Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL] Forum

[Definitely Not North]

Anybody know a good tutorial for how to do the mega backdoor roth with a Vanguard 401k? Google is turning up lots of articles talking about the fact that you CAN do it, but no no real step-by-step instructions on HOW to do it

[kaiser]

Anybody know a good tutorial for how to do the mega backdoor roth with a Vanguard 401k? Google is turning up lots of articles talking about the fact that you CAN do it, but no no real step-by-step instructions on HOW to do it

Not sure I am clear on the above. Some 401k plans with Vanguard will allow it, and some plans won't. Depends on your plan specifics, and you should call Vanguard to ask. Google isn't going to tell you whether your particular plan allows for it. For example, my 401k is through Vanguard. And while we have the option of after-tax contributions, my plan doesn't allow in-service withdrawals to a Roth IRA, or in-plan transfers to Roth 401k. So mega backdoor roth isn't an option for me.

[Anonymous User]

STB’s plan allows for a MBDR to a Roth IRA.

This is not entirely true yet. 2021 will supposedly revise to allow the in-plan conversion. Currently just can make contributions.

[Definitely Not North]

Anybody know a good tutorial for how to do the mega backdoor roth with a Vanguard 401k? Google is turning up lots of articles talking about the fact that you CAN do it, but no no real step-by-step instructions on HOW to do it

Not sure I am clear on the above. Some 401k plans with Vanguard will allow it, and some plans won't. Depends on your plan specifics, and you should call Vanguard to ask. Google isn't going to tell you whether your particular plan allows for it. For example, my 401k is through Vanguard. And while we have the option of after-tax contributions, my plan doesn't allow in-service withdrawals to a Roth IRA, or in-plan transfers to Roth 401k. So mega backdoor roth isn't an option for me.

Okay didn’t realize it wasn’t universal—yeah my Vanguard plan permits it.

[lonerider]

Anybody know a good tutorial for how to do the mega backdoor roth with a Vanguard 401k? Google is turning up lots of articles talking about the fact that you CAN do it, but no no real step-by-step instructions on HOW to do it

I don’t have Vanguard. I have Schwab. These are my steps:

1. Call Schwab 401k phone number and tell them I want to do an in-service distribution of my after-tax 401K funds. They will email me a withdrawal form. (The form has an ISBN code at the bottom that is unique and can’t be reused, so I have to call Schwab each time I want to do this to get a new form).

2. Fill out form indicating the after-tax withdrawal. I elect for NO tax withholding. I direct the after-tax contributions to be distributed to my Schwab Roth IRA, and any earnings on those contributions to be distributed to my Schwab IRA.

3. After I submit the form, it usually takes 2-3 business days to be processed.

4. I file a form with my Schwab 401K account and Schwab IRA (these are two different websites, a 401K administrative website and the normal Schwab brokerage website) to transfer the amounts deposited in the IRA back to the 401K. This final step is not necessary for the Mega Backdoor Roth, but it IS necessary if you’re doing the ordinary Backdoor Roth (which I assume you are, if you’re doing a MBDR). As an alternative, you could just transfer this amount to the Roth IRA but you will pay income tax on it, which I prefer to minimize.

[Anonymous User]

STB’s plan allows for a MBDR to a Roth IRA.

Thanks for sharing. It would be interesting to get a v10 [edit: a bit higher, because why not] rundown going, if anyone else can chime in:

Cravath (v1): ?
Skadden (v2): YES, to Roth IRA
Wachtell (v3): ?
SullCrom (v4): ?
Latham (v5): YES, to Roth 401(k)
Kirkland (v6): NO
Davis Polk (v7): ?
Simpson (v8): YES, to Roth IRA
Gibson Dunn (v9): NO
Paul Weiss (v10): YES, to Roth IRA
Sidley (v11): NO
Cleary (v14): NO
Jones Day (v16): NO
White & Case (v17): NO
Ropes (v19): NO
Paul Hastings (v22): YES
MoFo (v23): YES
Milbank (v25): YES

added milbank and mofo

[Anonymous User]

STB’s plan allows for a MBDR to a Roth IRA.

Thanks for sharing. It would be interesting to get a v10 [edit: a bit higher, because why not] rundown going, if anyone else can chime in:

Cravath (v1): ?
Skadden (v2): YES, to Roth IRA
Wachtell (v3): YES, to Roth IRA
SullCrom (v4): ?
Latham (v5): YES, to Roth 401(k)
Kirkland (v6): NO
Davis Polk (v7): ?
Simpson (v8): YES, to Roth IRA
Gibson Dunn (v9): NO
Paul Weiss (v10): YES, to Roth IRA
Sidley (v11): NO
Cleary (v14): NO
Jones Day (v16): NO
White & Case (v17): NO
Ropes (v19): NO
Paul Hastings (v22): YES
MoFo (v23): YES
Milbank (v25): YES

added milbank and mofo

Adding Wachtell.

[Anonymous User]

STB’s plan allows for a MBDR to a Roth IRA.

