Hello,
This is my first post asking for help in this forum.
I and DW are 47/45, MFJ, in one of the high tax brackets : ~35% Federal, and ~10% state (CA).
Thanks to this forum, I started this year on both Mega Back door and Back door Roth. DW started with back door Roth.
Here is what we did:
1. Opened Traditional IRA account at Fidelity, contributed $6000, converted (assume right terminology) to Roth IRA.
2. I contributed to company's after-tax-401k. Converted (rolled-over? I do not know the right terminology) to Roth IRA. It does have only contributions as after-tax 401k lost little money before I moved them to Roth IRA
Now, I have some contributions (some $6000) and earnings (some $20+) in after-tax 401k. I now have two choices to move this money to Roth IRA.
Option A) Convert all of this into Roth IRA. This will have pre-tax earnings of $20 which will potentially cause some complexity in withdrawal. (at least tax or documentation wise)
or
Option B) Split after-tax 401k into contributions and earnings. Roll-over earnings to Traditional IRA and contributions to Roth IRA.
Now, I still need to decide what to do with $20 that will be sitting in my Traditional IRA (It does have some $0.01 balance some how).
I can later convert this to Roth IRA by paying taxes.
Questions:
Q1. Should I choose Option A) or Option B)?
Q2. In either case, do I need to keep track of all these transactions and note it down to use when I withdraw later? or Will Fidelity, for example, would know the order of contributions or earnings coming out?
BTW, it is very unlikely we will withdraw from Roth IRA as we have good amount of money in Taxable. My only concern is accounting complexity, so the one with less complexity is preferred.
Thank you.
Mega Back Door Roth question
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Mega Back Door Roth question
Last edited by TruckLoadsEmpty on Fri Sep 17, 2021 6:39 pm, edited 1 time in total.
- anon_investor
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Re: Mega Back Door Roth question
Rollover all to Roth IRA pay tax at tax time for the $20 gain. Done.TruckLoadsEmpty wrote: ↑Fri Sep 17, 2021 6:36 pm Hello,
This is my first post asking for help in this forum.
I and DW are 47/45, MFJ, in one of the high tax brackets : ~35% Federal, and ~10% state (CA).
Thanks to this forum, I started this year on both Mega Back door and Back door Roth. DW started with back door Roth.
Here is what we did:
1. Opened Traditional IRA account at Fidelity, contributed $6000, converted (assume right terminology) to Roth IRA.
2. I contributed to company's after-tax-401k. Converted (rolled-over? I do not know the right terminology) to Roth IRA. It does have only contributions as after-tax 401k lost little money before I moved them to Roth IRA
Now, I have some contributions (some $6000) and earnings (some $20+) in after-tax 401k. I now have two choices to move this money to Roth IRA.
Option A) Convert all of this into Roth IRA. This will have pre-tax earnings of $20 which will potentially cause some complexity in withdrawal. (at least tax or documentation wise)
or
Option B) Split after-tax 401k into contributions and earnings. Roll-over earnings to Traditional IRA and contributions to Roth IRA.
Now, I still need to decide what to do with $20 that will be sitting in my Traditional IRA (It does have some $0.01 balance some how).
I can later convert this to Roth IRA by paying taxes.
Should I choose Option A) or Option B)?
In either case, do I need to keep track of all these transactions and note it down to use when I withdraw later? or Will Fidelity, for example, would know the order of contributions or earnings coming out?
BTW, it is very unlikely we will withdraw from Roth IRA as we have good amount of money in Taxable. My only concern is accounting complexity, so the one with less complexity is preferred.
Thank you.
Re: Mega Back Door Roth question
The earnings and losses should offset each other when the yearly totals are documented. I'd just move it all.TruckLoadsEmpty wrote: ↑Fri Sep 17, 2021 6:36 pm 2. I contributed to company's after-tax-401k. Converted (rolled-over? I do not know the right terminology) to Roth IRA. It does have only contributions as after-tax 401k lost little money before I moved them to Roth IRA
Now, I have some contributions (some $6000) and earnings (some $20+) in after-tax 401k. I now have two choices to move this money to Roth IRA.
Re: Mega Back Door Roth question
It is up to you to document how every dollar gets into Roth IRA - direct contribution, conversion, rollover from other plans. Whatever is not one of these is "earnings" that have occurred inside the Roth IRA. The info you want is date, amount of contribution/whatever, how much of that was taxable. Fidelity could end up with some of the information, but not all of it.TruckLoadsEmpty wrote: ↑Fri Sep 17, 2021 6:36 pm Q2. In either case, do I need to keep track of all these transactions and note it down to use when I withdraw later? or Will Fidelity, for example, would know the order of contributions or earnings coming out?
If you do not withdraw from Roth IRA before age 59.5 and the Roth IRA is 5 tax years old, none of this information will ever be used. Nevertheless, things happen. Better to eventually throw away useless info than need it and not have it.BTW, it is very unlikely we will withdraw from Roth IRA as we have good amount of money in Taxable. My only concern is accounting complexity, so the one with less complexity is preferred.
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Re: Mega Back Door Roth question
Option A. Roll / convert 100% of the after-tax amount to your Roth IRA.
If you must withdraw before age 59.5 you need to have the information available. You should keep your own spreadsheet either on paper or on the computer. For example, use Column 1 for the date of the after-tax contribution and Column 2 for the dollar amount of the after-tax contribution. Use Column 3 for the date of the rollover / conversion, Column 4 for the dollar amount of the conversion, and Column 5 for the taxable gain (or loss). In January when you get a 1099-R you should make sure the 1099-R totals match your totals.Q2. In either case, do I need to keep track of all these transactions and note it down to use when I withdraw later? or Will Fidelity, for example, would know the order of contributions or earnings coming out?
Re: Mega Back Door Roth question
Paying the small tax bill each time is probably simpler.
Even simpler is if you have an option for automatic in-plan conversions to Roth 401k. If you are ok with Roth 401k instead of Roth IRA, the automatic conversions seem to be becoming more commonly available. With this option, the plan automatically rolls/converts each after tax 401k contribution into Roth 401k immediately. This has the benefit of being automatic (no need to initiate a rollover to Roth IRA every time) and also minimizes any taxable earnings before becoming Roth.
Even simpler is if you have an option for automatic in-plan conversions to Roth 401k. If you are ok with Roth 401k instead of Roth IRA, the automatic conversions seem to be becoming more commonly available. With this option, the plan automatically rolls/converts each after tax 401k contribution into Roth 401k immediately. This has the benefit of being automatic (no need to initiate a rollover to Roth IRA every time) and also minimizes any taxable earnings before becoming Roth.
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Re: Mega Back Door Roth question
This may be the last year for the mega Roth IRA conversions as Ways and Means Committee has that in the bill that they approved. Something to follow and keep in mind.