Mega Backdoor Roth EoY Timing

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DMoogle
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Mega Backdoor Roth EoY Timing

Post by DMoogle »

I'm doing a mega backdoor Roth this year for the first time (and possibly last time... hoping not). I haven't rolled over my funds to my Roth IRA yet, but I plan to do that at the end of the year. However, I get paid twice monthly; one in the middle of the month, once at the end of the month. It looks like my last paycheck will go through on Dec 31.

Ideally, I would initiate the rollover on Dec 31 when the last funds of the year become available, and the rollover and everything would be counted for tax year 2021. However, I suspect the transfer will take several days to complete. I'm concerned that this will make it count as a 2022 transfer. Does anyone know which dates are important for these kinds of rollovers?

Not sure if it matters, but my 401k provider is Empower Retirement, and my IRA is with eTrade.
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jason2459
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Re: Mega Backdoor Roth EoY Timing

Post by jason2459 »

Good chance this will be locked. I plan to pause my after tax 401k contributions before my last December pay check to eliminate the risk of the actual roll over landing in January. And I'm about 100% certain it would occur in January.

Then I'll wait and see what happens to legislation.
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
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DMoogle
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Re: Mega Backdoor Roth EoY Timing

Post by DMoogle »

To be clear, my main concern is having everything counted as being in tax year 2021, regardless of whether the pending legislation passes or not. I'd be posting this question even if that wasn't a factor.
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jason2459
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Re: Mega Backdoor Roth EoY Timing

Post by jason2459 »

DMoogle wrote: Fri Dec 03, 2021 10:33 am To be clear, my main concern is having everything counted as being in tax year 2021, regardless of whether the pending legislation passes or not. I'd be posting this question even if that wasn't a factor.
If the last pay is the 31st how long does it normally take for the 401k funds to become posted? For me it's sometime the following week. Then the transfer can happen. For me it definitely would be in 2022.
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
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DMoogle
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Re: Mega Backdoor Roth EoY Timing

Post by DMoogle »

jason2459 wrote: Fri Dec 03, 2021 10:36 am
DMoogle wrote: Fri Dec 03, 2021 10:33 am To be clear, my main concern is having everything counted as being in tax year 2021, regardless of whether the pending legislation passes or not. I'd be posting this question even if that wasn't a factor.
If the last pay is the 31st how long does it normally take for the 401k funds to become posted? For me it's sometime the following week. Then the transfer can happen. For me it definitely would be in 2022.
I believe it's actually posted on the 31st. It shows in my 401k on my transaction history as the 31st or 30th. Sometimes I receive the rest of my paycheck in my bank account a few days before the 31st, so I assume they make the transfer a few days ahead of time so that it posts before the end of the month.
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jason2459
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Re: Mega Backdoor Roth EoY Timing

Post by jason2459 »

The taxable event is not the deposit into the after-tax allocation it's the timestamp of the transfer out.
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
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DMoogle
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Re: Mega Backdoor Roth EoY Timing

Post by DMoogle »

jason2459 wrote: Fri Dec 03, 2021 10:49 am The taxable event is not the deposit into the after-tax allocation it's the timestamp of the transfer out.
That's helpful, thank you.

I ended up calling my 401k provider, and after being on hold for ~30 minutes and being transferred twice, they said that the transfer out will take several days to process, and it sounded like the timestamp would reflect the end of that.

So basically there's no way to ensure my contribution for the 31st will get counted for 2021, so instead I'll just initiate the transfer for my account balance after my mid-month contribution goes through and hope for the best.
TetrisCollider
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Re: Mega Backdoor Roth EoY Timing

Post by TetrisCollider »

If you've never done this before at your work, you have no idea realistically how long the process takes. I recently did this for the first time as well and I would HIGHLY suggest you give it at least a 2 week buffer, if not more (taking into account Christmas holidays). You also need to know with 100% certainty HOW the funds will be rolled over/distributed. I am assuming you are performing an in-service withdrawal from your 401K and you need to know how these funds will be delivered to you. If they are not delivered electronically and via a paper check, you have to account for the time this check will get to you via snail mail (BTW, most brokerages suggest a paper check, because it is easier to demonstrate a specific roll-over amount, vs an electronic distribution into say, your regular bank account). In addition, the most important time/date stamp is WHEN these funds will be deposited into your Roth IRA. Also, if you are rolling over your post-tax contributions (or a portion of it), there could be a secondary pro-rated required distribution from your gains of your post-tax contributions (be aware that taxes could be withheld, based on potential pro-rated gain distribution). Bottom line - you already are cutting it close with just December being left in the year.
For some reason, people that know nothing, seem to know everything...
markcoop
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Re: Mega Backdoor Roth EoY Timing

