– I then do after tax contributions to my 401k plan and immediately convert those to the same Roth IRA (mega Backdoor to the same Roth I just did the Backdoor They all have a solo 401k but none of them will have that feature. Our company did not max out pension/profit sharing in 2014. As long as the plans have the underlying provisions like the after-tax source and in-service withdrawals, then you are golden. However, if you wish to do the Mega Backdoor Roth IRA, a SEP-IRA is probably the best option, since I don't know of an Individual 401K that allows both after-tax contributions and in-service withdrawals, although I wouldn't be surprised to see one that allowed in plan conversions, which are essentially the same thing. Bottom line, there are not ways to really get around the regs and taxation. Tax free gains going forward? Great strategy. The only reason a rollover to a 401k seems preferable is so I can do a backdoor roth. I am currently in the 15% tax bracket with about 30K room before hitting the 25% bracket. There are always ways to save more, but sometimes we have to be creative. That being said, I would get your summary plan description for your 401k and go through it. Depending on your age and how soon you will need the funds, the general school of thought is NEVER put a 457 plan with no early withdrawal penalties into something that will then restrict it for 10 years. If I understand all this backdoor / mega-backdoor stuff correctly…I can: 1) Convert the SEP IRA to a Roth IRA, tax free, Net Result: I got tax write-off for putting into SEP IRA, and the gains as well as distributions will be tax free from the Roth IRA after a 5 year waiting period), 2) Covert the TIRAs to Roth IRA, tax free. Ugh!! Not all 401(k) plans offer an after-tax source allowing for limits up to the $54000. But they do exist! I run large plans for Fidelity. Thanks! Hope that helps! Prior to getting into the variations, I need to point out that most physicians and most Americans probably don't want, don't need, or can't have a Mega Backdoor Roth IRA. A brief search indicates it’s not a promising/viable option for TSP participants. I would increase my contributions for the rest of the year to take advantage of some of this. The IRS and DOL are looking for people and plans that they and find all the loopholes and the penalties are costly and severe for individuals and sponsors. You are limited to a non-elective option of 2% of compensation up to $270,000 (within your business not including your ER plan) so it isn’t a match of sorts. I called Vanguard. We will move whatever amount the client requests and they will determine pre-tax or after-tax amounts when they file their taxes.”. this means if you open the roth after age 55, you have to wait until after you are normal retirement age and satisfied the 5 year holding period. Otherwise, they could be shown to not giving the declared benefit to an eligible employee and could lose their overall plan tax favored status. His pension payouts will be about $10,000 pretax a month. Right now I contribute the max to the Solo 401k via payroll. I know there are SIMPLE IRAs, individual 401ks, and SEP plans (for those of us in the US). You will restrict yourself regardless for 10 years on the Roth and Traditional IRA!!!! If you don’t need the assets, then convert a smaller portion but still leave yourself money in case of emergency. $2,100 plus 25% of $7,900 = $4,075? I could just leave growing my After-tax 401(k) contributions until I decide to rollover. Do you have any suggestions, or should I just hold off until I have a job that has an appropriate 401k and allows me to contribute? Your email address will not be published. If you are already maxing out your pre-tax 401(k) contributions (see this post for why I believe pre-tax contributions are better than Roth contributions for early retirees) and are also maxing out your IRA, you should check with your 401(k) custodian to see if you can start making after-tax contributions as well. Keep up the great work! Unfortunately, most 401Ks don't allow after-tax contributions. According to ascensus and vanguard this would not allow you to pass ACP testing. For some, that can be a real advantage for the Roth solo 401k plan.” – Slide 10, A few other notes: p.s Sorry about my freudian slip earlier — white coat, not white goat…although the way medicine is going and how the medical profession is “fighting back”, I understand why my brain went there. Bottom line is every plan is different, but understand the options available in your plan and how they work. Example referenced above: in order for the Backdoor Roth IRA to work, you CAN’T have ANY other Traditional IRA, SEP IRA, or SIMPLE IRA with money in it. What to do with the gains? I should be able to contribute 53k-18k = 35k (since my 401k has no match). 