Author Topic: Mega backdoor Roth  (Read 1991 times)

SubL stache

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Mega backdoor Roth
« on: March 08, 2018, 09:06:00 PM »
At my request my employer is looking into amending our company's plan document to include after tax contributions and in-plan conversions to Roth.

However when I asked about this I thought the owners/top management may be interested in utilizing this strategy.  What I didn't anticipate/think thru is the Highly Compensated Employee rules and testing required.  From what I understand the company must average the deferrals of every employee under 120k (HCE threshold) and then the above 120k folks may only contribute that much % or their deferrals get refunded. 

So in conclusion, I will become an HCE in the near future.  It sounds like I could be limited at that point and no longer can do 18,500?

The question I can't seem to find is, are after-tax contributions limited by HCE testing or not? Does this blow up my hopes of doing mega backdoor Roth?


Paul der Krake

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Re: Mega backdoor Roth
« Reply #1 on: March 08, 2018, 10:04:13 PM »
Yes, HCE rules get in the way of all contributions, not just pre-tax. If your company currently has an HCE problem, this will likely make matter worse as HCEs will now contribute even more than non-HCEs.

The way forward is to get rid of the HCE problem. The easiest way is to make the plan a safe harbor plan.

SubL stache

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Re: Mega backdoor Roth
« Reply #2 on: March 08, 2018, 10:23:01 PM »
Yes, I believe the company does have an HCE limit or return each year. There are a significant amount of NonHCE employees.

It sounds like the company is willing to make the change, but I'll have only 1 or 2 years to take advantage before being subject to HCE limits myself..sigh

I'll have to do more research to understand the safe harbor part you referenced.

MDM

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Re: Mega backdoor Roth
« Reply #3 on: March 09, 2018, 11:14:47 AM »
What’s Old Is New Again: “Mega Back Door” Roth IRA Contributions Spark New Interest in Old School After-Tax Contributions is somewhat pessimistic on applicability for many companies.  Probably worth a read.

seattlecyclone

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Re: Mega backdoor Roth
« Reply #4 on: March 11, 2018, 10:09:47 PM »
The way forward is to get rid of the HCE problem. The easiest way is to make the plan a safe harbor plan.

A less easy option is to spread the gospel of Mustachianism to the non-HCEs. Someone contributing $55k on a $100k salary is going to have a higher contribution percentage than someone contributing $55k on a $150k salary. Convince the non-HCEs to max out their contributions and you'll be able to do so as well.

ronsbusa3

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Re: Mega backdoor Roth
« Reply #5 on: March 21, 2018, 08:58:50 AM »
The company I work for failed the ADP test last year. I was rewarded with a check of $6800 plus earnings from the pre tax 401k contributions I made for 2017. Not very happy. We have a small workforce of 21 employees. Maybe 4 are under the 120k. Those 4 employees were able to effect the test. I started after tax contributions  in September 2017 and did my first mega backdoor Roth rollover in January. My goal is to hit the max after tax contributions this year as well as the pretax max. I fully expect that I will receive a check back in March for the after tax portion.  There is a different test for the ACP. Which includes the after-tax portion and company match. I think only 2 employees are contributing to the after tax. We were able to talk the  NHCE into contributing the max for this year. I hope.....