Post by markcoop »

Hmmm. My work offers "DAILY ROTH IN-PLAN CONVERSION". This past paycheck I saw the conversion happened on Nov 30, the same day the contribution was listed in the transactions. I think that should be ok to convert till my last paycheck on Dec 31. Without such an option, I wouldn't risk it. But I did make a note to stop contributions/conversions for next year if any rules change.
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absolute zero
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Re: Mega Backdoor Roth EoY Timing

Post by absolute zero »

OP, why do you care whether the rollover occurs in 2021 vs 2022? Do you have a significant amount of gains associated with your after-tax funds that you’re rolling over, and you expect to be in a higher marginal tax bracket next year? That’s the only scenario that I can envision in which it would matter…

EDIT: Does your plan only allow one rollover per calendar year? If that were the case then I would just do the rollover today. Any after-tax contributions that you make later this month could then be rolled over in Dec 2022, along with all your 2022 after-tax contributions.
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anon_investor
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Re: Mega Backdoor Roth EoY Timing

Post by anon_investor »

markcoop wrote: Fri Dec 03, 2021 5:49 pm Hmmm. My work offers "DAILY ROTH IN-PLAN CONVERSION". This past paycheck I saw the conversion happened on Nov 30, the same day the contribution was listed in the transactions. I think that should be ok to convert till my last paycheck on Dec 31. Without such an option, I wouldn't risk it. But I did make a note to stop contributions/conversions for next year if any rules change.
^^^ this.
tortoise84
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Re: Mega Backdoor Roth EoY Timing

Post by tortoise84 »

I had Empower in 2018, and now I have Fidelity, and both providers dated my after-tax rollovers on the date that I called them, as long as it was done before 4PM EST. Looking back at my records, I did in fact do one on 12/31/18. This is the date that matters for your tax return; not the date that you deposit the rollover check (but you still have to deposit it within 60 days). The withdrawal was included on my 2018 1099-R from Empower, so logically, I put it on my 2018 tax return.

If your 401(k) allows it, you might want to do one after-tax rollover of your balance now, and another one on 12/31 just in case there's a delay with that one. Because if it goes over to 2022 and they change the laws to disallow rollovers from after-tax 401(k)s, then there will be some hassle to sort it out. Most likely, you'll have to return the check because it would have been made payable to your IRA provider, but you won't be able to deposit it there anymore.
tomsense76
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Re: Mega Backdoor Roth EoY Timing

Post by tomsense76 »

anon_investor wrote: Fri Dec 03, 2021 6:04 pm
markcoop wrote: Fri Dec 03, 2021 5:49 pm Hmmm. My work offers "DAILY ROTH IN-PLAN CONVERSION". This past paycheck I saw the conversion happened on Nov 30, the same day the contribution was listed in the transactions. I think that should be ok to convert till my last paycheck on Dec 31. Without such an option, I wouldn't risk it. But I did make a note to stop contributions/conversions for next year if any rules change.
^^^ this.
Yeah exactly. This is what I do as well. It's immediate with my 401k provider.

Even if you decide to take the money from the Roth 401k and roll it into a Roth IRA, it will already be Roth money.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Rose
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Re: Mega Backdoor Roth EoY Timing

Post by Rose »

