Author Topic: Mega Roth Rollover for Post-Tax Contributions for 401k  (Read 8766 times)

gotmilklol

  • Newbie
  • *
  • Posts: 4
    • View Profile
Mega Roth Rollover for Post-Tax Contributions for 401k
« on: May 03, 2018, 05:32:17 AM »
Hello,

I had about $2000 in post tax contributions last year after I maxed out the 401k. I read MF's article on the mega backdoor roth involving in-service rollovers and it made sense. But would love to do an example study of it. Do I have to move all of my pre-tax money to a tIRA and post tax to the Roth? Can I just move all the post - tax to the Roth IRA?

I am reading that if you want to do a inservice rollover, we have to do a certain percentage of pre-tax with it?

I was reading the IRS example and the examples are confusing because it makes it seem you have to do a percentage for it.
https://www.irs.gov/pub/irs-drop/n-14-54.pdf


prognastat

  • Global Moderator
  • Jr. Member
  • *****
  • Posts: 92
    • View Profile
Re: Mega Roth Rollover for Post-Tax Contributions for 401k
« Reply #1 on: May 03, 2018, 07:15:29 AM »
It depends on your 401k provider so I would look at their documentation or give them a call. If your 401k provider allows inservice rollovers of the post-tax contributions only then you can do the mega backdoor roth. This isn't guaranteed though as not all providers allow this.

You have to pay taxes on the gains the post-tax investments made between the time they were purchased and when you perform the rollover.

clubsoda

  • Newbie
  • *
  • Posts: 11
    • View Profile
Re: Mega Roth Rollover for Post-Tax Contributions for 401k
« Reply #2 on: May 10, 2018, 01:03:04 PM »
You have to pay taxes on the gains the post-tax investments made between the time they were purchased and when you perform the rollover.

Hopefully this is not too much of a hijack from the original question. I am confused....On the differences between a backdoor Roth, and a mega backdoor Roth, aka Roth conversion ladder. Let's assume for purposes of my question, everything is at Vanguard without mystery fees and weird rules. Let's also assume that I am in the 25% tax bracket, just because it is an easy number to work with.

Scenario 1
Suppose I contribute $18,500 to a 401(k). Then, I roll it over into a traditional IRA. Then, I roll that over/convert that into a Roth IRA. I do this all within a week or so, the shortest period of time that it will take to process the rollovers. It gained a negligible amount during that week or so. I'm taxed at my usual rate on that gain. It isn't much tax because it was not sitting in the Traditional IRA long enough to gain a lot. Yay, now I have $18,500 growing in a Roth IRA that I won't be taxed on later....Can you really do that? Or can I only roll over $5500 per year that way? So, see scenario 2 below:

Scenario 2
Suppose I contribute $18,500 to a 401(k). It just sits there. Then, I open a separate Traditional IRA. I put $5,500 into that Traditional IRA, and immediately roll it into a Roth IRA I opened for such purpose. Yay, now I have $5,500 growing in the Roth IRA. Did I get that right?

Scenario 3
Suppose I contribute $18,500 to a 401(k). No employer match made. Then, I make after-tax contributions to that same 401(k) to bring my total up to $55,000. Then, I roll over the pre-tax part into a traditional IRA and roll over the after-tax part into a Roth IRA. Now my $36,500 is growing in a Roth IRA. Yay! Can I do this?

Long story short, this is the tax issue that I have been struggling to understand since I first discovered GCC and MF a little over a year ago. I haven't optimized it because I don't have a strong grasp of it, and until January of this year, I did not know what my tax bracket would be for 2017 for reasons that I won't get into here. I did not do an employer match because I'm self employed and was told that it would offer me no immediate tax benefit.  When I asked my CPA what CPA knew about Roth rollovers, it was scenario #2 that was described for me and I was told about the $5500 limit. CPA didn't get into any "mega" stuff.

Please correct any of my misunderstandings in the above scenarios. And, assuming they're correct, how might one determine which scenario is best for someone who is still working and not in a low tax bracket? I am still Roth eligible, but the taxes on funding a Roth "now" are painful enough to motivate me not to do it. So far, the last three years, I've just funded the $18,500 in the traditional 401(k) for the tax break and decided I would worry later about how to access the money early. But, I want to have a solid intellectual grasp of this stuff today in case I decide to withdraw the money in the next few years.

