Mega Backdoor Roth check steps

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Topic Author
joetro29
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Mega Backdoor Roth check steps

Post by joetro29 »

First time with after-tax options and super clunky and so hard to reach HR website and staff. Wanted to check details and my understanding:

1) we are paid biweekly
2) just got my first after tax amount in 401k. Let’s call it $1250 for simplicity sake.
3) it hit on the end of the 7th and is invested in an equity mutual fund
4) today I requested exactly the 1250 of my contribution be rolled over to Vanguard Roth IRA. I think it’s actually coming as a check to me made out to Vanguard in care of me.
5) but this will actually happen on close of business January 10th. So my 1250 could be more or less than this amount. I guess if less I won’t be getting 1250 but rather the actual amount. If more I guess the difference will be money I can then separately pull out and repeat the process but this time to my traditional.
6) therefore contributions or close to it go to Roth and gains go to traditional. In my traditional it’ll become tax deferred but subject to RMD. So I should invest in slower growth stuff.
7) I repeat this process 25 more times this year. Guess the final paycheck could be cutting things a little close.
8) given that I now have a traditional balance it might not make sense also to use the traditional for the back door Roth due to pro rata rule, right? So I should skip this step now since I can get a lot more in via Mega?

Thank you. This is all so clunky.
2pedals
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Re: Mega Backdoor Roth check steps

Post by 2pedals »

Why do you feel like you have to do it every paycheck? I am retired now but when I had a 401K plan I would do it every year. The plan administrator would keep track of how much is after tax and also the gains that are on the aftertax. The plan administrator would write two checks (FBO 2pedals) one for the after-tax that would written to my Roth account and the other for the gains on after-tax if any and written to my traditional IRA account. This was a non-taxable event. I agree that if the market went up it would have been better to have all the gains in the Roth but I found that it was much easier to do this on an annual basis.
Topic Author
joetro29
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Re: Mega Backdoor Roth check steps

Post by joetro29 »

I guess because doing it faster allows more gains in Roth. And with things being uncertain with legislation this year?
Figaro
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Re: Mega Backdoor Roth check steps

Post by Figaro »

I always invest in the closest to cash fund, since the funds in 401k are always proprietary to the 401k.

That way no issues with gains/ losses in the roll to Roth.
bigjoec
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Re: Mega Backdoor Roth check steps

Post by bigjoec »

Figaro wrote: Sat Jan 08, 2022 11:57 pm I always invest in the closest to cash fund, since the funds in 401k are always proprietary to the 401k.

That way no issues with gains/ losses in the roll to Roth.
But in effect, that is intentionally forgoing gains in order to avoid being taxed on those gains. Seems counterproductive.

Not sure what the significance is of the funds being proprietary. It does mean you can't transfer the shares themselves to the IRA, but your plan administrator will just liquidate and give you the cash (in check form) to transfer.
2pedals
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Re: Mega Backdoor Roth check steps

Post by 2pedals »

joetro29 wrote: Sat Jan 08, 2022 11:56 pm I guess because doing it faster allows more gains in Roth. And with things being uncertain with legislation this year?
....But I don't think I would want to do this every paycheck, somewhere between annual and quarterly would be much more desirable in my mind. I think it's unlikely that legislation will make Roth tax change rules for 2022 taxes in 2022. This could create a tax filer nightmare.
Topic Author
joetro29
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Re: Mega Backdoor Roth check steps

Post by joetro29 »

I don’t think I want to invest in cash bc all of my 401k would then have to be including pre-tax and match.

I agree it is cumbersome. But did I do and understand all the steps accurately?
sailaway
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Re: Mega Backdoor Roth check steps

Post by sailaway »

I am going to tag along here.

What is the penalty for leaving earnings behind? Looks like DH still has ~$25 in his after tax account after doing his 2021 rollover. Could be dividends that didn't arrive until after the rollover, but is this something we should roll out as soon as possible to avoid any accumulating penalties or just ignore until we do the next MBR?
nolesrule
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Re: Mega Backdoor Roth check steps

Post by nolesrule »

sailaway wrote: Sun Jan 09, 2022 4:35 pm I am going to tag along here.

What is the penalty for leaving earnings behind? Looks like DH still has ~$25 in his after tax account after doing his 2021 rollover. Could be dividends that didn't arrive until after the rollover, but is this something we should roll out as soon as possible to avoid any accumulating penalties or just ignore until we do the next MBR?

