Mega Backdoor - 2 Options?

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socialforums2019
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Mega Backdoor - 2 Options?

Post by socialforums2019 »

I will be maxing out my 401K contribution this month and am looking to get money into a Roth IRA. I am over the income limits, so my understanding is that I would need to do a backdoor contribution. I have a few questions that I wanted clarity on.

My employer just started offering the ability to do Roth In-Plan conversions in order to convert after-tax money to Roth. My understanding from Fidelity is that I can put in a contribution % of after-tax dollars and it will automatically get converted into a Roth? Is this equivalent to a Roth IRA or what is the difference between this method, vs putting money into a tIRA and converting that to Roth?

Does one method allow more contribution than the other? For example, can only one of these methods allow the additional $38,500 to be contributed? Ideally, I'd like to stock pile enough cash in savings and then do a single conversion on my own time instead of setting a after-tax contribution %, but didn't know if you had to follow one method or another.
docco
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Re: Mega Backdoor - 2 Options?

Post by docco »

There are basically 2 flavors of the Mega Backdoor Roth: 1) in-plan Roth conversions to Roth 401k, and 2) in-service distributions to a Roth IRA. In this case, your employer is offering 1), which means that your after-tax 401k contributions will end up within your 401k plan in the Roth sub-account, not in a Roth IRA. You may want to double-check if your plan also offers 2) above if you are interested in getting those funds directly into a Roth IRA asap. Otherwise, you may need to wait until you separate from your employer before you can rollover the Roth 401k into a Roth IRA.

On the other topic of whether you can do this outside of your paycheck, the answer would be “no”. Also, you do not want to stockpile funds in the after-tax 401k bucket as earnings that occur there will be taxable. You will want to move over funds asap into a Roth 401k or a Roth IRA in order for the entire amount to grow tax-free.
tashnewbie
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Re: Mega Backdoor - 2 Options?

Post by tashnewbie »

There is a difference between what's called Mega Backdoor Roth (MBDR) and regular Backdoor Roth.

User above described the 2 variants of the MBDR.

I would do regular backdoor Roth before MBDR. Sounds like you can do regular backdoor and at least some MBDR.

Check out these wikis for more information:

Mega Backdoor Roth

Backdoor Roth
terran
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Re: Mega Backdoor - 2 Options?

Post by terran »

Backdoor Roth and mega backdoor Roth are separate, so you can do both.

Mega backdoor Roth requires your employer plan offer certain features, which is sounds like they do. You can contribute a total of $58k to your employer plan between salary deferral ($19.5k in 2021), employer contributions (usually a percentage of salary) and after tax, so the limit for the after-tax portion can be quite high depending on the amount of employer contribution. The automatic conversion is a nice option since it minimizes gains in after-tax before converting to Roth, which would be taxable. Some plans also allow you to roll out to IRA, which can be useful because you can roll the contributions to Roth IRA and the gains to traditional IRA, thereby deferring taxes on the gains. Since the automatic conversions will minimize gains I wouldn't worry about whether your plan allows this unless your investment options in the 401(k) are really bad. These contributions will have to be made from payroll deduction just like your regular 401(k) contributions, so you won't be able to save up and make a single contribution.

For mega backdoor Roth it doesn't matter if you have any money in a traditional IRA, but for backdoor Roth it does. As long as you don't have any money in a traditional IRA that you previously deducted (including money rolled over from an old employer plan) you can also make backdoor Roth contributions. Here's a good guide on that. If you do have a previously deducted traditional IRA you could see if Fidelity will let you roll it in to your 401(k). IRA contributions have a separate annual limit ($6k in 2021), and you can save up and make this contribution all at once at any time until the tax filing deadline for the year (around April 15 of the following year).
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socialforums2019
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Re: Mega Backdoor - 2 Options?

Post by socialforums2019 »

Appreciate all of this clarity.

So in short, I can do the following:

401K After-Tax In Plan Conversion: The limit here will be $58,000. To determine after-tax limit to contribute, I'd just take $58K - $19.5K - Employer Match = Remaining. I can then establish a After-Tax Contribution % to fulfil the Remaining amount. As the After-Tax Contribution is made, Fidelity will automatically convert the After-Tax Contribution into Roth 401K funds. Is this accurate?