Thank you.....

gocurrycracker

  • Administrator
  • Sr. Member
  • *****
  • Posts: 297
  • I live here.
    • View Profile
    • Retire Early. Travel the World.
Re: Mega Roth Rollover for Post-Tax Contributions for 401k
« Reply #3 on: May 14, 2018, 01:40:37 AM »
I?m confused by the examples you provided.

A backdoor Roth is just something you do when income is too high to qualify for a direct Roth contribution. You make a non-deductible Traditional contribution and then immediately convert it to a Roth.

A mega backdoor Roth is not the same as a Roth conversion ladder.  it isn?t aka.

A mega backdoor is when you do after tax contributions to your 401k and then convert that portion to Roth, still in the 401k. Some 401k plans allow this, but most don?t.

A ladder is when you stop working and then convert funds every year for the rest of your life. See this post
https://www.gocurrycracker.com/gcc-vs-rmd/


If this doesn?t make sense, search for these terms individually on Bogleheads

clubsoda

  • Newbie
  • *
  • Posts: 11
    • View Profile
Re: Mega Roth Rollover for Post-Tax Contributions for 401k
« Reply #4 on: May 24, 2018, 12:34:53 PM »
I think I am finally understanding the difference. Thank you.

DMagu

  • Newbie
  • *
  • Posts: 2
    • View Profile
Re: Does Roth Conversion make sense for me
« Reply #5 on: October 23, 2018, 12:06:36 PM »
I am 61 and retired with considerable assets in both my brokerage accounts and traditional IRA's

In this late stage and with the assets I have (25 years worth of savings) does Roth Conversion make any sense at all and if so in what circumstance?

Any responses greatly appreciated

prognastat

  • Global Moderator
  • Jr. Member
  • *****
  • Posts: 92
    • View Profile
Re: Mega Roth Rollover for Post-Tax Contributions for 401k
« Reply #6 on: October 23, 2018, 03:00:10 PM »
I don't think so as most conversions are done to free up tradition 401k/Roth funds without penalties before you are able to withdraw them penalty free, however since you are 61 all of your withdrawals should be penalty free.

gocurrycracker

  • Administrator
  • Sr. Member
  • *****
  • Posts: 297
  • I live here.
    • View Profile
    • Retire Early. Travel the World.
Re: Does Roth Conversion make sense for me
« Reply #7 on: October 23, 2018, 10:24:46 PM »
I am 61 and retired with considerable assets in both my brokerage accounts and traditional IRA's

In this late stage and with the assets I have (25 years worth of savings) does Roth Conversion make any sense at all and if so in what circumstance?

Any responses greatly appreciated

Yes!

With significant assets in Traditional IRAs, at age 70.5 the IRS will require you begin minimum withdrawals (RMDs.) Those grow over time and can result in significant tax burden. You can voluntarily do large withdrawals in advance to reduce the size of the RMDs, paying tax now at 10% or 12% to avoid paying tax later at 22%+. (Your State may also tax these.)

You can see an example of this here:
https://www.gocurrycracker.com/reader-financial-review-scared-death-early-retirement/

If you are on an ACA health insurance policy, Roth conversions will reduce or eliminate your premium subsidies, so be sure to understand this.
https://www.gocurrycracker.com/obamacare-optimization-early-retirement/

With ACA subsidy impact it might be better to wait until when you enroll in Medicare to start Roth conversions. Or go abroad for a few years...



nomadEngineer

  • Newbie
  • *
  • Posts: 1
    • View Profile
Re: Mega Roth Rollover for Post-Tax Contributions for 401k
« Reply #8 on: January 07, 2019, 09:31:22 AM »


A mega backdoor is when you do after tax contributions to your 401k and then convert that portion to Roth, still in the 401k. Some 401k plans allow this, but most don?t.


Hi Jeremy, I think you can also roll the after-tax to a Roth outside of the 401k.
That's what I've been doing since my employer 401k allows in service distributions.

prognastat

  • Global Moderator
  • Jr. Member
  • *****
  • Posts: 92
    • View Profile
Re: Mega Roth Rollover for Post-Tax Contributions for 401k
« Reply #9 on: January 07, 2019, 03:24:41 PM »
Some 401k's allow you to do the former some only allow what you're doing in which case rolling it over to a Roth IRA is the best option.