2) Would I be better off rolling the entire 263K after-tax source from a 401K to Vanguard IRA’s instructing them to put the 91K of earnings to the regular IRA and to put the 172K after-tax money I contributed to my Roth IRA account? As you said, the tax savings will more than cover the fees so if you plan to get out of those funds anyway within two years, it makes sense to lower your taxes by $1,750 and reinvest that extra money in your taxable account. The key to maximizing this strategy is the ability to take in-service distributions, which allow you to minimize the amount of gains earned while the money is in the 401k account. Nice work, Mad Fientist! I hear it is quite a mess if you have to back out after you’ve rolled over to the Roth. Therefore, if I have the additional plan provision to defer after-tax dollars, I can contribute another $8,500. Yes, it’s discoverable. Next, do an in-service rollover/transfer of the after-tax money to a traditional IRA. Thanks again! How about just leaving the after-tax 401k gains in the 401k and just moving out the contributions? I don’t contribute to it. However, instead of an employee, you are now the owner and responsible for the match and any profit-sharing contributions due to your employees. Hope this can clear things up for some people. Now If I decide to do a 25K rollover on 01/01/2019 from my 401K: I work for a large multinational corporation in the Power/Energy industry. Great example and question Alyssa. Or in a subsequent calendar year? (I already know my 403(b) allows roll-ins so that part’s not an issue at least.). Wouldn’t I need to convert the entire 401k though (both pre-tax and after tax) to avoid creating a problem with the pro rata rule? Great discussion, everyone. 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. I had been making after-tax contributions in the past, but only started doing the Roth conversion recently. Update: everything has been working per plan above. You’re brilliant!! But the amazing news is, in Fidelity for example, I can buy whatever I want; ETFs, stocks, mutual funds etc. And we could contribute an additional $35,000 from his vacation paydown to the pretax account but that ties it up for another 10 years (we are both 50). So for example, if you contribute to AfterTax401k on a monthly basis (monthly paychecks) throughout the year, you’ll have to do the rollover 12 times, and probably keep track of all those rollovers. 2. So if you want to put in 25k in a 1099 i401k you will have to profit 100k on that side business. Comment below! Is it smart to be maxing this account given it is held at EJ? This should actually be WAY cheaper than any individual account you can get with Vanguard (I worked at VG and they are awesome, but you have the collective buying power of the 457 which I assume is a SUPER LARGE governmental plan.) As for your final question, I can’t speak for the author but I believe he was stating to take the after-tax amounts and earnings and moving them directly to a Roth IRA and paying the applicable tax on the earnings instead of separating the tax-deferred earnings from the after-tax contribution. So, I will have 3 accounts. It’s still an interesting thought experiment for how much one can tweak the rules. If so, worth doing? You can do a Roth employee contribution into a solo 401(k) (but not if you use your employee contribution at your main job’s 401(k)). Thank you for keeping it updated and easy to understand! I’d also check again to see if there are any low-cost index funds you can invest in at Edward Jones. What happens if you exceed it? If the owner employee is the only one contributing after-tax, the test will likely fail. why not leave it in the Trad-401k (pretax) bucket and just move the Aftertax-401k portion to Roth (401k or ira), especially if you might already have a good 401k plan, with say Vanguard? You take everything out every year, the tax-deferred goes to a traditional IRA and the after-tax to a Roth. Thanks for the great post! I could leave it there to grow tax free, but I chose to transfer it to my Roth account at Fidelity so I have full brokerage investment choices, and it takes a phone call to Vanguard to do that. I am going to wait until March of the following year (2016 in this case) to roll over 2015 contributions+gains though to make sure they pass the HCE test. As Eric mentioned, this ruling is very new so maybe some administrators haven’t caught on yet but even if yours hasn’t, I’m sure it will eventually. Fidelity is researching the recorded call