What dis mega backdoor Roth ?

[Beginning]

Hi,

In the short time I have been here, I have already learned so much !!! I am particularly intrigued by the mega backdoor Roth plan but while googling for info came across such technical explanations that I gave up in frustration.

Can anyone explain this in terms that a person like me (not the sharpest knife in the drawer) can understand ?

My background : Husband's work offers a ROTH 401k. He has some money in pre-tax (regular 401k) and just started contributing some to his Roth 401k. He also has a ROTH IRA. I am self employed and just opened a ROTH IRA.

We want to turn our lives around and your advise would help us.

Thanks !

[disneysteve]

I am self employed and just opened a ROTH IRA.

A Roth IRA is a good choice but keep in mind that you are also eligible to contribute to a SEP-IRA which is for self-employed people. The contribution limits are much higher than with a Roth. You can actually do both - I do.

[Beginning]

A Roth IRA is a good choice but keep in mind that you are also eligible to contribute to a SEP-IRA which is for self-employed people. The contribution limits are much higher than with a Roth. You can actually do both - I do.

Thank you for the headsup, Steve !!!

BTW, can you help me understand this from an article I read on the mega backdoor Roth ?
"You want after-tax contributions that are not Roth. Roth is after tax, but after-tax isn’t necessarily Roth."

I tried to ask the agent at Vanguard (my husband's 401k administrator) and the lady insisted that after tax contributions are ROTH 401K contributions !!

Please help !!

[disneysteve]

BTW, can you help me understand this from an article I read on the mega backdoor Roth ?
"You want after-tax contributions that are not Roth. Roth is after tax, but after-tax isn’t necessarily Roth."

I'm actually not familiar with the mega backdoor Roth. Someone else here might be.

[Like2Plan]

Here is a link to a wiki on this subject.

https://www.bogleheads.org/wiki/After-tax_401(k)

There is a board members who does this.

http://www.savingadvice.com/forums/investing-banking/85205-mega-backdoor-roth-complete.html

http://www.savingadvice.com/forums/investing-banking/80543-after-tax-401k-contribution.html

[corn18]

It sounds like your husband's plan has 3 different types of contributions that can be made:

1. Pre-tax 401k (this is like a traditional IRA)
2. After tax Roth 401k (this is like a Roth IRA)
3. After tax (this is unique to 401k's and what would be used for mega backdoor Roth conversions)

This is a good plan if you can do all three.

So you can contribute up to $18k to #1 and #2 combined ($24k if your husband is 50 or older). The decision between which to use for this first $18k depends on your current tax bracket vs. your expected tax bracket in retirement. For example, if you are currently in the 33% tax bracket and expect to be in a lower tax bracket in retirement, then contribute all $18k to #1. That way you get the bigger tax benefit now. Then pay less tax on the way out (save 33% now, pay 25% later). If you are in the 25% tax bracket now and expect to be in the 25% tax bracket in retirement, then whether you choose #1 or #2 for his $18k is a wash (pay 25% now or 25% later).

If you plan to contribute at or below $18k ($24k if 50+), then #3 is not relevant and you should not worry about a mega backdoor Roth.

You must tell the plan where your contributions go, so that is the confusion with the VG plan administrator. I can see a situation where you might decide to contribute pre-tax dollars to the 401k, after tax dollars to the 401k Roth and after tax dollars to the after tax 401k all at the same time. You have to tell the plan where to send each dollar you contribute and you can contribute all three types at the same time. This can get confusing real quick, but that's how it works.

So, are you contributing at least the max to #1 and/or #2 (either singly or combined)?

If no, carry on. No need to worry about the mega back door Roth (MBDR).

If yes, then you can think about contributing to #3 and doing the mega back door Roth (MBDR).

The MBDR can only be accomplished if your plan allows an "in service rollover of after tax NON 401k Roth contributions". You must ask exactly like this otherwise they might do something wrong. Each plan is different so you must ask the plan administrator this exact question. If they do then you can do this:

1. Contribute $18k to the pre-tax 401k or Roth 401k (depends on your tax bracket)
2. Contribute to after tax 401k (NOT the same as Roth 401k)
3. Do an in service rollover of the after tax 401k contributions to a Roth IRA (this is the mega backdoor Roth)
4. Enjoy having gobs of cash in a Roth

I know this isn't as simple as you hoped, but it is a complex transaction.

