Backdoor Roth, Mega Backdoor and QLACs

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Topic Author
Boricua
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Backdoor Roth, Mega Backdoor and QLACs

Post by Boricua »

I have been doing backdoor and mega backdoor Roth conversions for many years. That mega backdoor Roth conversions are done through a retirement plan in which I am the only participant and trustee.

I am considering the purchase of a QLAC through Blueprint Income. When I asked about funding sources, they suggested that I move money from my Profit Sharing plan to an IRA. My concern is that it would mess up my backdoor Roth conversion strategy. My preferred alternative would be to fund it directly from the profit sharing plan (which I could in theory amend if needed).

Questions:

- Does anyone here have experience (good or bad) with funding a QLAC from a 401(k) or Profit Sharing Plan?

- Am I on the right track in thinking that this should be funded from the retirement and not an IRA if I plan to do more backdoor and mega backdoor Roth conversions in the future?
humblecoder
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by humblecoder »

I am assuming that the suggestion is to just use the IRA as a way station for the money, and that your IRA would be zeroed out once you fund the QLAC.

My understanding is that the backdoor Roth pro-rata rule is based upon your IRA balance at the end of the year (but please fact check this). Assuming my understanding is correct, then if you ensure that the transfer completes by 12/31, I think you would be okay.
Topic Author
Boricua
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by Boricua »

Thank you for your response. I was starting to come around to your position which I hope is right.

I guess my follow up question is whether the FMV of the QLAC is ignored when calculating IRA assets on form 8606. If they're not included then I might be OK.
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retiredjg
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by retiredjg »

The presence of an IRA does not interfere with the mega-backdoor Roth (unless you do it wrong). So that is not an issue.

I would also assume if the IRA is just a way-station for the money and the IRA is empty at the end of the year, that would work out OK as well. Timing is important if you have already done your backdoor Roth process this year.

All that said, it is unclear to me if the QLAC, once purchased, is considered to be "in" an IRA or if the money came "from" an IRA. This article is very informative and in some ways, it hints that the money is still in the IRA. In other ways it seems that money is no longer in the IRA. So I don't know if it would be still considered an IRA or not.

https://www.immediateannuities.com/qlac ... -contract/

You'll notice the last question answered in the Q&A section is from 2022, so maybe you could write them and ask. If you do, let us know what they say please.
Topic Author
Boricua
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by Boricua »

Thank you retiredjg.

All that said, it is unclear to me if the QLAC, once purchased, is considered to be "in" an IRA or if the money came "from" an IRA. This article is very informative and in some ways, it hints that the money is still in the IRA. In other ways it seems that money is no longer in the IRA. So I don't know if it would be still considered an IRA or not.
Yes, that does appear to be at the heart of the issue. If I receive a definitive answer I will post back here.

A second issue I'm tracking is which retirement assets are considered when determining the amount that can contributed to the QLAC. My understanding is that the maximum amount that can be contributed is the lesser of $145K or 25% of X. Unfortunately, the definition of X is unclear to me. If X is "IRA balances", then I have a problem since my IRA balance is $0 and 25% of $0 is $0. If X is "IRA + 401(k) and Profit Sharing accounts" then 25% of X is in excess of $145K so there wouldn't be a problem.
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retiredjg
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by retiredjg »

That article made me think it was 25% of your qualified accounts (401k and profit sharing and IRA and previous QLACs). See the questions.

I'm curious though. If you have enough income to use the backdoor and mega-backdoor, if you are willing to share....why are you interested in the QLAC? Seems like sheltering $145k from RMDs is not much of an accomplishment. Especially after paying 3% commission to buy the thing.
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Boricua
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by Boricua »

I'm curious though. If you have enough income to use the backdoor and mega-backdoor, if you are willing to share....why are you interested in the QLAC?
A reasonable question. I recently set up a TIPS ladder that will provide from my expected retirement age to 85. I'm not sure I'll want (or be able) to deal with TIPs after 85 and my wife has no interest in managing anything. Mostly I'm just looking to lock in some income after 85 for peace of mind.
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retiredjg
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by retiredjg »

Thanks.
Alan S.
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by Alan S. »

Boricua wrote: Mon Oct 03, 2022 9:06 am Thank you for your response. I was starting to come around to your position which I hope is right.

I guess my follow up question is whether the FMV of the QLAC is ignored when calculating IRA assets on form 8606. If they're not included then I might be OK.
Even though QLAC values are reported on Form 1098 Q, this form is for all QLACs. The IRS 5498 instructions do not address QLACs in any manner and therefore do not exempt them. QLACs in an IRA are just a deferred annuity until age 85 or whenever payouts begin. Until that time, they have a year end value, either the premiums paid or a closely related calculation not specified in the QLAC Regs.