logs and says they will call me and let me know if it can be reversed in 5 days. I think it would be a great addition to the article and clarify for people why they might want to do this. If you never need these assets and can pay the taxes, go for it. Each person I spoke with was aware of 2014-54, but none of them interpreted the gains in the after-tax voluntary account as transferable to a traditional IRA under this rule. So what’s the benefit of moving pre-tax 401k money into a traditional IRA? Max out the employee contribution ($17,500) in either a Roth or traditional tax-deferred manner. Hope this helps! So I front-loaded my 401(k) this year and did the mega back door Roth. Yes, it’s a very good benefit. He is now self employed and has a solo 401k at ameritrade, which accepts rollovers. I don’t know if this is done at Folio Investing during the Conversion process or another IRS form needs to be filled out for tax year 2014 to declare this type of conversion.”, Folio Investing IRA Dept Response: I wonder how many people at the IRS read your blog and think ‘damn, this guy is good!’. Do I understand correctly that some of the plans mentioned in previous posts allow for in-service distributions before age 59.5? Only snag thus far: I have a pension contribution (13k per yr) and apparently that counts against the 52k max. My wife and I both work for employers that use Vanguard for their 401(k)s. My employer allows you to roll over your after-tax 401(k) sub-account to a Vanguard Roth IRA with a few clicks on the website. Second, you need to evaluate pre-tax 401K vs. Roth, and the most important determining factor is your tax rate between now and after you retire. Is this a good strategy? And Safe Harbor eliminates certain tests. Given my low income (60,000$) per annum, whats the optimal order of investment. But if you can’t, no big deal. My 401(k) plan allows after-tax contributions, which i have started doing this year. I’ll be implementing this strategy in 2015, at least the contributions side. :-). I am maxing out my pretax 401k and after-tax 401k to reach the IRS contribution limit of 56,000. For example, $7,000 (getting funds from my taxable account and putting into SIMPLE) at 25% saves $1,750 in taxes, way more than the fees I will incur (in the short-term anyway, though in the long run I fear the fees would catch up with me). We shall see…. You can’t contribute to a 401(k) from outside savings. Also, along with the regular 401K, I am offered Roth 401K. It makes a moot point of converting your 401K into two IRA baskets, pre-tax and after-tax contributions. You should have a provision in your plan that allows you to take distributions on your rollover assets at any time. I wouldn’t do it though – instead just add the Roth feature to the 401k plan, and you are good to go. If you stop in an IRA, the pro-rata rule would certainly apply. Thank you! I’m not sure if this is for all Vanguard 401k’s, or just the way it’s set up with my employer. We might also consider not using terminology like “loophole” and “backdoor” as it implies we’re up to no good. http://thefinancebuff.com/rollover-after-tax-to-roth.html. No. With an MBR, contributions are tied up for 5 years (it’s treated as a conversion), and gains until 59.5. In addition, the selling of taxable funds won’t trigger additional taxes due as I have enough in “losers”. If your plan has the optional source, then they will inform you of the additional deferral option up to the plan deferral limit. Thanks for this info – I had not heard of this before and we are going to use it since we can’t contribute to a Roth currently due to income limits. Within minutes I had the head of the company, Mark Nolan JD, on the phone answering my questions. Administratively and operationally we support anything and everything the IRS and DOL have sent our way through laws and regulations. You could take out money from a Pre-tax subaccount at that the same time, but most people would want to avoid that. This prevents any taxable gains and makes the process a whole lot easier. 20,000 in after tax amount invested in the plan (on top of 18k limit and along with employer match) Can after-tax contributions made to a 401(k) plan be in excess of a person’s income for that particular year? I contributed after tax dollars to my retirement account in 2017 for the first time. I don’t qualify for traditional roth ira contributions, but am considering the backdoor Roth IRA. It’s usually larger older employer who created their plan a long time ago (think well before 2000). Backdoor Roth IRA = $5500 From what I’ve read so far in the IRS regs, that seems to be the case. The same exact thing happened to me, DB40. No to your first question. A lot to make sure is in line. So you can choose to take all of it, half or it, or 1%. 