There are no penalties. If it's still there when you start doing withdrawals there will be a small amount of after-tax money in the withdrawals, and of course any growth that happens while in the pre-tax account will also be taxable and will either be taxed as part of a withdrawal or future conversion.
sailaway
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Re: Mega Backdoor Roth check steps

Post by sailaway »

nolesrule wrote: Sun Jan 09, 2022 4:45 pm
sailaway wrote: Sun Jan 09, 2022 4:35 pm I am going to tag along here.

What is the penalty for leaving earnings behind? Looks like DH still has ~$25 in his after tax account after doing his 2021 rollover. Could be dividends that didn't arrive until after the rollover, but is this something we should roll out as soon as possible to avoid any accumulating penalties or just ignore until we do the next MBR?

There are no penalties. If it's still there when you start doing withdrawals there will be a small amount of after-tax money in the withdrawals, and of course any growth that happens while in the pre-tax account will also be taxable and will either be taxed as part of a withdrawal or future conversion.
Oh, good. That we can deal with. Especially on $25.
Topic Author
joetro29
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Re: Mega Backdoor Roth check steps

Post by joetro29 »

So I did my first after-tax distribution and got a check made out to Vanguard with my Roth IRA number on the check. I then made a fat finger problem and deposited it into my taxable brokerage settlement account. Vanguard could not cancel this.

How do I now get this into my Roth where it was intended and what if any are the tax issues?
mdchemist
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Re: Mega Backdoor Roth check steps

Post by mdchemist »

I'm not sure if there is a solution to having accidentally put the rollover into your taxable account instead of your Roth IRA. Maybe you can open a Roth IRA with your 401k provider so the rollover can be done online in the future?

On a separate note, I wanted to address a point in your OP:
joetro29 wrote: Sat Jan 08, 2022 11:37 pm 4) today I requested exactly the 1250 of my contribution be rolled over to Vanguard Roth IRA. I think it’s actually coming as a check to me made out to Vanguard in care of me.
5) but this will actually happen on close of business January 10th. So my 1250 could be more or less than this amount. I guess if less I won’t be getting 1250 but rather the actual amount. If more I guess the difference will be money I can then separately pull out and repeat the process but this time to my traditional.
The money that gets rolled out of an after-tax 401k is a prorated mix of gains and contributions. So in this example, if your account value is higher than 1250, some of the rollover will be taxable and you will still have some basis in the 401k after-tax account. It might be cleaner to just rollover the entire after-tax balance.
nolesrule
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Re: Mega Backdoor Roth check steps

Post by nolesrule »

joetro29 wrote: Sun Jan 23, 2022 12:00 pm So I did my first after-tax distribution and got a check made out to Vanguard with my Roth IRA number on the check. I then made a fat finger problem and deposited it into my taxable brokerage settlement account. Vanguard could not cancel this.

How do I now get this into my Roth where it was intended and what if any are the tax issues?
If they couldn't cancel it, then maybe they can correct it after the fact. You'll probably need to call them.
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retiredjg
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Re: Mega Backdoor Roth check steps

Post by retiredjg »

joetro29 wrote: Sun Jan 23, 2022 12:00 pm So I did my first after-tax distribution and got a check made out to Vanguard with my Roth IRA number on the check. I then made a fat finger problem and deposited it into my taxable brokerage settlement account. Vanguard could not cancel this.

How do I now get this into my Roth where it was intended and what if any are the tax issues?
It seems they should fix it since the check was not made out to your taxable account. It was made out to your Roth IRA account.

However, if they won't fix this, I suppose you could just turn it into a 60 day rollover? By depositing the same amount into your Roth IRA along with the 60 day rollover paperwork?

I'd give it another try on the fix though - they deposited the check into an account it was not made out to.
home_body
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Re: Mega Backdoor Roth check steps

Post by home_body »

Just curious, who is the administrator of the 401k plan?
Topic Author
joetro29
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Re: Mega Backdoor Roth check steps

Post by joetro29 »

Couldn’t fix. Done as 60 day rollover. One time allowed this year. I’ll inform my accountant.

Is there paperwork needed? Did I turn this into something taxable?
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retiredjg
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Re: Mega Backdoor Roth check steps

Post by retiredjg »

The money went into taxable and then into Roth IRA. I don't see how that would turn into a taxable event. Well, if whatever you sold in taxable had gains, it could be a taxable event I suppose.

I think that one time per year is 365 days from now, not one per calendar year. Edited...this rule does not apply to a rollover from a work plan to an IRA.

I suggest you check your account in a day or two to be sure it is designated as a rollover, not a contribution.
Last edited by retiredjg on Tue Jan 25, 2022 5:14 pm, edited 1 time in total.
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retiredjg
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Re: Mega Backdoor Roth check steps

Post by retiredjg »

You need to keep up with how money gets into Roth IRA because some of it may have a 5 year clock attached to it.