Pebbles555

  • Newbie
  • *
  • Posts: 13
    • View Profile
Re: Does Roth Conversion make sense for me
« Reply #10 on: April 12, 2019, 11:00:35 AM »
I am 61 and retired with considerable assets in both my brokerage accounts and traditional IRA's

In this late stage and with the assets I have (25 years worth of savings) does Roth Conversion make any sense at all and if so in what circumstance?

Any responses greatly appreciated

Yes!

With significant assets in Traditional IRAs, at age 70.5 the IRS will require you begin minimum withdrawals (RMDs.) Those grow over time and can result in significant tax burden. You can voluntarily do large withdrawals in advance to reduce the size of the RMDs, paying tax now at 10% or 12% to avoid paying tax later at 22%+. (Your State may also tax these.)

You can see an example of this here:
https://www.gocurrycracker.com/reader-financial-review-scared-death-early-retirement/

If you are on an ACA health insurance policy, Roth conversions will reduce or eliminate your premium subsidies, so be sure to understand this.
https://www.gocurrycracker.com/obamacare-optimization-early-retirement/

With ACA subsidy impact it might be better to wait until when you enroll in Medicare to start Roth conversions. Or go abroad for a few years...

Hello. We have somehow same situation. My husband is 61 y.o now and he is planning to retire at age of 67. We are planning what to do in his 403b. We are thinking that when he stop working at age 67, he will roll over his 403b to traditional IRA and wait for the RMD(but we know rmd will keep on increasing yearly). He is also planning to take his social security at age of 68. I am younger than him of 20 years and when he retires i will still be working. We are trying to think how to reduce our tax especially when he retires. We really don?t have that much money though and that is why we are trying to lower our taxes. We don?t have that much investment except the 403b and brokerage account that we invested in vanguard.

Husband 403b when he retires: 200,000 (plan to roll over to traditional Ira when he stops working)
His expected social security:     24,000 yearly
Wife working with annual gross income of: 77,000
No kids
No debts except for home mortgage.
Yearly expenses now: 40,000

Any suggestions what to do with his 403b when he stops working??? Is it a good idea to roll over to traditional IRA or ROTH IRA??? Our plan is rollover the 403b to traditional IRA and the remaining 3 years he has, will try to do the ROTH IRA conversion. At the same time he will take his full retirement social security at age of 67 and 8 months.And whatever is the remaining on his tIRA will follow the RMD. I wife is still working during the process.Does it make sense? I believe that my income and his social security is enough for us to live when he stops working. I am hoping that i will not pay more tax during the process.

Thank you very much and really appreciate any suggestions....
Sorry for my ignorance about this thing but I?m just started learning this things especially the investment.
« Last Edit: April 12, 2019, 05:21:03 PM by Pebbles555 »

gocurrycracker

  • Administrator
  • Sr. Member
  • *****
  • Posts: 297
  • I live here.
    • View Profile
    • Retire Early. Travel the World.
Re: Does Roth Conversion make sense for me
« Reply #11 on: April 13, 2019, 12:02:27 AM »
Any suggestions what to do with his 403b when he stops working???

It sounds like you understand what to do perfectly. I'd follow the plan that you described.

The RMD will only be a small fraction of total income. At age 70.5, the RMD distribution factor is 27.4 (or 3.65%.)
For $200k, that is a withdrawal of ~$7k, or only 10% of earned income.

Pebbles555

  • Newbie
  • *
  • Posts: 13
    • View Profile
Re: Does Roth Conversion make sense for me
« Reply #12 on: April 13, 2019, 02:31:43 PM »
Any suggestions what to do with his 403b when he stops working???

It sounds like you understand what to do perfectly. I'd follow the plan that you described.

The RMD will only be a small fraction of total income. At age 70.5, the RMD distribution factor is 27.4 (or 3.65%.)
For $200k, that is a withdrawal of ~$7k, or only 10% of earned income.

Thank you for your reply. I am glad that i am doing the right way since i am new with this investments :-). One more question though, I understand that when my husband hits 70 and start taking his RMD. Is there a limit age or years for him to do the Roth IRA conversion???
Once again really appreciate your reply and thank you very much...

gocurrycracker

  • Administrator
  • Sr. Member
  • *****
  • Posts: 297
  • I live here.
    • View Profile
    • Retire Early. Travel the World.
Re: Mega Roth Rollover for Post-Tax Contributions for 401k
« Reply #13 on: April 13, 2019, 06:42:04 PM »
There are no limits for age or size for Roth conversions.