Timing of Mega Backdoor Roth

[Paul der Krake]

After months of inexcusable procrastination on my part, I finally confirmed that the 401(k) at my current employer does indeed allow in-service distributions. Mega backdoor roth, here. I. come.

When I say after-tax in this post, I really mean the post-86 after-tax portion, not a Roth 401(k). When I say Roth IRA, I mean Roth IRA.

Facts:
- the plan is held at Fidelity (and I trust that they know their stuff)
- for simplicity, I have elected to shove all my contributions into a Vanguard Target Retirement fund (institutional shares, with extremely low expense ratio)
- the plan allows a maximum of 40% of contributions (pre-tax and after tax combined), but I have only been maxing out the after-tax portion since sometime in spring 2015. Contributing the whole 40% of my salary is  below the total 53k annual limit, and lets me max out the pre-tax portion AND put some in the after-tax, which is what I’ve been doing.
- there is currently about $5,000 of after-tax money in the after-tax portion of the 401(k), and no gains whatsoever because of the recent mild market downturn.
- I can only rollover the after-tax portion, and it would have to be liquidated into a cash position first as the institutional shares cannot be rolled over in kind. The rep said it takes roughly 3 days between the liquidation and the ability to reinvest the money in the Roth IRA, which means there is potential for gains or losses due to normal market volatility.
- I cannot have my pre-tax contributions separate from my after-tax contributions: in other words I must put everything in the same investment when contributing. That might change but I’m not holding my breath.


Nothing is certain but I don’t see myself staying at the current employer much longer. I should get a substantial annual bonus in 6 months, and was planning on leaving shortly thereafter. Other life events may lead me to stay longer, but the assumed plan is still to GTFO after the bonus hits the checking account. Just kidding, I can also put up to 40% of the bonus in the 401(k) plan, so that’s where it will go.

Now, I realize how lucky I am to have the in-service distribution available to me, and that my next job most likely will not have that option. If I am set on leaving in the first quarter of 2016, for the few months of 2016 it makes sense to direct the whole 40% to the after-tax money portion while I can at the current job, and only worry about filling the 18k bucket of pre-tax money at the new job. Right?
The only downside I can think of is if the new employer has a plan that for one reason or another doesn’t let me contribute fast enough to max out the pre-tax 18k, then I lose out on some of that sweet tax sheltered income and can never claim that space back.

How often would you rollover the after-tax money? Every paycheck? Once now, once after I’ve left? Only when I leave?

I already have Roth and Traditional IRAs at Vanguard, however I wonder whether that could make things more complicated should something go wrong. Rolling everything over into a new IRA at Fidelity would let me know to just one rep instead of having to deal with transfers between the two brokerage houses and potentially grueling 3-way telephone calls if somebody screws up the paperwork.

Please, please, let me know your thoughts, poke holes in my logic. I don’t want to screw this up.

[seattlecyclone]

Your plan to direct all 2016 contributions to the after-tax portion of your 401(k) seems solid, as long as you're pretty sure you will indeed be getting another job with a 401(k) that year.

Based on all the factors you mention, I would probably wait until after leaving the company to move the after-tax funds. You'll probably want to transfer your whole 401(k) to your Vanguard IRAs at that time. Might as well do it all at once because there's a fair bit of hassle in moving money between institutions. The only benefit to doing it more frequently is that you can get a bit more tax-free growth in your Roth account. If your after-tax account is already in the red, even a small rebound won't create a meaningful amount of gains to worry about there. You can always move any gains into your traditional IRA along with your traditional pre-tax contributions, letting you defer paying the tax on this money until retirement.

Does your 401(k) plan offer in-plan Roth conversions for these after-tax funds? This might be another option to get that money into a Roth bucket as soon as possible without needing to open yet another IRA account or deal with multiple transfers between firms.

[MDM]

Rolling everything over into a new IRA at Fidelity would let me know to just one rep instead of having to deal with transfers between the two brokerage houses and potentially grueling 3-way telephone calls if somebody screws up the paperwork.

Agree in particular with the quote above.  Also, the rest of your plan seems well thought - good luck!

See also http://forum.mrmoneymustache.com/ask-a-mustachian/starting-'back-door-roth'-and-nervous-about-screwing-up-on-the-right-track/ for similar discussion.

[Jellyfish]

Good luck! I am jealous of your ability to do this.  I work for a 50,000+ firm and my employer does not allow this because it would be "administratively difficult" and "no one ever asks for this." 

[Paul der Krake]

So I went ahead and did it. It boiled down to having the opportunity to smooth any normal market fluctuations by doing it 3-4 times instead of taking a chance and doing it lump-sum when leaving.

Does your 401(k) plan offer in-plan Roth conversions for these after-tax funds? This might be another option to get that money into a Roth bucket as soon as possible without needing to open yet another IRA account or deal with multiple transfers between firms.

Oops. I completely forgot to ask. Looking at the plan litterature, I don't see any mention of it. But the problem with those is that you can't withdraw your contributions from the converted tax bucket before 59.5, right?