QLACs have a 25% of account value limitation when purchased, but the QLAC Regs do not specify that this % must be maintained after purchase. Therefore, the remainder of the IRA could be rolled into an employer plan to isolate basis and the QLAC IRA would still be valid. But the QLAC IRA would not likely be accepted by the employer plan and therefore the back door Roth would be compromised by the value of the QLAC IRA.

The IRS has also never issued guidance for addressing basis in an annuitized IRA, which would include a QLAC once it switches into payout mode. At that time the cash value has been paid to the insurance company in return for a cash flow.

Be careful with QLAC purchases, as they defer RMDs on their value, but at 85 the payouts are deemed to be RMDs in addition to RMDs on other accounts. Therefore, a QLAC concentrates RMDs into fewer years, and in many cases after the death of a spouse this additional taxable income will be subject to single filer tax rates.
Topic Author
Boricua
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by Boricua »

Thank you Alan S.
QLACs have a 25% of account value limitation when purchased, but the QLAC Regs do not specify that this % must be maintained after purchase.
Is the 25% account value limitation based on IRA assets or IRA assets plus other retirement account assets (401K and Profit Sharing)? My current IRA assets are $0. I've been told that I would need to move the premium amount from the "rollover" bucket in my 401(k) plan to an IRA and then fund the QLAC from that.

My goal is to fund the QLAC to the current max amount ($145K), but that only works if all retirement assets are considered.

But the QLAC IRA would not likely be accepted by the employer plan and therefore the back door Roth would be compromised by the value of the QLAC IRA.
Good to know. I guess I'd probably just stop doing backdoor Roth conversions.

My understanding is that I could continue to do mega backdoor Roth conversions (i.e., contribute after tax amounts to retirement account and then convert to Roth) without causing complications if I decide to pursue the QLAC option.

The IRS has also never issued guidance for addressing basis in an annuitized IRA, which would include a QLAC once it switches into payout mode. At that time the cash value has been paid to the insurance company in return for a cash flow.
I'm not sure I fully understand the issue. Would this only be a concern if I continued doing backdoor Roths?

Be careful with QLAC purchases, as they defer RMDs on their value, but at 85 the payouts are deemed to be RMDs in addition to RMDs on other accounts. Therefore, a QLAC concentrates RMDs into fewer years, and in many cases after the death of a spouse this additional taxable income will be subject to single filer tax rates.
Thank you for pointing this out.
Alan S.
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by Alan S. »

Boricua wrote: Mon Oct 03, 2022 6:52 pm
Is the 25% account value limitation based on IRA assets or IRA assets plus other retirement account assets (401K and Profit Sharing)? My current IRA assets are $0. I've been told that I would need to move the premium amount from the "rollover" bucket in my 401(k) plan to an IRA and then fund the QLAC from that.

My goal is to fund the QLAC to the current max amount ($145K), but that only works if all retirement assets are considered.

My understanding is that I could continue to do mega backdoor Roth conversions (i.e., contribute after tax amounts to retirement account and then convert to Roth) without causing complications if I decide to pursue the QLAC option.
The 25% limit is based on the value of all non Roth IRA accounts you own. Balances in non IRA plans do not count in determining the % limit for an IRA QLAC.

An IRA QLAC does not affect any mega back door Roth conversion since those transactions do not involve Traditional IRA accounts.
Topic Author
Boricua
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by Boricua »

Thanks so much for generously sharing your expertise.
Balances in non IRA plans do not count in determining the % limit for an IRA QLAC.
I currently have $0 in IRAs.

Does this mean that in order to fund a $145K QLAC I would have to move $580K from a 401K to IRA? If that's the case, it would be dealbreaker for me since I can only distribute rollover assets from the 401K and I don't have $580K in rollover assets.
Topic Author
Boricua
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Re: Backdoor Roth, Mega Backdoor and QLACs

Post by Boricua »

The examples in the following article illustrate that the 25% limits are by type (subject to an overall limit).

https://www.forbes.com/advisor/retireme ... y-contract

For example, one can fund a QLAC from 25% of IRA assets or, when allowed by the plan, 25% of 401(k) assets

The thing I was hoping to do does not appear to be permitted. If I take $145K from my 401(k) and put it in an IRA, I can only move 25% of the 145K to a QLAC
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