Thanks for sharing. It would be interesting to get a v10 [edit: a bit higher, because why not] rundown going, if anyone else can chime in:

Cravath (v1): ?
Skadden (v2): YES, to Roth IRA
Wachtell (v3): YES, to Roth IRA
SullCrom (v4): ?
Latham (v5): YES, to Roth 401(k)
Kirkland (v6): NO
Davis Polk (v7): ?
Simpson (v8): YES, to Roth IRA
Gibson Dunn (v9): NO
Paul Weiss (v10): YES, to Roth IRA
Sidley (v11): NO
Cleary (v14): NO
Jones Day (v16): NO
White & Case (v17): NO
Ropes (v19): NO
Paul Hastings (v22): YES
MoFo (v23): YES
Milbank (v25): YES
Cadwalader (v55): YES

added milbank and mofo

Adding Wachtell.

Adding Cadwalader (yes)

[Anonymous User]

Anyone know if Weil or S&C allow for this?

[synergy]

I'm a senior associate with little knowledge of personal finance. If my firm allows both a roth 401k and a mega backdoor roth ira, which is preferable? Sounds like conventional wisdom is for biglaw associates to avoid roth 401k's generally?

[abcdoremi]

I'm a senior associate with little knowledge of personal finance. If my firm allows both a roth 401k and a mega backdoor roth ira, which is preferable? Sounds like conventional wisdom is for biglaw associates to avoid roth 401k's generally?

It is absolutely not correct to avoid Roths. It is true you want to maximize your IRA and your 401k first, since you pay tax on these during retirement, when your tax rate is lower, while on Roths you pay tax now. However, after you pay tax initially you do not have to pay any tax on the Roth when you use funds during retirement, meaning you don't pay a capital gain tax on the gains from basis (same as non-Roth) and you don't pay income tax. This is advantageous as opposed to simply sticking your money in the stock market since you will need to eventually pay capital gains taxes on that, assuming your investments make money. Wisdom is, if possible, max out everything, IRA, 401(k) and mega-backdoor Roth.

Not sure of what to do if you can do both, whatever lets you put the most money in I suppose, but I'm no expert on this.

[Jchance]

I'm a senior associate with little knowledge of personal finance. If my firm allows both a roth 401k and a mega backdoor roth ira, which is preferable? Sounds like conventional wisdom is for biglaw associates to avoid roth 401k's generally?

401k, and then backdoor Roth IRA, and then mega backdoor Roth IRA

[synergy]

I'm a senior associate with little knowledge of personal finance. If my firm allows both a roth 401k and a mega backdoor roth ira, which is preferable? Sounds like conventional wisdom is for biglaw associates to avoid roth 401k's generally?

401k, and then backdoor Roth IRA, and then mega backdoor Roth IRA

Just so I'm clear, this means to max out traditional 401k, then backdoor Roth IRa then mega backdoor Roth IRA? And opt not to put any money in the firm's Roth 401k? I realize now that I should have clarified, the firm offers both traditional and Roth 401k's. Thanks so much!!

[Anonymous User]

STB’s plan allows for a MBDR to a Roth IRA.

Thanks for sharing. It would be interesting to get a v10 [edit: a bit higher, because why not] rundown going, if anyone else can chime in:

Cravath (v1): ?
Skadden (v2): YES, to Roth IRA
Wachtell (v3): YES, to Roth IRA
SullCrom (v4): ?
Latham (v5): YES, to Roth 401(k)
Kirkland (v6): NO
Davis Polk (v7): ?
Simpson (v8): YES, to Roth IRA
Gibson Dunn (v9): NO
Paul Weiss (v10): YES, to Roth IRA
Sidley (v11): NO
Cleary (v14): NO
Jones Day (v16): NO
White & Case (v17): NO
Ropes (v19): NO
Paul Hastings (v22): YES
MoFo (v23): YES
Milbank (v25): YES
King & Spalding (v39): YES
Cadwalader (v55): YES

added milbank and mofo

Adding Wachtell.

Adding Cadwalader (yes)

Added King & Spalding (yes)

[Anonymous User]

Greenberg Traurig allows it

[jotarokujo]

I'm a senior associate with little knowledge of personal finance. If my firm allows both a roth 401k and a mega backdoor roth ira, which is preferable? Sounds like conventional wisdom is for biglaw associates to avoid roth 401k's generally?

401k, and then backdoor Roth IRA, and then mega backdoor Roth IRA

Ngl im bad at this kinda stuff. why is it important to max the pre-tax 401k before doing Roth IRA?

[Jchance]

t401k (and so does HSA) reduces your MAGI, which means you don't have to pay taxes now at highest bracket and can pay taxes later (assuming at a lower tax rate/bracket).

There is a lot of discussion of t401k vs. Roth 401k on the Internet, feel free to research into this topic. Most people opt for t401k.

[Anonymous User]

.

