Couple Questions On Backdoor Roth IRAs

[njmoney]

I have a couple of questions on the backdoor Roth that I was hoping people could answer for me.  Be gentle, I'm a novice so I may not be using the right terminology!  A little bit of background:

- Currently, my wife and I have a combined income that does not allow us to contribute to a Roth IRA so we purchase Traditional IRAs each year.
- I have a couple of old 401Ks that I haven't moved.  All are low fee and delivering good returns. 
- I'm 41, my wife is 32.

My questions are this on the backdoor Roth:

- Overall, any downsides to the backdoor Roth?
- We bought our Traditional IRAs for 2017 through Vanguard.  Did it almost exactly a year ago.  Is there some time limit you have to wait before converting a Traditional IRA to a backdoor Roth?
- Is it beneficial to move my old 401ks to Traditional IRAs and then convert them to Roth IRAs as soon as possible? 

Any feedback is appreciated!

[jamesplease]

njmoney, here is my understanding of the Mega Backdoor Roth:

- Any downsides? Yes, you run the risk of getting a big tax bill if you convert too much all at once. See the answer to the last question for more.

- Any time limit you must wait before converting? No, you can do it immediately.

- Is it beneficial to do the rollover as soon as possible? For most 401(k) accounts, no. I assume that the majority of your old 401(k) is comprised of pre-tax contributions as well as gains from those pre-tax contributions. Rolling these into a Roth IRA will be a taxable event, because of the way that Roth IRAs work. (Source). If this is true, then you want to wait as long as possible before doing the conversion, and you want to convert only the amount that you need. If your retirement “income” is low enough, you could pull this off tax-free (Source).

Let’s say your income is $100k, and you have $100k in your old 401(k)s. This is $80k in pre-tax contributions and $20k in gains from those contributions. If you roll all of that over to a Roth IRA, then my understanding is that you will be taxed on $200k for that year.

However, if your 401(k) is either Roth or post-tax contributions, then you can roll it over without it being a taxable event, and I do not think there is any problem with doing the conversion immediately. For after-tax contributions, there is a benefit to doing it as early as possible, because you avoid paying taxes on the gains (which are taxed like normal).

I plan to Mega Backdoor Roth, and it looks something like this:

Each paycheck (which occur on Fridays), I contribute $x after-tax dollars as an after-tax contribution to my 401(k). The next Monday, I call my 401(k) company and start the rollover to a Roth IRA. This is to minimize gains on the after-tax contributions, so that I don’t pay many taxes.

This amount that gets rolled over is what I am able to withdraw before I am of retirement age. However, any gains on that amount that occur while it is in the Roth IRA account are off-limits until I am of retirement age.

My pre-tax and employer match to my 401(k) remain in the 401(k) plan. Should I leave my job, I will roll them over to a “Rollover IRA,” which is also pre-tax, in my personal Vanguard.

When/if I early retire and am in a lower tax bracket, I will do yearly conversions from my Rollover IRA to a Roth IRA so that I can access the dollars. This isn’t considered to be the Mega Backdoor Roth, though; this is just a Roth IRA Conversion Pipeline/Ladder (source).

This is a great post that goes into great detail about accessing 401(k)/Traditional IRA funds: https://livingafi.com/2014/05/18/drawdown-part-3-strategy/

Let me know if that helps! And if anyone sees any errors in the above, feel free to correct them. I’m no tax expert; my understanding my partially correct/incomplete.

[MDM]

Although the names are similar, there are many differences between a Backdoor Roth IRA and a Mega Backdoor Roth IRA.

See those links for more details. 

To the OP's questions:
1) No downside to the backdoor Roth if you do not have a large pre-tax traditional IRA balance.
2) No time limit you have to wait before converting a Traditional IRA to a backdoor Roth.
3) Probably not beneficial to move old 401ks to Traditional IRAs and then convert them to Roth IRAs as soon as possible, because you will pay tax on that income all at once.