Backdoor Roth IRA Contribution: The limit here is $6,000. I do not have tIRA, so I would just open a tIRA, contribute $6K and then convert that into Roth IRA. Is this accurate?

In total, your max contribution would be $58K in 401K and $6K in Roth IRA through backdoor process.
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retiredjg
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Re: Mega Backdoor - 2 Options?

Post by retiredjg »

socialforums2019 wrote: Wed Jul 28, 2021 7:53 am My employer just started offering the ability to do Roth In-Plan conversions in order to convert after-tax money to Roth. My understanding from Fidelity is that I can put in a contribution % of after-tax dollars and it will automatically get converted into a Roth? Is this equivalent to a Roth IRA or what is the difference between this method, vs putting money into a tIRA and converting that to Roth?
Your employer plan seems to be offering automatic conversions of after-tax contributions to 401k. This in-plan Roth rollover (IRR) is one of the forms of the "mega-backdoor".

The money ends up in Roth 401k. Some plans then allow you to roll that account out to Roth IRA, but unless you just are not happy with your 401k, there is no particular reason to do this. When you leave that employer, that part of your 401k will be rolled to your Roth IRA.

Putting money into tIRA and converting it to Roth IRA is a similar but separate process. It is called the "backdoor" Roth process and even though similar, is not related to the mega-backdoor process.

Does one method allow more contribution than the other?

The mega-backdoor contribution limit is frequently higher - might even be $38,500, but that depends on your plan's rules and employer match. The ordinary backdoor contribution limit is $6k ($7k if 50 or over).

Ideally, I'd like to stock pile enough cash in savings and then do a single conversion on my own time instead of setting a after-tax contribution %, but didn't know if you had to follow one method or another.
We have had 1 or 2 posters who report being able to do this. Very rare. It is almost always required that the after-tax contributions come from your salary just like your usual 401k contributions.
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retiredjg
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Re: Mega Backdoor - 2 Options?

Post by retiredjg »

socialforums2019 wrote: Wed Jul 28, 2021 8:46 am 401K After-Tax In Plan Conversion: The limit here will be $58,000. To determine after-tax limit to contribute, I'd just take $58K - $19.5K - Employer Match = Remaining. I can then establish a After-Tax Contribution % to fulfil the Remaining amount. As the After-Tax Contribution is made, Fidelity will automatically convert the After-Tax Contribution into Roth 401K funds. Is this accurate?
Very close. The only difference is that a few plans will have forfeitures that will also be subtracted from the $58k limit. This seems to be uncommon.

Backdoor Roth IRA Contribution: The limit here is $6,000. I do not have tIRA, so I would just open a tIRA, contribute $6K and then convert that into Roth IRA. Is this accurate?
Yes. But...but these two things have to be documented on your taxes using Form 8606. Few people mess up the backdoor process, but a lot of people mess up the documentation and get query from the IRS 2 years later. If you go this route, figure out the documentation first to save yourself the heartache.

Also, the presence of a tIRA (including SEP IRA, SIMPLE IRA, and rollover IRA) interfere with the backdoor process but not the mega-backdoor.

In total, your max contribution would be $58K in 401K and $6K in Roth IRA through backdoor process.
Yes, assuming your plan allows the full contribution to $58k. Not all do.
somekevinguy
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Re: Mega Backdoor - 2 Options?

Post by somekevinguy »

socialforums2019 wrote: Wed Jul 28, 2021 8:46 am Appreciate all of this clarity.

So in short, I can do the following:

401K After-Tax In Plan Conversion: The limit here will be $58,000. To determine after-tax limit to contribute, I'd just take $58K - $19.5K - Employer Match = Remaining. I can then establish a After-Tax Contribution % to fulfil the Remaining amount. As the After-Tax Contribution is made, Fidelity will automatically convert the After-Tax Contribution into Roth 401K funds. Is this accurate?

Backdoor Roth IRA Contribution: The limit here is $6,000. I do not have tIRA, so I would just open a tIRA, contribute $6K and then convert that into Roth IRA. Is this accurate?

In total, your max contribution would be $58K in 401K and $6K in Roth IRA through backdoor process.
Yes. DW’s plan allows this and we had been doing quarterly conversions of after tax contributions to a Roth IRA. They recently started allowing in plan conversions to the Roth 401k so to simplify and avoid gains, we have gone this route. The one caveat is that I’m not sure they automatically move it to a Roth 401k for you- we had to call to set that process up so I would make sure and not assume that your after tax contributors are being converted to the Roth 401k.
professor_americus
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Re: Mega Backdoor - 2 Options?

