Author Topic: Mega Roth?? How do we contribute 36k?  (Read 5857 times)

TheAnonOne

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Mega Roth?? How do we contribute 36k?
« on: February 04, 2015, 11:06:10 AM »
Reference Article- http://www.madfientist.com/after-tax-contributions/

Hello,

My 401k allows for either PRE or POST(roth) contributions.... I was a bit curious about this mega roth option.

Is the article saying I could contribute 18k to my pre-tax 401k and 18k to my roth-401k as long as I move the 18k roth portion to a roth IRA ???

The part I am confused about is how you get 36k into this monster...

seattlecyclone

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Re: Mega Roth?? How do we contribute 36k?
« Reply #1 on: February 04, 2015, 12:25:38 PM »
No, you may not make $18k of pre-tax contributions and $18k of Roth contributions. There's a third type of contributions: traditional after-tax contributions. These contributions are similar to Roth contributions in that you pay tax on the amount contributed when you earn it, but they differ from Roth contributions because you have to pay tax on any gains when you withdraw the money. These after-tax contributions don't count toward the $18k limit. Instead they're constrained by a $53k combined limit across all additions to the account: pre-tax contributions, Roth contributions, employer matching contributions, and after-tax contributions put together must be under $53k. Not all companies allow their employees to make these contributions; it's possible that this is not an option for you.

CtrlMagicDel

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Re: Mega Roth?? How do we contribute 36k?
« Reply #2 on: February 04, 2015, 01:22:55 PM »
I've been reading into this a bit lately and I'm still trying to grasp the benefit. If you aren't able to make in-service distributions or leave your employer and rollover the after-tax contributions to a Roth, why is this option better than just opening up a taxable account, just because you don't get taxed on dividends? Not even sure my work offers it but I'm attending a presentation on our 401K in a couple of week and want to be sure to ask educated questions about this option.

skyrefuge

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Re: Mega Roth?? How do we contribute 36k?
« Reply #3 on: February 04, 2015, 01:59:46 PM »
If you aren't able to make in-service distributions or leave your employer and rollover the after-tax contributions to a Roth, why is this option better than just opening up a taxable account

It's not.

You first need to find out if your plan offers in-service distributions. If not, you can discard the Mega Backdoor Roth.

brooklynguy

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Re: Mega Roth?? How do we contribute 36k?
« Reply #4 on: February 04, 2015, 03:01:01 PM »
It's not.

Actually it can be, under the right circumstances.  Keeping the after-tax investments inside the 401(k) until FIRE shields the earnings from taxes during your high-income earning years and (unlike immediately transferring them to the Roth account via in-service distributions) can give you penalty-free early access to the earnings (by folding the earnings in the after-tax account into your Roth conversion pipeline).  See the discussion in this thread, starting at reply # 70:

http://forum.mrmoneymustache.com/investor-alley/did-the-irs-just-give-an-extra-$35kyr-of-tax-free-growth-saving-space/
« Last Edit: February 04, 2015, 03:05:19 PM by brooklynguy »

MrMoogle

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Re: Mega Roth?? How do we contribute 36k?
« Reply #5 on: February 04, 2015, 03:35:49 PM »
Just reiterating what brooklynguy already said:

So the after tax 401k, if you don't have in-service distributions.  When you leave the job, the contributions can be sent (free of any more tax) to a Roth IRA, and earnings on those contributions can be sent to a tIRA.  So if you're in the 25% bracket or higher while working, you wouldn't have to pay taxes on the earnings while you're working.  For mustachians, with the Roth ladder, you might have to pay some taxes when you convert it, but most of us will be in the 15% or lower bracket, so worst case it comes out even, best case (you're paying 10% or no taxes on it) you come out ahead.  The first 10k for singles or 20k for a couple can be converter tax free, so most of my money coming from a tIRA will be free.

From what I've seen, Fidelity is better at this than Vanguard:
http://forum.mrmoneymustache.com/investor-alley/401k-pro-rata-rule-for-mega-backdoor-roth-ira-(vanguard)/
Vanguard is making me jump hurdles to do in-service-distributions.

skyrefuge

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Re: Mega Roth?? How do we contribute 36k?
« Reply #6 on: February 04, 2015, 04:05:45 PM »
It's not.

Actually it can be, under the right circumstances.

Dammit, you caught me; I thought I'd be able to get away without including an asterisk!

My view is that if brooklynguy and seattlecyclone cannot come to an agreement on the applicability of a strategy, that means the applicability of that strategy is simply unknowable in this universe. And thus, for anyone below 14th-level Financial Wizard, "it's not" is a valid simplification that will probably benefit their lives more than a plunge into arcana. But yes, I should have at least made a reference (in very small text!) on the off chance that CtrlMagicDel happens to enjoy diving down the rabbit hole as much as we do.

brooklynguy

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Re: Mega Roth?? How do we contribute 36k?
« Reply #7 on: February 04, 2015, 04:36:19 PM »
As always, it's impossible to craft a worthy response to your pithy remarks, but I would feel remiss if I did not say that I've never received a higher compliment on these boards :)

That said, CtrlMagicDel, do take the time to read the extended discussion in the linked thread if you have the appetite for it.  I honestly believe many aspiring early retirees would be well-served by using the mega backdoor Roth strategy even without an option for in-service withdrawals.

MrMoogle

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Re: Mega Roth?? How do we contribute 36k?
« Reply #8 on: February 04, 2015, 07:59:18 PM »
If you don't have in-service distributions, there's another possible issue.  What if they get rid of this conversion between now and you leave your job?  It's in Obama's proposal, not to say it'll get passed this year, but it's been brought up as a "loophole":

http://blogs.wsj.com/totalreturn/2015/02/02/obama-would-block-strategies-to-pump-up-roth-iras/

brooklynguy

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Re: Mega Roth?? How do we contribute 36k?
« Reply #9 on: February 04, 2015, 08:46:25 PM »
Good point.  You've now added an asterisk to the asterisk.

