Mega-backdoor rollovers

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Goldilocks
Posts: 92
Joined: Fri Sep 04, 2020 3:04 pm
Location: Tempe, AZ

Mega-backdoor rollovers

Post by Goldilocks »

My employer's 401k rules at Empower allow for the Mega-Backdoor Roth. So I have made After-tax contributions to the 401(k) and plan to use this strategy, and have a few questions. I plan to have Empower do an allowable in-service by sending me two separate checks (one for contributions, one earnings) payable to these Vanguard accounts on my behalf which I will then forward to Vanguard:

1)The converted "basis" portion of the After-tax contributions rolling over to my Vanguard Roth IRA brokerage account that holds multiple ETFs. under one account no. So far, this account has only been funded with contributions and it is over 5 years old. I want to keep my Roth Simple with one account, but have concerns about adding this conversion rollover which is a different funding type. Could holding contributions and conversion rollovers in the same Roth account cause issues with accounting or hinder my ability to make +5 year contribution withdraws penalty and tax-free? Is there a need to open a separate Roth account to receive this new conversion rollover from the After-Tax to keep my contributions and new conversion rollovers separate?

2)The converted earnings from the After-tax rolling over to my Vanguard Traditional IRA brokerage account that also holds multiple ETFs. So far, this account has only been funded with a 401k rollover from a former employer that had only pre-tax contributions from me and employer matching. I see no reason to open a separate traditional IRA to receive this new After-tax earning rollover; am I correct?

Employer shall send me 1099-Rs for this but it should not be taxable, am I correct?
The 1st mix was too volatile, and the 2nd was too idle. But the 3rd allocation was just right!
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Mega-backdoor rollovers

Post by FiveK »

1) The IRS treats all your Roth IRAs as one, so it doesn't matter whether you have one account or many. Based on your plan you will have no "Conversions, taxable portion" in your Roth IRA so your combined "Contributions" plus "Conversions, nontaxable portion" (see the chart for Treatment of distributions) may be withdrawn tax and penalty free at any time.

2) I believe you are correct, in that the IRA will remain a "rollover IRA" and thus satisfy any 401k plan that allows incoming rollovers only from rollover IRAs, should you wish to do so at some point.

And yes, nothing taxable but you will need to enter the 1099-R distribution amount when filing.
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: Mega-backdoor rollovers

Post by retiredjg »

Goldilocks wrote: Tue Jul 27, 2021 1:07 am My employer's 401k rules at Empower allow for the Mega-Backdoor Roth. So I have made After-tax contributions to the 401(k) and plan to use this strategy, and have a few questions. I plan to have Empower do an allowable in-service by sending me two separate checks (one for contributions, one earnings) payable to these Vanguard accounts on my behalf which I will then forward to Vanguard:
Check to be sure that both checks are made out to the Roth IRA and tIRA accounts, not you. Some plans will only do this for one of the checks. It all works out the same in the end, but the process is different.

1)The converted "basis" portion of the After-tax contributions rolling over to my Vanguard Roth IRA brokerage account that holds multiple ETFs. under one account no. So far, this account has only been funded with contributions and it is over 5 years old. I want to keep my Roth Simple with one account, but have concerns about adding this conversion rollover which is a different funding type. Could holding contributions and conversion rollovers in the same Roth account cause issues with accounting or hinder my ability to make +5 year contribution withdraws penalty and tax-free? Is there a need to open a separate Roth account to receive this new conversion rollover from the After-Tax to keep my contributions and new conversion rollovers separate?
There is no need for a separate Roth IRA. You do need to keep up with how money gets into your Roth IRA so start that process and get it up to date now (starting with your first contribution). Your ability to take out contributions is not affected by co-mingling this money.

2)The converted earnings from the After-tax rolling over to my Vanguard Traditional IRA brokerage account that also holds multiple ETFs. So far, this account has only been funded with a 401k rollover from a former employer that had only pre-tax contributions from me and employer matching. I see no reason to open a separate traditional IRA to receive this new After-tax earning rollover; am I correct?
I would use a separate IRA myself, in case you need/want to roll this rollover IRA into a 401k some day. It is not required to do this, but sometimes is just easier.

Employer shall send me 1099-Rs for this but it should not be taxable, am I correct?
Correct.
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Duckie
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Joined: Thu Mar 08, 2007 1:55 pm

Re: Mega-backdoor rollovers

Post by Duckie »

Goldilocks wrote: Tue Jul 27, 2021 1:07 am Employer shall send me 1099-Rs for this but it should not be taxable, am I correct?
You are correct, doing it your way it is not taxable. But it is reportable. Some people mistakenly think that because they don't have to pay taxes they don't have to enter the information on their tax return. A couple of years later they get a CP2000 notice from the IRS.
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