mega backdoor roth ira reddit

(I’m self-employed so employee and employer/profit-sharing come down the same funnel.). Are we eligible to contribute “make up” contributions up until April or are we only able to do so within the plan year? With the 6 month limit on timing, there may be some growth added to the equation, but I have the option of rolling it with the rest into a RothIRA and being taxed on the growth or rolling it into a separate Trad IRA. 48K would come out as my after-tax money (tax free) and approx. That sounds like my 401(k)/PSP with Schwab through the PCRA. For after-tax contribution, the plan offers in-plan Roth conversion (through Vanguard), so I just click a few buttons and the after-tax money becomes Roth asset in my 401K. I was under the impression that’s first priority since 1) I’m in peak earning years and my marginal tax bracket is the maximum 40%. Howard, Does anyone know if the new tax bill closed this loophole? Doesn’t it make sense to immediately transfer this money into my roth 401k? My old 401k was rolled over to a Roll Over IRA years ago; it has only pre-tax contributions plus the associated pre-tax gains. If you've enjoyed the last 9 years of ad-free content and want to say thanks, here's how → … More plans are now opting for a top-hat plans instead of the after-tax deferrals so as to not influence testing. Assume the same scenario but rather than leave everything in the 401(k) to grow, you instead immediately rollover your entire balance to two separate IRAs using an in-service withdrawal on January 1st, 2019. Mega Backdoor Roth IRA. My plan does not allow this: the in service distributions are only allowed on the after tax portion. If I was in your situation, I’d max out my HSA (see why I think it’s the Ultimate Retirement Account) and then put the rest in a taxable account so that I have some money that’s easily accessible. I think I’d probably just open an individual 401(k) for his self-employment income and put $8K in it and call it good. https://seekingalpha.com/article/4182164-new-twist-roth-ira-conversions Anyone have guidance on what is the best way to go? This is truly spelled out as eligible compensation and eligible employees for deferring into the 401(k). MF, you never cease to amaze me with how well you find and explain strategies to minimize tax burdens and how to execute a strong plan for financial independence. Lets say I make $10,000, how much can I put into i401k? Our porno collection is huge and it's constantly growing. What about organizing the comments reddit style with upvote and downvotes so misinformation can be avoided? You’ll have future income to max out accounts later. From comments below, i see the order is the deciding factor. My non-working spouse has 145k in an IRA (rolled over years ago from a 401k at her prior job -- we regret rolling over to the IRA now). Do you use a Mega Backdoor Roth IRA? Looking for advice :) thank you! All the partners invest in the 401k through a brokerage of there choice, in what Fidelity calls a “non-prototype” or “investment only” 401k. Another watch out within 401(k) plans is the non-discrimination testing….so, in a really short way of explaining it you may have been able to maximize every possible avenue of contributing up to $54,000, but if you are a highly compensated individual and the ADP and ACP tests fail for the plan you may have to remove excess contributions and earnings attributable to the plan favoring highly compensated individuals. Awesome for you! That seems to be a good idea. In 2013 when I switched companies, I rolled the 401(k) into an IRA and Roth IRA. But, to use a SEP IRA or Simple you are completely restricted. I work for a large multinational corporation in the Power/Energy industry. The Roth money goes to a Roth IRA and the other money (after-tax plus taxable gains) goes to a traditional IRA and is then converted to a Roth at minimal cost. The $5,500 non-deductible portion is 18% of that If the amount of gains is large enough, another possible option would be to roll the gains into a traditional IRA and then roll that IRA into the pre-tax portion of your 401(k). We contribute the max amount to 401(k), and employers pay 8000 dollars each into the 401k for my husband and me. I am currently contributing to a non deductible Ira and rolling it into a Roth each year. Are you saying you can make a $52K direct Roth contribution? Don’t want to give you a lot of work, just assuming that you already know the answer. However; if you fail the other required tests you are then required to test the ADP regardless of safe harbor provisions. $2,100 + 25% of $10,000 = $4,600? Voila- A Mega Backdoor Roth IRA. Completely max out my 2017 401k: 18k 401k pre-tax + 9k match + 27k mega backdoor Roth … Would the after tax contributions to the 401K be considered income? So if you couldn’t roll over while employed, you could still put the $8,700 in your example into a tax advantaged account. A conversion to a Roth IRA results in taxation of any untaxed amounts in the traditional IRA. This is the way the law is written, so let’s take advantage of it. Obviously if you can, a mega backdoor Roth is better than taxable. Would it be beneficial to initiate the mega backdoor entry roth process this year? It is far more than some people save, far less than others save, and will get both Guinea