Tom

[kork13]

I'm only familiar with it from a military member's perspective -- I don't know if any other classes of people have such an option. However, I do know that military members who are deployed overseas in a combat tax exclusion zone area (most of the middle east, and certain parts of Africa & SE Asia...Phillippines come to mind), you are authorized to make what are called "Annual Additional Contributions" up to a total contribution limit of $54k to their TSP accounts (including the normal $18k). These contributions are also after tax like the Roth option, but they are treated similarly to the Traditional TSP rules on withdrawal -- basically, that you can roll them into a Traditional IRA or you can pay income taxes on your earnings as normal income upon withdrawal. A sub-set of this second option is to roll over the "additional contributions" into a Roth IRA, and pay normal income taxes on your earnings. This is also considered a mega back-door roth rollover. I don't know if this is possible while still in the service, but I don't think so... I believe TSP rollovers can only be done after leaving service. Otherwise, the rollover process is the same as corn18 posted above.

[Beginning]

Thank you all so much !

We're out of luck -- our plan does not allow any investment beyond the $18000 into the 401K plan !

[Like2Plan]

Tom,
DH is planning to start a new job in the next couple of months. The plan literature at the new job indicates they accept after tax contributions. (We'll see ) DH will have already contributed up the match with his current employer.

Is it a requirement to max out the contributions up to 24k before you can do the after tax (MBDR) contributions? (I was wondering about this because DH's new job won't see his previous contributions.)

Are you limited in the number of "in service rollover of after tax NON 401k Roth contributions" that you can do in one year? (Would it be a paperwork nightmare to do it after each pay?)

[corn18]

Tom,
DH is planning to start a new job in the next couple of months. The plan literature at the new job indicates they accept after tax contributions. (We'll see ) DH will have already contributed up the match with his current employer.

Is it a requirement to max out the contributions up to 24k before you can do the after tax (MBDR) contributions? (I was wondering about this because DH's new job won't see his previous contributions.)

Are you limited in the number of "in service rollover of after tax NON 401k Roth contributions" that you can do in one year? (Would it be a paperwork nightmare to do it after each pay?)

You'll have to call your plan provider to see what they allow. All of them are different. My Fidelity 401k allows me to do all of what you mention, but many do not allow any of it. Since your DH's plan allows after-tax, that is at least a good sign they might let you do all of it.

Same applies to when you can do the in service rollovers. My plan allows me to do it unlimited times whenever I want. It is very simple to do. I just call them and it takes 5 minutes. I just do it once a year, though.

Some plans only allow you to do it when you leave your employer. This could be undesirable if you build up a huge after tax amount in your 401k and then they change the law and poof!, away goes the MBDR. The after tax money might be stuck in the 401k until 59.5 at that point. Again, depends on your plan rules.

No paperwork is required until the end of the year when you fill out the IRS form 8606 which is the most baffling tax form I have ever seen. I still haven't figured out how to do it right so I hired a CPA to help me.

Tom

[Like2Plan]

Same applies to when you can do the in service rollovers. My plan allows me to do it unlimited times whenever I want. It is very simple to do. I just call them and it takes 5 minutes. I just do it once a year, though.

That is encouraging. Do you have your Roth set up with the same company?

Some plans only allow you to do it when you leave your employer. This could be undesirable if you build up a huge after tax amount in your 401k and then they change the law and poof!, away goes the MBDR. The after tax money might be stuck in the 401k until 59.5 at that point. Again, depends on your plan rules.

No paperwork is required until the end of the year when you fill out the IRS form 8606 which is the most baffling tax form I have ever seen. I still haven't figured out how to do it right so I hired a CPA to help me.

Tom

We will have to make sure about the "in service roll over" bit with HR (using your exact phraseology. ). DH is already over 59.5.

I didn't realize this would result in needing to fill out form 8606. I guess it makes sense. I already have to do that form for my IRA conversion. You're right about it being very tricky.

[corn18]

That is encouraging. Do you have your Roth set up with the same company?


We will have to make sure about the "in service roll over" bit with HR (using your exact phraseology. ). DH is already over 59.5.

I didn't realize this would result in needing to fill out form 8606. I guess it makes sense. I already have to do that form for my IRA conversion. You're right about it being very tricky.

I do have my Roth IRA that I use for the MBDR with FIDO. I could move it anywhere, but it can stay there for now. I use USAA for my tIRA backdoor Roth and have those in the same FIDO mutual funds, but held at USAA because USAA offers free trades on FIDO mutual funds.

I doubt HR will know anything about your 401k WRT MBDR. They might. Who is the administrator of DH's 401k?

[Like2Plan]

I believe it's going to be Fidelity.