TheAnonOne

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Re: Mega Roth?? How do we contribute 36k?
« Reply #10 on: February 05, 2015, 10:31:51 AM »
So my thoughts of putting 36k into a roth IRA with tax free growth and tax free withdraws are unrealistic.

I really don't see the point of having it in this account then vs just a taxable account. Different coat of paint on the same car....

CtrlMagicDel

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Re: Mega Roth?? How do we contribute 36k?
« Reply #11 on: February 05, 2015, 12:32:28 PM »
Awesome, thanks for the clarification. I don't even know if my work offers the ability to contribute after tax beyond 18,000 (our HR application certainly doesn't seem like it allows it) it and I'd likely want to finish paying off my mortgage before I would even really consider it so I have at least 3 years. That said, I have several bullet points of items to ask at my 401k presentation and I should be able to explain where I'm coming from pretty well.

Thanks!

MrMoogle

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Re: Mega Roth?? How do we contribute 36k?
« Reply #12 on: February 05, 2015, 01:08:32 PM »
My plan specifically mentions the after-tax part (separate from Roth), although they call it something else.  And they specifically mention the limit of $53k.  If your plan doesn't mention it, it's not available.  And they could change the limit to something below the federal maximum.

You first need to find out if your plan offers in-service distributions. If not, you can discard the Mega Backdoor Roth******.
Is that enough asterisks? 

"If not, there's a lot more to consider with the Mega Backdoor Roth."

spud1987

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Re: Mega Roth?? How do we contribute 36k?
« Reply #13 on: February 05, 2015, 02:03:47 PM »
If you don't have in-service distributions, there's another possible issue.  What if they get rid of this conversion between now and you leave your job?  It's in Obama's proposal, not to say it'll get passed this year, but it's been brought up as a "loophole":

http://blogs.wsj.com/totalreturn/2015/02/02/obama-would-block-strategies-to-pump-up-roth-iras/

This is my concern. I am currently contributing the max to my 401k (18k pre-tax plus 15k match plus 30k after-tax). I don't plan to leave my employer for at least five years. If the "loophole" gets closed before I leave I'll be stuck with a 100% rollover to a trad IRA. It's not the end of the world, but the lost opportunity could be somewhat significant if my after-tax contributions total $150k plus.

ZiziPB

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Re: Mega Roth?? How do we contribute 36k?
« Reply #14 on: February 05, 2015, 02:42:39 PM »
If you don't have in-service distributions, there's another possible issue.  What if they get rid of this conversion between now and you leave your job?  It's in Obama's proposal, not to say it'll get passed this year, but it's been brought up as a "loophole":

http://blogs.wsj.com/totalreturn/2015/02/02/obama-would-block-strategies-to-pump-up-roth-iras/

This is my concern. I am currently contributing the max to my 401k (18k pre-tax plus 15k match plus 30k after-tax). I don't plan to leave my employer for at least five years. If the "loophole" gets closed before I leave I'll be stuck with a 100% rollover to a trad IRA. It's not the end of the world, but the lost opportunity could be somewhat significant if my after-tax contributions total $150k plus.

Spud, does your plan allow in-plan conversions?  That may be another option to explore.  My plan allows both in-service withdrawals and in-plan conversions (both subject to a "seasoning" holding period of 2 years) so I can either rollover to a Roth IRA or simply convert to Roth 401k while I'm working.  You should check if that second option is available even if you cannot do an in-service distribution (rollover).

brooklynguy

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Re: Mega Roth?? How do we contribute 36k?
« Reply #15 on: February 05, 2015, 04:59:23 PM »
...and I'd likely want to finish paying off my mortgage before I would even really consider it so I have at least 3 years.

If your mortgage still has significant remaining life to maturity (or, even if it doesn't, if you have any appetite for refinancing), you may want to read up on the "invest vs. payoff" debates in this forum if you haven't already done so.

Apologies for the unsolicited, off-topic advice if you've already considered and rejected the possibility (and the potential benefits) of investing in lieu of prepaying your mortgage, but because that is one of my favorite recurring topics I simply couldn't help myself.

CtrlMagicDel

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Re: Mega Roth?? How do we contribute 36k?
« Reply #16 on: February 06, 2015, 07:04:52 AM »
...and I'd likely want to finish paying off my mortgage before I would even really consider it so I have at least 3 years.

If your mortgage still has significant remaining life to maturity (or, even if it doesn't, if you have any appetite for refinancing), you may want to read up on the "invest vs. payoff" debates in this forum if you haven't already done so.

Apologies for the unsolicited, off-topic advice if you've already considered and rejected the possibility (and the potential benefits) of investing in lieu of prepaying your mortgage, but because that is one of my favorite recurring topics I simply couldn't help myself.

I thought of adding a "let's not open that can of worms" caveat when mentioning that, but didn't. Silly me. Yes I've read and considered both parts of the argument, but having a paid off or at least mostly paid off mortgage is one part of my medium term FI plan that also includes significant investing. As someone who grew up with parents who got evicted several times while I was growing up, I accept that many other people might not share my views on a stable living environment but it is very important to me. I'd also potentially be more willing to accept riskier employment opportunities in the future that could have potentially higher rewards but higher risks of employment volatility if I didn't have to worry about making a home payment. On paper I accept the argument but not having a mortgage has other benefits to me.