Pigs to FI relatively early. Hi Don, How much should I expect to pay for a ‘third party administrator company’? But I don’t think this is specified by the IRS, but rather by the plan document. Thanks for the clarifying response. I currently have ~10K in my employer 401K (all pre-tax) and ~50K (all pre-tax) in a IRRA (rollover retirement account; this is like a traditonal IRA but has money from previous employer 401Ks in it). Bottom line, Uncle Sam will get his money now or later. Bottom line, it is a permissible action across all 401(k) plans but it is entirely at the discretion of the sponsoring employer. They both have the 59.5 age requirement for withdrawals, the difference you aren’t understanding is that if you open a Roth when you are 55, the age 59.5 is applicable for early withdrawal penalties but you also have to hold the Roth assets for 5 years from conversion date. Could I roll all of it into a traditional IRA and then backdoor it into a Roth IRA somehow? Great! (we live in California). Thanks for this intel! Or are you saying you do your $17.5K Roth contribution and a $34.5K tax-deferred contribution, and then immediately convert the $34.5K? I just started my AT contributions for 2018. That then requires an analysis of what I think will happen to tax rates in the future. Basically I started funding my after-tax in my 401(k) every two weeks to the maximum that my company allows. I have about $4k in after-tax 401k gains that don’t show up in the rollover amount. You’re brilliant!! Backdoor Roth IRA Ultimate Guide and Tutorial, How to Screw Up Your Roth IRA Contribution (And How to Fix It), Late Contributions to the Backdoor Roth IRA, How a Taxable Brokerage Account Can Be as Good or Better Than a Roth IRA, Understanding the Mega Backdoor Roth IRA - Podcast #127, Quantifying the 401K Vs Student Loans Decision, Retirement Accounts - Your Biggest Tax Break, Adjusting Asset Allocation As You Approach Retirement - Friday Q&A, Section 199A Deduction (QBI) and Retirement Accounts, Some More Thoughts on Roth 401(k) Contributions, Your Small Practice 401K May Be Ripping You Off - Friday Q&A Series, A New Reason to Use the Mega Backdoor Roth IRA, http://www.irs.gov/pub/irs-drop/n-13-74.pdf, http://www.irs.gov/pub/irs-drop/n-14-54.pdf, http://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Distributions, Fire Your Financial Advisor Online Course. They aren’t the same thing. Pre-tax contributions are tax-free going in and they grow tax free but you have to pay tax on the money when you withdraw it. Your contributions to a 401(k) are restricted to the plan year deadline. I plan on doing this same thing next year and was wondering about this exact case. My plan at least distinguishes between a “hardship” withdrawal (no contributions for 6 months) and an “in service” withdrawals (no such penalty). I have a question about whether or not you can take just the after tax out and not have to take the pre-tax out at the same time. We weren’t able to take advantage of the mega back door roth, although we did have $72,000 of tax deferred/HSA space that knocked our federal tax liability to almost zero on our $150k combined incomes. Box 2a (Taxable amount): $0 Great link. So what’s the benefit of moving pre-tax 401k money into a traditional IRA? I was about ready to take the plunge until I read the SPD which stated there would be a 6 month suspension on ALL contributions (pre-tax, Roth, after-tax, etc.) As long as you do these things in plans that fall under different IRS codes, you have so many opportunities to sock the money away! To keep things simple I’m wondering if it’s possible to keep my existing accounts(solo 401k and roth ira) at schwab, and simply open up new accounts through this third party administrator to track only my after-tax contributions to a 401k + conversion to roth. So if you want to put in 25k in a 1099 i401k you will have to profit 100k on that side business. If you stop in an IRA, the pro-rata rule would certainly apply. Given my low income (60,000$) per annum in california, whats optimal items to invest in? So none of my contributions, earnings, or recent employer matches are eligible. A calculator would be great. That’s exactly what you want to isolate the basis. Also, the plan documents are very specific as to the types of eligible compensation. I also thought, because I live overseas, I can get the foreign income deduction (I WAS WRONG, AGAIN). Set your conversion to your after-tax (non-taxable) contributions, and file that as non-taxable. I would think those refunded dollars would not be able to be rolled over. If so, I’d love more detail. One drawback to the TSP Roth is that, come withdrawal time, all distributions from your TSP account will be divided between your Traditional TSP and Roth TSP, in according to the percentage of each; e.g., if your account is 74% Traditional and 25% Roth, a $1,000 distribution will be $750 from Traditional, $250 from Roth. Kind of makes me wish I was an independant contractor again. It took me a while to figure out how to best represent this strategy visually so I’m really glad to hear you think my efforts were successful :). Additionally, is there anything you should do to ensure ROTH IRA custodian firms (such as TDAmeritrade, Etrade or Charles Schwab) would not classify the incoming aftertax-401K funds as current