions are available (the day after my paycheck) I call Fidelity and ask to do a Roth in-plan conversion.  The next day the money has moved from After-Tax source into "Roth-In Plan Conversion" source.  The whole process takes 2-3 days.

That sounds more like a 1-day process, unless you start counting on payday.  Regardless, in your situation do you know/recall whether the fund price you get on the conversion is locked in as of COB on the day you make the call?  That seems to be how it works with Vanguard, so the potential taxable gains are limited to whatever the market does in 1 day.
@Bird In Hand Sorry for the late response, I just saw this.  To answer you question, the fund price is locked in on the day I make the call so the only taxable earnings are whatever the market moves are the day I call in.  In-service withdrawals are allowed in my plan so that is one of the reasons I just do a in-plan conversion.  Would there be any difference in impact between these two strategies if in-service withdrawals are allowed?