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). taxed and not deducted) contribution to a Traditional IRA. If you haven’t already, you can contribute $5.5K to your Traditional IRA, then roll it over into a Roth IRA. As an example, let’s say you make a non-deductible $5,500 contribution. I usually recommend that a self-employed physician use an Individual 401K instead of a SEP-IRA. Eric – I can only answer one part of your post, but you can make Roth IRA contributions, via the backdoor method (http://www.rothira.com/what-is-a-backdoor-roth-ira). I wonder if a way to get around this is to rollover your entire 401k balance every year – tax deferred into a rollover IRA and after-tax into a roth IRA. I have some questions: 1) Since I am not asking for any employer contributions, and I also don’t intend to make any pre-tax contributions (for simplicity’s sake, in this example), would I be writing a check? and a combined backdoor IRA contribution of $11k for a total of $46k. However, I can contribute a certain % of my paycheck via the after-tax 401k contribution which will still leave me with more than 6k of room before I hit the 57k ceiling for all retirement contributions. Now just check your email to get your spreadsheet download link! For example: Is a rollover the same as a withdrawal? and also what exactly do you do – step for megaroth- what does the TPA exactly do- full service. I’ve been hazy if I could do both IRA and 401k. Isn’t it true that for those of us over the age of 50 who are eligible for catch-up contributions the limit for 2015 would be 53K + 6K = 59K? But beware, you cannot withhold the taxes to be paid from the converted amount. The 0% capital gains tax could go away, whereas current Roth funds would likely be grandfathered if tax changes happened to Roth accounts. Good idea? Box 5 (Employee contributions) $9852 I’m being told by my administrator that I can contribute $18500 for all types of contributions. The one suggestion I’d have on this is to check to see if your 401k plan will allow “In Plan Roth Conversions” Not all of them do, but if yours does, you can get the exact same benefits of the article and avoid the added complexity of in service distributions. Thank you very much for the great article. my husband: works full time but starting some side physician practice this year still in the built up but he expect to make atleast 70-90 k next year. If there’s common ownership (that includes spouses) – there are detailed rules for what that means – then for the purpose of retirement plans it’s considered the same company. What do you think, Mad Fientist? The advanced topic question is – how do you invest OVER 53K per year? One particular option that a couple consultants have requested we explore, is the option to allow “Mega Backdoor Roth” after tax contributions. Or do I put it in a taxable account? 2 questions: if we find one that does allow it, I’ve heard differing opinions on whether or not we have to compensate our employees in order for us to contribute after tax dollars. Secondly – what does it gain you to move PreTax401k to TradIRA anyways? A taxable account with investments that do not generate dividends or only qualified dividends such as VTSAX will generate minimal or no tax drag, but the gains will be taxable at the time of sale. Some 401Ks not only permit $17.5K of either tax-deferred or Roth contributions, but ALSO permit you to contribute your own, after-tax money into the plan up to the $52K limit. I’ve seen the “mega back door roth” discussed on reddit and the bogleheads sites, but your graphics convey the practical mechanics better than merely reading about it! When talking to vanguard to contribute more $$ towards Roth 401k, they said that 18k is combined limit for both type of contributions. “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).”. Just to be clear, when should the after tax 401(k) contributions be taken from the 401(k) plan and rolled into the ROTH IRA? Getting around to doing my 2015 taxes now, so here’s my example. I didn’t want to split it into TIRA and Roth IRA to not reduce my $5,500 annual IRA contribution limits for regular backdoor TIRA to Roth IRA conversion (I can’t contribute pre-tax to TIRA or Roth IRA due to income limits). Income is income; you have to report all of your income as such on the FAFSA, whether you deposit it into pretax 401k or aftertax or Roth. Great link. Initiating a rollover into my 401k from my tIRA now. (unless you are catch-up eligible and those provisions and amounts are different depending on