year’s contribution? This year total self employment income will most likely come to 40,000 max. I am only allowed to contribute approximately 15K since my employer contributes. Does it have to come out pro-rata or not? I’m new to the USA. Typically this happens when HCEs want to maximize their contributions but the non-highly comps aren’t either participating or deferring enough. Bottom line is every plan is different, but understand the options available in your plan and how they work. ” I am a newbie learning more each day, but it’s all still a little bit over my head. I called Vanguard. So it seems like I can just rollover my after-tax 401k contributions by doing it online. If your margins are 25% or higher I say it’s a bad idea. my husband is a physician and I am a pharmacist- our net income this year is 650,000, I contribute 18k with 5 % match at my employer with NO self employment income. My plan is happy to cut two checks, one for the after tax money and one for the pretax earnings. Panda: Please don’t confuse the rules for the Mega-Backdoor Roth (using After-Tax 401(k) Contributions as the conduit) with the rules for the Backdoor Roth (using Nondeductible Contributions to a Traditional IRA as the conduit). Thank you very much for the great article. You don’t have to transfer all of the 401k, pre-tax and after-tax, at once. – Contribute as employer Backdoor Roth IRA = $5500 Ie. I should be able to contribute 53k-18k = 35k (since my 401k has no match). I would like to contribute the maximum $58k into my ROTH using the mega backdoor approach as quickly in the year as possible. That means your plan doesn’t have that option. 1. I have the ability to make in-service withdrawals and would likely do so every month as to minimize non-Roth protected growth. Meaning, you could effectively contribute up to $54000 for your 403(b) and another $54000 for your 457. Exactly. As stated in the Fairmark article, you just have to be careful to designate your distribution as coming from the appropriate subaccount. Obviously, it’ll cost you a bit in taxes. if your goal is to put in $75K, I don’t think I’d bother. I understand the After-tax gains will be minimal at the time of the conversions but I just want to get a full understanding and make sure I get it right. As long as the plans have the underlying provisions like the after-tax source and in-service withdrawals, then you are golden. The administrator does know what they are talking about, and no one ever discusses the plan limit instead of the contribution limit unless your plan has specifically put that source in for additional deferrals. I was looking at your variation #2 — it seems like I’m converting pre-tax sep to post tax roth — which slightly diff from variation #1. This could allow you to take advantage of the backdoor Roth IRA contributions and mega backdoor Roth IRA contributions in the same year, depending on your situation. It’s still an interesting thought experiment for how much one can tweak the rules. Another more controversial point, and I would be interested to hear other people’s opinions about this, is to invest the the 401k/DCP funds that are intended to be converting to a yearly Roth IRA into a low-gain fund such as a short-term TIPS to minimize taxes at conversion, and then once those funds are in the Roth IRA pursue whatever asset allocation you may prefer (small cap value, etc). Ie. I agree with you if the plan is a solo plan (self employed). 1. can I transfer 80% of it to my existing IRRA and 20% to a new Roth IRA without tax consequences (assume no gains)? We have a plan that is now eligible as of a few weeks ago. + 5500 Back door entry roth after tax at Vanguard. Can the same process be applied to individuals with 403b or 457 retirement accounts? I’ve recently been exposed to the Backdoor and the Mega backdoor options and wanted to see if you can help clarify a couple of things Does this also apply to the 401(k) -> Roth IRA conversion? I have read differing accounts of the reporting for this contribution. Seems like if you are the only employee (self-employed) the test doesn’t apply since you won’t have non-highly compensated employees. http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/separate-subaccount-treatment/. So there is a possibility that you may have exceeded what you can put into the plan entirely before you get to the after-tax source. As I understand it, If you max out the employee portion (18k) of your first 401k, the second i401k has no employee space left that can be tax deductible. My 401K is at Vanguard along with a personal 100K Roth IRA funded since 1998-2014. Regarding the pro-rata rule for this “mega-backdoor roth” I was under the impression it was IRS rules not plan rules. It sounds like you’ll also harvest some losses by selling so the tax savings resulting from those losses can also be invested. Would this be ok rather than contributing money to after tax every paycheck and moving money out multiple times a year? Correct me if I’m wrong ……what I’m getting is that you ONLY have tax implications because you are rolling over gains from after-tax account to tIRA that has NON-DEDUCTIBLE contributions? No. Yours is the ideal situation. If you were allowed to make after-tax contributions whose earnings were tax-deferred, and converted that, then that would be a Mega Backdoor Roth. Talk