[seattlecyclone]

Oops. I completely forgot to ask. Looking at the plan litterature, I don't see any mention of it. But the problem with those is that you can't withdraw your contributions from the converted tax bucket before 59.5, right?

I think that as long as it's in the Roth 401(k) there may be some pro-rata rules that make any withdrawals from the Roth 401(k) be proportional between conversions, contributions, and earnings (which is less than ideal because you'll pay tax and penalty on the part that is attributed to earnings). However if you roll that money over to a Roth IRA after you leave the company, any amount that was treated as an "investment in the contract" (i.e. not earnings) when it was in your 401(k) will be treated as a Roth IRA contribution and would thus come out of the IRA first, tax free. (source: https://www.law.cornell.edu/cfr/text/26/1.408A-10)

[JonasNC]

How did you find out that your employer allows the in-service distributions?  Is this something that you find out from your company's HR department, or did you ask Fidelity?  I would love to do this, but don't know whether to start investigating with my company or Vanguard.

Thanks!

[Paul der Krake]

Oops. I completely forgot to ask. Looking at the plan litterature, I don't see any mention of it. But the problem with those is that you can't withdraw your contributions from the converted tax bucket before 59.5, right?

I think that as long as it's in the Roth 401(k) there may be some pro-rata rules that make any withdrawals from the Roth 401(k) be proportional between conversions, contributions, and earnings (which is less than ideal because you'll pay tax and penalty on the part that is attributed to earnings). However if you roll that money over to a Roth IRA after you leave the company, any amount that was treated as an "investment in the contract" (i.e. not earnings) when it was in your 401(k) will be treated as a Roth IRA contribution and would thus come out of the IRA first, tax free. (source: https://www.law.cornell.edu/cfr/text/26/1.408A-10)

I see. So from our enlightened ER perspective, it doesn't matter because we wouldn't withdraw before quitting (unless your plan was horrible, I guess, but what kind of horrible plan would allow things like this).

How did you find out that your employer allows the in-service distributions?  Is this something that you find out from your company's HR department, or did you ask Fidelity?  I would love to do this, but don't know whether to start investigating with my company or Vanguard.

I can't speak for every firm, but my HR folks know nothing past the basics crammed into the 15 minute powerpoint presentation given at employee orientation. Unless you happen to speak with your department's closet Mustachian/Boglehead, you will getting misinformation at best, or most likely a blank stare. Call your provider and ask to be bounced around until you get someone who understands exactly what you're trying to do.

Shoutout to Trent F. at Fidelity, my man.

[JonasNC]

Thanks Paul.  I called Vanguard and they were unfortunately able to confirm that my company's plan doesn't allow after-tax contributions.  Thanks for the response.  Good to hear from another Durham mustachian!

[Paul der Krake]

Good to hear from another Durham mustachian!

There are lots of us! Go say hello in the Triangle meetup thread, we are overdue for another gathering.

[Paul der Krake]

Update and new dilemma!

Bonuses were distributed yesterday. Since putting this plan in motion last fall, I have been able to cram almost $20,000 in the after-tax portion of the 401(k), roll it the balance over to the Roth IRA every other month or so.

Thanks to a recent change in the compensation structure, I can now add $2,700 per month to any of my 401(k) buckets, pre-tax or after-tax. I have less of an incentive to jump ship ASAP and will be more picky in choosing my next gig, because all things considered, I've got it pretty good here.

The dilemma is as follows: I still want to cram as much as possible in the mega backdoor roth pipeline, but I am not willing to forego a reduction of $18,000 in my taxable income either. I order to do both, if I were to stay at my current gig, I would need to switch to pre-tax contribution sometime in June to reach the $18,000. If I were to jump ship to another gig earlier, well that's the big unknown. How big of a contribution can I reasonably expect to be able to make at a programming job with a salary somewhere around 90k-110k? Should I hedge my bet and start allocating part of my contribution to the pre-tax bucket right now?

[seattlecyclone]

Update and new dilemma!

Bonuses were distributed yesterday. Since putting this plan in motion last fall, I have been able to cram almost $20,000 in the after-tax portion of the 401(k), roll it the balance over to the Roth IRA every other month or so.

Thanks to a recent change in the compensation structure, I can now add $2,700 per month to any of my 401(k) buckets, pre-tax or after-tax. I have less of an incentive to jump ship ASAP and will be more picky in choosing my next gig, because all things considered, I've got it pretty good here.

The dilemma is as follows: I still want to cram as much as possible in the mega backdoor roth pipeline, but I am not willing to forego a reduction of $18,000 in my taxable income either. I order to do both, if I were to stay at my current gig, I would need to switch to pre-tax contribution sometime in June to reach the $18,000. If I were to jump ship to another gig earlier, well that's the big unknown. How big of a contribution can I reasonably expect to be able to make at a programming job with a salary somewhere around 90k-110k? Should I hedge my bet and start allocating part of my contribution to the pre-tax bucket right now?

Well, a $90k salary is $7,500/month. There's no good reason to restrict employees from contributing less than about 80% of their salary (some is needed to pay for payroll taxes and other stuff), so don't take a job that would. :-)