the type of plan. The Mega Backdoor Roth is a strategy that could allow you to contribute an extra $37,000 to your Roth IRA every year! 35K on after-tax basis to pre-tax portion. After every pay period, my husband calls to convert the after-tax portion of our contribution to a Roth 401K, since this can’t be done online. You should think about going 1099, and opening a solo 401k with the Mega Backdoor Roth option. Then there are never any taxable gains associated with the after-tax contribution. Is it possible to rollover all the pre-tax assets (includes the pre-tax gains of the after-tax assets) in the IRA to the pre-tax portion of the 401K? 4. Awesome! My employer offers a Roth as well but no after-tax contribution option. So you can put in your $17,500 that is either tax-deferred or Roth, then contribute another $34,500 to the plan in after-tax dollars, similar to a non-deductible traditional IRA. Right now, my employer contributes (not matches) 16% of my pay. Even if your plan doesn't allow in-service withdrawals (like the TSP), if you are separating soon from the company (or military), you may be able to isolate that basis and accomplish the same thing like I did after I left the military. I make these calls after each paycheck to minimize taxable earnings. At Fidelity we are ahead of the game in terms of plan design and what we can operationally support, but we are restricted by what the employer wants as an acceptable provision to their plan. The plan must allow for after-tax contributions above and beyond the $17,500 employee contribution limit, preferably up to the $52,000 limit. So it seems like I can just rollover my after-tax 401k contributions by doing it online. I call it the “Mega Backdoor Roth IRA.” There are several variations. Eduardo: You are correct. to two or more plans, “then the recipient can select how the pretax amount is allocated Here are the 2018 income limits for obtaining Traditional IRA tax deductions: IRA deductions for people covered by a retirement plan at work (e.g. I’ve been a lurker for a few months, by first post. Then all the company contribution would come to me as taxable income. I plan to roll it over next March/April once I know the highly compensated employee bit has cleared. So the conclusion: that custodial will move as much as you want, and you just have to file the 8606 form to determine your pre-tax and after-tax liability. All the partners invest in the 401k through a brokerage of there choice, in what Fidelity calls a “non-prototype” or “investment only” 401k. That seems like a pretty great benefit to me, but your employers rules may vary. However; the eligibility period could be satisfied by the time you served doing the contract work. Seems like a great way to increase your Roth holdings if allowed?? На Дунаєвеччині автомобіль екстреної допомоги витягали зі снігового замету, а у Кам’янці на дорозі не розминулися два маршрутних автобуси, внаслідок чого постраждав один з водіїв. – This sits there for lets say 6 months and you quit at the end of the year. Yes be careful!!! With the rest of my monthly income (about $900 after tax), which strategy is next? In other words, to get all the post-tax money out from a 401(k) one would need to convert the whole pile, with the destinations a traditional IRA for the pre-tax money and a Roth IRA via conversion-at-no-cost for the after-tax component. Or should I just realize that time is on my side, put the monty in a taxable account, invest in Vanguard mutual funds with a 75/25 split of total stock market/total bond market, and slowly move the money into our Roths over the next 30 years? I have just been looking into this and If I am reading everything right. That will cover our expenses. That being said, look at the investments you are in with the 457 plan. Let’s take a Sub-S owner who is 40 years old and has W-2 income of $40,000. My 401k is with Vanguard invested in VIIIX which has an ER of .02, I’d like to leave it there if possible. Or maybe you’re asking if you get a custom plan design on an individual 401(k) and then do a megabackdoor Roth IRA there. The one main point that I took away from the notice was that the distribution of pre- and post-tax money from one’s 401(k)/403(b) follows a pro rata rule. Since it is still early days, I hope there will be more case examples or clearer language/examples to make this easier to understand. I am a partner in a small group of docs, all payed on a K-1. do you have to choose your own banks like fidelity or scwabb open those3 accounts for him- first after obtaining the separate EIN or do folks like Nora take care of everything from guiding you step wise- opening accounts to everything? My