TetrisCollider wrote: Fri Dec 03, 2021 5:36 pm If you've never done this before at your work, you have no idea realistically how long the process takes. I recently did this for the first time as well and I would HIGHLY suggest you give it at least a 2 week buffer, if not more (taking into account Christmas holidays). You also need to know with 100% certainty HOW the funds will be rolled over/distributed. I am assuming you are performing an in-service withdrawal from your 401K and you need to know how these funds will be delivered to you. If they are not delivered electronically and via a paper check, you have to account for the time this check will get to you via snail mail (BTW, most brokerages suggest a paper check, because it is easier to demonstrate a specific roll-over amount, vs an electronic distribution into say, your regular bank account). In addition, the most important time/date stamp is WHEN these funds will be deposited into your Roth IRA. Also, if you are rolling over your post-tax contributions (or a portion of it), there could be a secondary pro-rated required distribution from your gains of your post-tax contributions (be aware that taxes could be withheld, based on potential pro-rated gain distribution). Bottom line - you already are cutting it close with just December being left in the year.
FWIW, it took Empower two tries before they successfully sent me my rollover check this summer, although they didn't have any issue last year. (The first check never made it to me.) I'm also paid biweekly and plan to do rollover after the first check goes through, if not next week.

Good luck.
invest4
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Re: Mega Backdoor Roth EoY Timing

Post by invest4 »

tortoise84 wrote: Fri Dec 03, 2021 6:19 pm I had Empower in 2018, and now I have Fidelity, and both providers dated my after-tax rollovers on the date that I called them, as long as it was done before 4PM EST. Looking back at my records, I did in fact do one on 12/31/18. This is the date that matters for your tax return; not the date that you deposit the rollover check (but you still have to deposit it within 60 days). The withdrawal was included on my 2018 1099-R from Empower, so logically, I put it on my 2018 tax return.

If your 401(k) allows it, you might want to do one after-tax rollover of your balance now, and another one on 12/31 just in case there's a delay with that one. Because if it goes over to 2022 and they change the laws to disallow rollovers from after-tax 401(k)s, then there will be some hassle to sort it out. Most likely, you'll have to return the check because it would have been made payable to your IRA provider, but you won't be able to deposit it there anymore.
Thanks for sharing. I was also very interested in this as I was unsure about what "counted" as far as timing (date of submitting the request vs other). In the worst case, I figured I would have some small amount of after-tax monies that I would possibly convert and pay whatever taxes, etc.
FunnelCakeBob
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Re: Mega Backdoor Roth EoY Timing

Post by FunnelCakeBob »

DMoogle wrote: Fri Dec 03, 2021 10:11 am I'm doing a mega backdoor Roth this year for the first time (and possibly last time... hoping not). I haven't rolled over my funds to my Roth IRA yet, but I plan to do that at the end of the year. However, I get paid twice monthly; one in the middle of the month, once at the end of the month. It looks like my last paycheck will go through on Dec 31.

Ideally, I would initiate the rollover on Dec 31 when the last funds of the year become available, and the rollover and everything would be counted for tax year 2021. However, I suspect the transfer will take several days to complete. I'm concerned that this will make it count as a 2022 transfer. Does anyone know which dates are important for these kinds of rollovers?

Not sure if it matters, but my 401k provider is Empower Retirement, and my IRA is with eTrade.
Based on what you're told us, you should definitely initiate a rollover mid-month, and then another one on the last day of the year.

Like you, my 401k provider is also Empower Retirement and IRA with eTrade. I just did a rollover this week. Empower has agreement with eTrade and can electronically transfer the funds. I initiated the process via the Empower Retirement app early morning 12/1. The distribution date on the Empower end reflects 12/1, but the transaction was dated 12/2 on the eTrade end. It was really simple and fast for me. YYMV if your plan requires additional approval steps as each 401k plan may be different.
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DMoogle
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Re: Mega Backdoor Roth EoY Timing

Post by DMoogle »

FunnelCakeBob wrote: Sat Dec 04, 2021 3:11 pmBased on what you're told us, you should definitely initiate a rollover mid-month, and then another one on the last day of the year.

Like you, my 401k provider is also Empower Retirement and IRA with eTrade. I just did a rollover this week. Empower has agreement with eTrade and can electronically transfer the funds. I initiated the process via the Empower Retirement app early morning 12/1. The distribution date on the Empower end reflects 12/1, but the transaction was dated 12/2 on the eTrade end. It was really simple and fast for me. YYMV if your plan requires additional approval steps as each 401k plan may be different.
Should've mentioned this before, but unfortunately I believe there's a $50 fee for each rollover. If this fee didn't exist, I would've been rolling over more frequently - at least quarterly:

Distribution Fee
$50
Per Distribution
Fee for taking a withdrawal against your plan balance. This fee is deducted from the withdrawal proceeds. If you initiate more than one withdrawal you will be assessed the fee for each new withdrawal.