Post by professor_americus »

Check your 401k plan documents. My plan allows lump-sum contributions outside of regular paycheck deferrals. Such capability would allow you to do the stockpile and lump-sum approach. I write a check to company, then the lump-sum check ultimately becomes a 401k after-tax contribution after a few weeks.
raixx017
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Re: Mega Backdoor - 2 Options?

Post by raixx017 »

Some employers also limit how much you can contribute to the "after-tax" bucket (say x% from every pay cheque). Just fyi.
frg81
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Re: Mega Backdoor - 2 Options?

Post by frg81 »

docco wrote: Wed Jul 28, 2021 8:01 am There are basically 2 flavors of the Mega Backdoor Roth: 1) in-plan Roth conversions to Roth 401k, and 2) in-service distributions to a Roth IRA. In this case, your employer is offering 1), which means that your after-tax 401k contributions will end up within your 401k plan in the Roth sub-account, not in a Roth IRA. You may want to double-check if your plan also offers 2) above if you are interested in getting those funds directly into a Roth IRA asap. Otherwise, you may need to wait until you separate from your employer before you can rollover the Roth 401k into a Roth IRA.

On the other topic of whether you can do this outside of your paycheck, the answer would be “no”. Also, you do not want to stockpile funds in the after-tax 401k bucket as earnings that occur there will be taxable. You will want to move over funds asap into a Roth 401k or a Roth IRA in order for the entire amount to grow tax-free.
Thanks for the explanation, I fall into the first option you described above, In Plan Roth conversion going to Roth 401K. Now i have called fidelity and asked if i could convert this to ROTH IRA and they said it is possible. My question is if i do this, what are the withdrawal guidelines, i believe it follows the ordering guidelines (mentioned in other thread) if need to withdraw only my contributions?

Say i initiate a 20K rollover from IRC (Roth in plan conversion) to Roth IRA in 2020 and continue to do so every year till 2025. Out of the 20K each year 15K is from contributions and 5K from earnings. (say that is true for each year till 2025) Would i be able to withdraw 15*5 =75K in year 2025?
I have seen generic statements saying contributions to ROTH IRA can we withdrawn any time, does this apply to rollover/conversion from IRC to Roth IRA? Do i need to wait for 5 years? Also if i need to wait, is the waiting time for each conversions?
docco
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Re: Mega Backdoor - 2 Options?

Post by docco »

frg81 wrote: Mon Aug 30, 2021 1:25 pm Thanks for the explanation, I fall into the first option you described above, In Plan Roth conversion going to Roth 401K. Now i have called fidelity and asked if i could convert this to ROTH IRA and they said it is possible. My question is if i do this, what are the withdrawal guidelines, i believe it follows the ordering guidelines (mentioned in other thread) if need to withdraw only my contributions?

Say i initiate a 20K rollover from IRC (Roth in plan conversion) to Roth IRA in 2020 and continue to do so every year till 2025. Out of the 20K each year 15K is from contributions and 5K from earnings. (say that is true for each year till 2025) Would i be able to withdraw 15*5 =75K in year 2025?
I have seen generic statements saying contributions to ROTH IRA can we withdrawn any time, does this apply to rollover/conversion from IRC to Roth IRA? Do i need to wait for 5 years? Also if i need to wait, is the waiting time for each conversions?
When you roll over a Roth 401k to Roth IRA, the contribution ($15k annually in your example) becomes your basis in the Roth IRA, which is treated the same way as a regular Roth IRA contribution when you withdraw from the Roth IRA. So, the answer in your case is that yes, you can withdraw $15k immediately from the Roth IRA, or $30k in year 2 and so forth up to and including $15k*5 = $75k in 2025. You are not subject to a 5 year waiting period in this scenario, unlike the 5 year conversion period for a normal "Roth conversion" (i.e., traditional IRA to Roth IRA).
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retiredjg
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Re: Mega Backdoor - 2 Options?

