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Go Curry Cracker => Taxes => Topic started by: r4inv on August 13, 2020, 06:24:25 AM

Title: Mega Backdoor Roth, Earnings Destination
Post by: r4inv on August 13, 2020, 06:24:25 AM
Hello team,

I am glad I found this forum, and this is my first post. I just realized that my wife's 401k allows after-tax contributions and non-hardship in-service withdrawals: contributions rolled over into a Roth IRA, earnings into a Traditional IRA. Jackpot! She is now considering implementing the mega backdoor Roth strategy.

We are concerned about rolling the earnings into a Traditional IRA because we also do regular non-mega backdoor Roths, which would trigger taxes on these funds. The alternative is to withdraw the earnings into a taxable account, but that would also trigger taxes.

Which way should we go? FWIW, our marginal tax rate is 26%.

Any input would be much appreciated. Thank you!
Title: Re: Mega Backdoor Roth, Earnings Destination
Post by: gocurrycracker on August 14, 2020, 12:10:51 AM
You can try doing the in-service withdrawal the same day as the contribution, leaving in cash between contribution and withdrawal (so zero earnings), or just paying some taxes.

Withdrawals to a brokerage account before age 59.5 would also incur an additional 10% penalty. 10% penalties seem undesirable.

You could also start a small business with a solo-401k, and roll those Traditional IRAs into that 401k. I assume your current employer doesn't support this.
Title: Re: Mega Backdoor Roth, Earnings Destination
Post by: r4inv on August 18, 2020, 07:50:31 AM
Thank you for the options, and for the heads-up on the 10% penalty.