Each time you do this rollover, there may be some earnings that occur before you get the money out of the after-tax account. If that happens, the contribution itself does not have a clock but the earnings does have a clock. But if you take money out of Roth IRA, the earnings (with penalty if it has been less than 5 tax years) will have a clock.

I see you plan to do this 25 times so each time, you need to keep up with contribution and earnings. I believe your 401k custodian should give you paperwork at the end of the year showing the total contribution for the year and the total earnings that you have rolled to Roth IRA.

Just start keeping up with all this so you don't have to try to reconstruct this information at a later date.

You are correct that you should not use the ordinary backdoor process because of your tIRA.

Does your plan allow you to do the Roth conversion within the plan? This is called an in-plan Roth rollover and would be much easier.
Topic Author
joetro29
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Re: Mega Backdoor Roth check steps

Post by joetro29 »

Thank you. I will therefore avoid the back door Roth. The earnings will go to traditional IRA (although so far just losses). My Roth has been open well over 5 years so I’m not that bothered by the clock, but this is a good point.

This will basically be a direct rollover as the check goes to me but is made out to my Vanguard IRA. I’m going to skip this a bit and maybe not do 26 times per year!

My final paycheck will be 12/22/22 this year with funds into after taxes usually a day or two later. But given the delay in the check I’m worried about how to get the last amount into Roth. Is it just that my after tax money has to be out by 12/31/22 or also that the money must be into the Roth by 12/31/22?
Topic Author
joetro29
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Re: Mega Backdoor Roth check steps

Post by joetro29 »

We do not allow in-plan Roth rollovers.
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retiredjg
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Re: Mega Backdoor Roth check steps

Post by retiredjg »

joetro29 wrote: Mon Jan 24, 2022 12:30 pm Thank you. I will therefore avoid the back door Roth. The earnings will go to traditional IRA (although so far just losses). My Roth has been open well over 5 years so I’m not that bothered by the clock, but this is a good point.
There is more than one clock. Each conversion has a clock and this will matter if you are not yet 59.5 years old.

My final paycheck will be 12/22/22 this year with funds into after taxes usually a day or two later. But given the delay in the check I’m worried about how to get the last amount into Roth. Is it just that my after tax money has to be out by 12/31/22 or also that the money must be into the Roth by 12/31/22?
The money does not have to be out by 12/31. You can skip that one if you want and just do the conversion the following year. However, if you want it to be included in something for this year, I think the only thing that matters is that they have withdrawn the money and sent you the check...but I'm not sure.
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retiredjg
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Re: Mega Backdoor Roth check steps

Post by retiredjg »

joetro29 wrote: Mon Jan 24, 2022 10:39 am Couldn’t fix. Done as 60 day rollover. One time allowed this year. I’ll inform my accountant.

Is there paperwork needed? Did I turn this into something taxable?
Another thread just jarred my memory. The one per year limit does not apply to a plan to IRA rollover.
placeholder
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Re: Mega Backdoor Roth check steps

Post by placeholder »

joetro29 wrote: Mon Jan 24, 2022 12:30 pm This will basically be a direct rollover as the check goes to me but is made out to my Vanguard IRA.
Not basically it absolutely is a direct rollover.
How do I complete a rollover?

Direct rollover – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
https://www.irs.gov/retirement-plans/pl ... tributions
Topic Author
joetro29
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Re: Mega Backdoor Roth check steps

Post by joetro29 »

Was credited as incoming rollover to my Roth, thanks all!
Topic Author
joetro29
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Re: Mega Backdoor Roth check steps

Post by joetro29 »

So as an update I called Vanguard and confirmed this was coded as a direct rollover. This is important because of the below:

In terms of my after tax, apparently the company cannot do two checks with gains to traditional and contributions to Roth. I can only get one check made out to one account and one as cash. When I tried a direct rollover from Roth, they withheld federal taxes from my gains portion. Customer service said instead to take out the taxable as direct rollover to traditional and the rest in cash which I could do as Indirect rollover to Roth. But this is only allowed once per year, so I guess I’d have to do it end of December.

Isn’t this … odd? Is there something I’m missing ?
MrJedi
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Re: Mega Backdoor Roth check steps

Post by MrJedi »

Once per 12 month indirect rollover is for IRA to IRA. 401k to IRA does not have that restriction.
placeholder
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Re: Mega Backdoor Roth check steps

Post by placeholder »

Back before the split rollover was officially approved by the irs many people used do the method of a rollover check for the pretax and cash for after tax which didn't matter because there was no withholding so they would just roll the cash over to a roth.
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