Post by retiredjg »

docco wrote: Mon Aug 30, 2021 2:45 pm
frg81 wrote: Mon Aug 30, 2021 1:25 pm Thanks for the explanation, I fall into the first option you described above, In Plan Roth conversion going to Roth 401K. Now i have called fidelity and asked if i could convert this to ROTH IRA and they said it is possible. My question is if i do this, what are the withdrawal guidelines, i believe it follows the ordering guidelines (mentioned in other thread) if need to withdraw only my contributions?

Say i initiate a 20K rollover from IRC (Roth in plan conversion) to Roth IRA in 2020 and continue to do so every year till 2025. Out of the 20K each year 15K is from contributions and 5K from earnings. (say that is true for each year till 2025) Would i be able to withdraw 15*5 =75K in year 2025?
I have seen generic statements saying contributions to ROTH IRA can we withdrawn any time, does this apply to rollover/conversion from IRC to Roth IRA? Do i need to wait for 5 years? Also if i need to wait, is the waiting time for each conversions?
When you roll over a Roth 401k to Roth IRA, the contribution ($15k annually in your example) becomes your basis in the Roth IRA, which is treated the same way as a regular Roth IRA contribution when you withdraw from the Roth IRA. So, the answer in your case is that yes, you can withdraw $15k immediately from the Roth IRA, or $30k in year 2 and so forth up to and including $15k*5 = $75k in 2025. You are not subject to a 5 year waiting period in this scenario, unlike the 5 year conversion period for a normal "Roth conversion" (i.e., traditional IRA to Roth IRA).
This really needs a definitive answer from Alan S, but...

What you have described applies to Roth 401k that arises from Roth elective deferrals (ordinary Roth 401k contributions). As I understand what Alan S. has been telling us lately, in plan Roth rollovers (after-tax to Roth 401k) that later get sent to Roth IRA are handled differently.

The entire rollover of Roth 401k that arises from in-plan Roth rollovers gets added to the Roth IRA basis, not just the contribution part.

See instructions for lines 22 and 24 on Form 8606.
Last edited by retiredjg on Mon Aug 30, 2021 3:22 pm, edited 1 time in total.
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retiredjg
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Re: Mega Backdoor - 2 Options?

Post by retiredjg »

viewtopic.php?p=6181782#p6181782

Your Roth IRA regular contribution basis will be increased by 4,000. In the 8606 Inst, the IRS states that IRRs rolled over to a Roth IRA are treated as regular Roth contribution basis, not conversion basis as would be expected.

He gives a longer explanation in another post, but I'm not finding it.
docco
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Re: Mega Backdoor - 2 Options?

Post by docco »

retiredjg wrote: Mon Aug 30, 2021 3:08 pm This really needs a definitive answer from Alan S, but...

What you have described applies to Roth 401k that arises from Roth elective deferrals (ordinary Roth 401k contributions). As I understand what Alan S. has been telling us lately, in plan Roth rollovers (after-tax to Roth 401k) that later get sent to Roth IRA are handled differently.

The entire rollover of Roth 401k that arises from in-plan Roth rollovers gets added to the Roth IRA basis, not just the contribution part.

See instructions for lines 22 and 24 on Form 8606.
You are right that a definitive answer should come from Alan S. :)

I was assuming that the OPs Roth 401k was co-mingled with both direct elective deferrals and any amount that ended up their via in plan Roth rollovers from after-tax 401k. And in theory I would agree with "entire rollover of Roth 401k that arises from in-plan Roth rollovers gets added to the Roth IRA basis," because that rollover already triggers a 1099-R. But once it's in the Roth 401k, it hopefully grows further and therefore you end up with a contribution amount and some earnings amount.
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retiredjg
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Re: Mega Backdoor - 2 Options?

Post by retiredjg »

That's a good point. And I agree that earnings that have occurred in the Roth 401k after the IRRs occurred may not become part of the Roth IRA basis.

But if I understand Alan correctly, the earnings that occurred inside the after-tax account that became part of the IRR to Roth 401k do become part of the basis regardless of the 5 year conversion clock...contrary to what would be expected.
okwriter
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Re: Mega Backdoor - 2 Options?

Post by okwriter »

retiredjg wrote: Mon Aug 30, 2021 3:54 pm That's a good point. And I agree that earnings that have occurred in the Roth 401k after the IRRs occurred may not become part of the Roth IRA basis.