CPA explained that if, for example I had 190k saved in tax defered 401k plan and 10k this year in after-tax 401k contributions, then I tried to roll that 10k after tax money into a roth IRA then only 5% (10k divided by 10k + 190k) would be tax free. 2) Keep contributing and exceed $53k. I verified with vanguard that 18k is IRS restriction and not from my employer. So 18%, or $992, of the conversion will NOT be taxed You can usually only ever go from SEP to SEP given the nature of the taxation and most rollover/traditional IRAs have a mix of non-deductible and deductible contributions where a lot of institutions don’t want to comingle the assets. Then rollovers come out (first in, first out). We save the rest in regular vanguard account. That’s actually something I’ve been looking into lately because I’m getting pretty overwhelmed with the amount of emails I’ve been receiving. Yeah, I haven’t thought about how I’d do it yet but it would be cool if I could come up with something useful! Late to the game…. Eric, first you need to find out if your employer 401k plan allows you to have after-tax contributions, as some plans don’t and some have limits lower than what IRS allows. Although the tool allows me to do this, it sounds like I probably shouldn’t because it’s in violation of the pro-rata rule you mentioned. I maxed after-tax (non-Roth): $27,250. It’s FIFO method. Before-tax contributions, before-tax gains, after-tax gains (non-Roth) So if you paid tax on a traditional-to-Roth conversion two years ago and you rolled over some after-tax money this year, you wouldn’t be able to get the after-tax money back until you first withdraw the money you rolled over two years ago and paid any applicable penalties on those funds. We plan to retire in about five years at age 42. I’m not sure I understand your question. SEP is entirely different. With my former employers plan, I could roll out after-tax 401k investments into a Roth IRA every 6 months. And it seems like a good way to jumpstart your tax-free account. Maybe better investment options? $10,000!! I can specify just the after tax amount, and when i select it, it give me an estimate of what the reportable taxable income will be on the gains (about $20 right now). Max out your pre-tax first to 19,000 then make after tax contributions and roll those to a Roth… why not just make all after-tax contributions and roll everything to Roth? Is there a reason I should not deposit my money directly into the Roth 401K but do the in-service withdrawl into a Roth IRA? After-tax contributions are made with money you’ve already paid tax on (like Roth contributions) and can grow tax-free but the growth will be taxed upon withdrawal. Be very careful when contributing to two plans simultaneously to understand if you are close to exceeding your limits through EE and ER contributions. My inquiry: This works just like the Backdoor Roth IRA, and you need to make sure you do not have any other traditional IRA, SEP-IRA, SIMPLE IRA money as of December 31st of that year. Curiously, the total amount I can do is exactly equal to the total amount of all my after-tax 401k contributions over the years. That seems to be a good idea. You are out of luck. Bottom line, unless you have no worries about possibly throwing yourself into another tax bracket and have outside cash to pay the taxes, do not move these assets. Yes! The book summarizes the most important information on the blog and contains material not found on the site at all. I haven’t read through all the comments so this may have been discussed. I personally convert the whole balance to my Roth IRA a few times a year. I ran them for 12 years. Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan? The first account can be rolled over into a traditional IRA without tax implications. 2) can I withdraw the contributions without taxes or penalties (and without waiting 5 years)? there can only be a difference of 2% or less between the Average HCE deferral rate to the Average Deferral Rate of the NHCE. Which of these operations should i do first? A great tip I will maximize going forward. If you have a $130K SEP, and you convert it, and your marginal tax rate is 33%, then your tax due on that conversion will be $130K*33%=$42,900. Nonetheless, thanks for the education MF! 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. We would like to show you a description here but the site won’t allow us. For the last 4 years I’ve only been maxing the pre-tax 18k and putting my extra money into normal taxable investments. Then doing the contract work funds ( 401k or IRA, am I missing something the... 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