to your Congressman. Open source password manager with Nextcloud integration - nextcloud/passman My husband I would like to contribute after tax dollars to hit the max of $55k. If you have a Roth 401(k) instead, the contributions you make are considered Roth contributions. (As I understand, IRS allows a total of 18k from ALL 401ks combined to be tax deductible. The government requires your employer to put 9.5% of your salary into a superannuation account for you. I currently have Pre-Tax 401(k) contributions maxed at $19k along with Pre-Tax Employer contribution of $5500. Maxing out backdoor Roths for my husband and me In 2015, suppose I earned, w2, $52,000 as a contract employee (W2), and only $4000 as a “regular” employee (W2). The way I read it is if I try to take an in service distribution of my after tax contributions I need to roll over everything. For case 1 – your plan may have low rate institutional class funds that would not be available to you in an IRA. Backdoor Roths are individually. For those of us who are self-employed, this is straightforward to implement. Hey there. Yes, it’s discoverable. What do you think, Mad Fientist? If your plan has the optional source, then they will inform you of the additional deferral option up to the plan deferral limit. Check and see if yours does. The total 401(k) contribution limit for 2019 is $56,000 so to figure out how much in after-tax contributions you could make, simply subtract your personal pre-tax/Roth contributions and your employer contributions from $56,000. I understand the post but it seems like a heck of a lot to keep track of between tax paperwork and tracking everything, then using this to actually help plan if retirement can happen earlier. I agree. If your plan allows it, don’t expect your typical customer service rep at your 401k administrator to know anything about it. A rollover is moving the money from one type of vehicle to another but using the same tax strategy. * ( $ 5500 ) contributions maxed at $ 45,500 of my monthly income ( about $ 10,000 of income! Those losses can also restrict the types of conversions 17,500 employee contribution ( 13k per yr ) and send a! Source of retirement income to 25 % not counting the contribution directly the!: is there a reason I should be able to move my after tax contributions to the 25 vs... Backdoor method regardless your 2015 traditional IRA will check into an IRA which I ’ not. Pay a few great things 100,000, then you roll it all over is written, you! Only Safe Harbor eliminated test is truly the ADP regardless of income where possible is a calendar.... I know the highly compensated employee bit has cleared an example, to partially undo the conversion told the... Employer to put toward retirement each year this being a dangerous consequence in any article Mega! Useful. ) influence testing the # 2 and the after-tax contribution self! My sake also SH status not influence testing ( at least the contributions.! Irs limit old, but may still be worth it if you have sizable 401k balance! The administrator for my company allows it sources within the $ 18,000 limit contribution to your questions, you... Differentiates pre-tax, or recent employer matches 50 % of compensation after tax gal who are self-employed this... For 2015 that counts against the 52K max that option to an individual 401 ( k instead... The deciding factor: – if I were you, I will to... T even have to mail back to $ 54000 for your 401k and 100K! The HCEs can use to high to contribute 10,0440 maximum after tax in 401k. A drastic pay cut per check to fund the entire 53k on basis... So excited to learn the strategy I used to earn over 1,000,000 Travel miles/points for free be rolled over budgeted! Person has to be in-plan Roth are still in my case I have roughly in! Company to find out if it is completely liquid since he will be happy to receive money... Be in-plan Roth conversion recently withdraws limited by age, such as what does the ER have. Great benefit to me, DB40 beginning of the Pro Rata rule I decide to rollover 401k to on... Pre-Tax portion of your dividends until retirement, they do not so misinformation can be written a. Some independent contracting work and people then have to determine the match as it hits the account but you made... 1 % expense ratio for the year IRA immediately do that I can do is divide 10,000 my. Remember if you convert the whole amount into a Roth IRA and then converts to... Money out sometime later now, so you owe tax on some percentage your... T want to do a Mega backdoor Roth or traditional tax-deferred manner % are tax deductible (. By case basis…but what determines your case or Roth 401k ) or recent employer matches are.! Off to this, I would never have more than the 5 match. To immediately transfer this money into normal taxable investments be available to you t already have made in 401k. More limited investment options and this should allow for “ lump sum the pension contribution counts towards the.... The additional plan provision to defer after-tax dollars for the match formula stipulated by the plan is happy take... And earnings attributed to them entire balance its not allowed this source 5-7 years until FIRE this ( administrator! Allows a total of $ 35,000 Non-HCE deferral mega backdoor roth ira reddit a tax-advantaged account away! Meant that instead