But if I understand Alan correctly, the earnings that occurred inside the after-tax account that became part of the IRR to Roth 401k do become part of the basis regardless of the 5 year conversion clock...contrary to what would be expected.
There's a comment from the Finance Buff that contests that last point: https://thefinancebuff.com/mega-backdoo ... ment-23222
The Finance Buff wrote:The general principle is that you are not able to gain distribution rights by moving money around. If the plan allows in-service distribution, without an in-plan Roth rollover, you would have to distribute the earnings on the after-tax contributions. By taking a distribution from the money that came from an in-plan Roth rollover, at best you would have to distribute the pre-rollover taxable earnings as well. By first doing an in-plan Roth rollover followed by a rollover to a Roth IRA, the rules would make it the same as originally doing an in-service distribution from after-tax to Roth IRA. In other words the pre-rollover earnings must be distributed and subject to 10% penalty within 5 years of the rollover.
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retiredjg
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Re: Mega Backdoor - 2 Options?

Post by retiredjg »

Don't know what to tell you other than that is what we all thought back in 2018. I think that is what Alan meant by "...as would be expected".

I don't know what Harry thinks these days, but I believe Alan S. now thinks something different.
wrongfunds
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Re: Mega Backdoor - 2 Options?

Post by wrongfunds »

Quick Question:-

Are there any mega backdoor plan which will take the incoming "money" aka can I send check of $38K made to "FBO Myself, My Company's 401K" ?

I think answer is NOT but it is always better to have the correct answer than a guess! I suspect only payroll money can be diverted to any form of 401K.
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Re: Mega Backdoor - 2 Options?

Post by goodenyou »

wrongfunds wrote: Fri Sep 17, 2021 1:20 pm Quick Question:-

Are there any mega backdoor plan which will take the incoming "money" aka can I send check of $38K made to "FBO Myself, My Company's 401K" ?

I think answer is NOT but it is always better to have the correct answer than a guess! I suspect only payroll money can be diverted to any form of 401K.
I tried that. It was no. It is very complicated to project just the right amount of deduction out of 24 payroll periods in order to get to the maximum in just the right time frame without defeating the match by crowing it out with after-tax money. And, taking into account that the last deduction will be made in the following tax year (deposited) and counted in the previous year (since that's when it was deducted), which also confused everyone (including the custodian). It is unnecessarily complicated. I wish you could just write the check all at once.
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wrongfunds
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Re: Mega Backdoor - 2 Options?

Post by wrongfunds »

goodenyou wrote: Fri Sep 17, 2021 1:57 pm
wrongfunds wrote: Fri Sep 17, 2021 1:20 pm Quick Question:-

Are there any mega backdoor plan which will take the incoming "money" aka can I send check of $38K made to "FBO Myself, My Company's 401K" ?

I think answer is NOT but it is always better to have the correct answer than a guess! I suspect only payroll money can be diverted to any form of 401K.
I tried that. It was no. It is very complicated to project just the right amount of deduction out of 24 payroll periods in order to get to the maximum in just the right time frame without defeating the match by crowing it out with after-tax money. And, taking into account that the last deduction will be made in the following tax year (deposited) and counted in the previous year (since that's when it was deducted), which also confused everyone (including the custodian). It is unnecessarily complicated. I wish you could just write the check all at once.
same or similar here; there are also other peculiar restriction on payroll deduction options; so if one wants to get the regular aka pre-tax 401K done first and then flow the rest in to after tax; that could not be automated. so you have to wait until one is done before going after the other. There is also total deduction limit.

But still 1st world problem.
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retiredjg
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Re: Mega Backdoor - 2 Options?

Post by retiredjg »

wrongfunds wrote: Fri Sep 17, 2021 1:20 pm Quick Question:-

Are there any mega backdoor plan which will take the incoming "money" aka can I send check of $38K made to "FBO Myself, My Company's 401K" ?

I think answer is NOT but it is always better to have the correct answer than a guess! I suspect only payroll money can be diverted to any form of 401K.
We have had 2 or 3 posters say they can do this although they did not mention how the check was made out. I was skeptical the first time this was mentioned, but the poster did convince me that s/he was actually doing it that way.

Since then, 1 or 2 others have posted the same thing. So I believe it is possible but exceedingly rare.
wrongfunds
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Re: Mega Backdoor - 2 Options?

Post by wrongfunds »

I guess I am going to ask Fido representative as they handle our Megacorp but I suspect they will tell me to ask the Megacorp. I should just read the SPD top to bottom!
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