I spoke with my HR about timing with 401k contribution changes. They said as long as I make a change before the 22nd, it'll be reflected in my paycheck on the 31st. So current plan is to initiate a rollover after my next paycheck (15th), and if there's any, uh, "legislative risk," then cancel future contributions, starting with the 31st.

Thanks for the detail regarding your experience btw. I noticed I can initiate the rollover electronically rather than via paper form, so that's definitely a headache averted.
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ejvyas
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Re: Mega Backdoor Roth EoY Timing

Post by ejvyas »

DMoogle wrote: Sat Dec 04, 2021 6:28 pm
FunnelCakeBob wrote: Sat Dec 04, 2021 3:11 pmBased on what you're told us, you should definitely initiate a rollover mid-month, and then another one on the last day of the year.

Like you, my 401k provider is also Empower Retirement and IRA with eTrade. I just did a rollover this week. Empower has agreement with eTrade and can electronically transfer the funds. I initiated the process via the Empower Retirement app early morning 12/1. The distribution date on the Empower end reflects 12/1, but the transaction was dated 12/2 on the eTrade end. It was really simple and fast for me. YYMV if your plan requires additional approval steps as each 401k plan may be different.
Should've mentioned this before, but unfortunately I believe there's a $50 fee for each rollover. If this fee didn't exist, I would've been rolling over more frequently - at least quarterly:

Distribution Fee
$50
Per Distribution
Fee for taking a withdrawal against your plan balance. This fee is deducted from the withdrawal proceeds. If you initiate more than one withdrawal you will be assessed the fee for each new withdrawal.


I spoke with my HR about timing with 401k contribution changes. They said as long as I make a change before the 22nd, it'll be reflected in my paycheck on the 31st. So current plan is to initiate a rollover after my next paycheck (15th), and if there's any, uh, "legislative risk," then cancel future contributions, starting with the 31st.

Thanks for the detail regarding your experience btw. I noticed I can initiate the rollover electronically rather than via paper form, so that's definitely a headache averted.
I have empower and I have the same fee. I rollover every yr to keep it simple. I have stopped my contribution for this yr and plan to rollover this week. However since I am late, I might not be able to do the Roth & traditional (gains). There is not enough time to transfer from traditional back to my 401k.

Do you know if empower allows Roth in plan conversion?
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riverant
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Re: Mega Backdoor Roth EoY Timing

Post by riverant »

I’m in the same boat and am stopping my after tax contribution the paycheck prior and will roll to my Roth with 1-2 weeks to spare in 2021. I’m not convinced payroll will meet their stated timelines and don’t want to risk my entire MBD.
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DMoogle
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Re: Mega Backdoor Roth EoY Timing

Post by DMoogle »

Quick update: I paused my after-tax contributions indefinitely, starting with the EOY contribution. I plan to restart it at some point next year, assuming nothing fundamental changes.

I requested the rollover to my Etrade Roth two days ago, and... my Etrade account ALREADY got the funds. I've heard doing after-tax rollovers was a headache for some, but this ended up being super easy, fast, and painfree. I think part of it is that Empower already had a partnership with Etrade, so all I had to do was provide my account number and I was golden. Props to them for making it easy. Unfortunately, still a $50 fee for the withdraw, but nothing I can do about that.
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ejvyas
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Re: Mega Backdoor Roth EoY Timing

Post by ejvyas »

DMoogle wrote: Fri Dec 17, 2021 2:25 pm Quick update: I paused my after-tax contributions indefinitely, starting with the EOY contribution. I plan to restart it at some point next year, assuming nothing fundamental changes.

I requested the rollover to my Etrade Roth two days ago, and... my Etrade account ALREADY got the funds. I've heard doing after-tax rollovers was a headache for some, but this ended up being super easy, fast, and painfree. I think part of it is that Empower already had a partnership with Etrade, so all I had to do was provide my account number and I was golden. Props to them for making it easy. Unfortunately, still a $50 fee for the withdraw, but nothing I can do about that.
Empower unfortunately wont send the check to Vanguard directly and want me to feel the pain. I will have the same $50 fee. I checked there were no in-plan conversions available in my plan
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