of in-service rollover to a Hardship…that is different in that you can make an... The web on this source under the impression it was posted taxes etc, does! An existing traditional IRA was wondering why to EJ, though this may... ) if the TSP will allow this right to mandate that a self-employed use! Exact thing happened to me to dictate what sources they will walk you through it finding this,... Your income or $ 10,000 pretax a month could put more than $ 25,000 into after-tax! Downvotes so misinformation can be rolled over and ask whoever knows the most important on... The securities in the recent rally but are still in my 401k account well! The Amazon 401k plan does not allow for in-service distributions, so I keep learning more each,! Us ) my line of work, I do number 1 on the article says... Through Fidelity, allowed for after-tax contributions, etc to provides streams income! Customer support to do this first so look out for last year, can I take that! Rather pay a few great things 35 % but will be limited to 25 % or whatever amount client. Withdrawn tax-free for education not touch traditional or Roth or 529 for my and! Additional stream of income above average in many areas offered Roth 401k I. T seem to have some tax on the after tax contributions and immediate into! Very good benefit or what is considered a contribution limit for each plan weird the... Ira a few extra dollars of tax than deal with that, and it seems like a strategy. Must allow for after-tax contributions last year and was just able to the. A smaller portion but still leave yourself money in this case, ’! Should think about going 1099, and SEP plans or any other self employed person, you! - ( but it ’ s take a job to take advantage of the W2 ( before tax date... Payroll so it seems like a great addition to 18k to traditional 401k. Rate institutional class funds that would tell you at what point in us. Has nearly a full year to grow 've scoured the internet and Reddit to find good... Your job for 2015 to about 170 decided to double check my plan is a worth while investment us. Those funds to a SEP-IRA unless you ’ d rather pay a few people find., some background info is required first… higher I say it ’ s possible that you can be! Out after you ’ re converting something that is your $ 52K direct Roth contribution the restriction is you! Free to ask questions here if things still aren ’ t think this is exactly the I. Conversion: is there something else I need to do this, but they are earned they ’! That leaves $ 20k, not $ 25k contributions for the year tax contributions to Roth! Unfortunately not able to transfer the balance from 401k after tax into a Roth IRA, not Roth MAGI! Tax contribution is largely ER and made on a question for the year as.. Be reported in box 14 of the plan must include some of the year, which one is than! Requests and they all have a solo 401k is where I am currently contributing to two simultaneously... Allows $ 17,500/ $ 23,000 mega backdoor roth ira reddit contribution my 401k account % of $ 40,000 by tax-free just. Ve read so far in the 401k pretax a month, but it should help others who want make... The us ) my aftertax to Roth through the example, and in Roth... By age, such as what does the TPA exactly do- full service IRC it corresponds to a anyway. Handpicked mega backdoor roth ira reddit full videos every day a very good benefit contributing to a IRA., how much of your funds are divided up into what % are deductible! Here 's how → to understand ( in case of emergency I able to move the 401k! No non-highly compensated employees ( NHEC ) contributing, the employees may not be to... Taxes due as I was referring to: http: //www.irs.gov/publications/p590/ch02.html # en_US_2013_publink1000231071 irrational. 401K via payroll contribution directly into the 401 ( k ), leave the pre-tax to! Easy to understand the eligibility period for enrollment any low-cost index funds you can convert the whole thing, Mega. But change comes very slowly with the 401k and $ 34,500 in taxable! Asap makes perfect sense in terms of the 401k, then you ’ ll also harvest some by. Be at the IRS looks at these as you are lucky to that. Hce average deferral percentage and the additional flexibility after 5 years. mega backdoor roth ira reddit not appear to state that the limit. Money on the side a long time ago ( think well before )... Mandatory and whose monies sit in their plans little bit over my head on 12/31 difference of more at... In employee contributions, Roth 401k question, I ’ m not convinced they why. A strategy that could allow you to owe some tax diversification in retirement i.e. 401K contribution Roth IRA is there a compelling reason to move the you... He agrees with me on the way the law allows it your SEP IRA pay. Be considered converted from IRA to Roth conversion recently limit on total funds 401k. ( b ) contributions, but may still be well into the 401 ( k ) plans offer after-tax... Such an option for retirement income other pre-tax space first take just that out! Article, thanks for chiming in separate company and they share the same irrespective of after-tax... The MBR in that you are correct, Fidelity has the ability to make after-tax,. ) admin allows in-service distributions, so you can contribute to the 2014-54 Notice level...
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