[Anonymous User]

Thanks for sharing. It would be interesting to get a v10 [edit: a bit higher, because why not] rundown going, if anyone else can chime in:

Cravath (v1): ?
Skadden (v2): YES, to Roth IRA
Wachtell (v3): YES, to Roth IRA
SullCrom (v4): ?
Latham (v5): YES, to Roth 401(k)
Kirkland (v6): NO
Davis Polk (v7): ?
Simpson (v8): YES, to Roth IRA
Gibson Dunn (v9): NO
Paul Weiss (v10): YES, to Roth IRA
Sidley (v11): NO
Cleary (v14): NO
Jones Day (v16): NO
White & Case (v17): NO
Ropes (v19): NO
Paul Hastings (v22): YES
MoFo (v23): YES
Milbank (v25): YES

Can anyone speak to DPW’s policy?

[RedNewJersey]

Ngl im bad at this kinda stuff. why is it important to max the pre-tax 401k before doing Roth IRA?

I think this misses an important feature of a Roth 401k, which is that it allows you to put more money in than a traditional. If the contribution amount were the same, then the calculation would largely turn on your current tax rate and your projected tax rate in retirement. But it's not. The contribution cap on a Roth 401k is 19.5k (or whatever--it changes) in post-tax money, while the cap on t401k is 19.5k in pre-tax money. Those numbers aren't comparable. You need both to be either pre-or-post-tax. When you do that, the economic reality is a Roth 401k allows you to contribute more (by, 20+% or whatever your marginal rate is).

[masterherm]

Ngl im bad at this kinda stuff. why is it important to max the pre-tax 401k before doing Roth IRA?

I think this misses an important feature of a Roth 401k, which is that it allows you to put more money in than a traditional. If the contribution amount were the same, then the calculation would largely turn on your current tax rate and your projected tax rate in retirement. But it's not. The contribution cap on a Roth 401k is 19.5k (or whatever--it changes) in post-tax money, while the cap on t401k is 19.5k in pre-tax money. Those numbers aren't comparable. You need both to be either pre-or-post-tax. When you do that, the economic reality is a Roth 401k allows you to contribute more (by, 20+% or whatever your marginal rate is).

Except you can also contribute the difference to a regular taxable investment account. If you're making big law money and don't expect to make big law money forever, then a traditional is the obvious choice.

[showusyourtorts]

Ngl im bad at this kinda stuff. why is it important to max the pre-tax 401k before doing Roth IRA?

I think this misses an important feature of a Roth 401k, which is that it allows you to put more money in than a traditional. If the contribution amount were the same, then the calculation would largely turn on your current tax rate and your projected tax rate in retirement. But it's not. The contribution cap on a Roth 401k is 19.5k (or whatever--it changes) in post-tax money, while the cap on t401k is 19.5k in pre-tax money. Those numbers aren't comparable. You need both to be either pre-or-post-tax. When you do that, the economic reality is a Roth 401k allows you to contribute more (by, 20+% or whatever your marginal rate is).

Except you can also contribute the difference to a regular taxable investment account. If you're making big law money and don't expect to make big law money forever, then a traditional is the obvious choice.

+1. The vast majority of biglawyers I know will do a pre-tax 401k versus a Roth 401k (with the exception being married folks that file jointly and are the sole earner, i.e. they are in a lower tax bracket). Also, if your firm offers the mega back door roth, then you'll have up to another ~37k of runway to stuff tax advantaged accounts.

[RedNewJersey]

Except you can also contribute the difference to a regular taxable investment account. If you're making big law money and don't expect to make big law money forever, then a traditional is the obvious choice.

+1. The vast majority of biglawyers I know will do a pre-tax 401k versus a Roth 401k (with the exception being married folks that file jointly and are the sole earner, i.e. they are in a lower tax bracket). Also, if your firm offers the mega back door roth, then you'll have up to another ~37k of runway to stuff tax advantaged accounts.

It's of course fine to say that the difference in projected tax rates outweighs the higher cap, but it does seriously change the picture. If, say your marginal rate is 35%, you are putting in 30k in pre-tax money, compared to 19.5. True, you can take the extra 6.8k (after-tax amount of 10.5) and put it in a taxable account, but you lose the tax-benefit on that money due to your choice. If you are confident your rate will be much lower, maybe that's worth it--but it is materially less in your tax-protected account.

It's worth actually doing the calculation and seeing at what tax rate that makes sense. For example, if your tax rate now is 35%, your tax rate in retirement is 30% (and recall, t401k is ordinary income, not capital gains), and capital gains rate is 15% (this applies to the gains in the "difference" you set aside), you come out pretty much even. Are you confident your rate will be at least 5% lower in retirement?

That's not even considering: the additional income from your t401k might *change* the bracket you are in in retirement relative to the Roth (since you'll have that much more ordinary income), and tax rates are likely to go up, not down (especially capital gains rates). Also, are people actually putting the "difference" into a not-going-to-touch-it retirement taxable account? I'm skeptical people are doing this.

I don't doubt most people use t401k, but that doesn't sway me (I would wager that the Roth is more common among "personal finance-y" people, though it probably still is less than half). Most people probably aren't even maxing out all their tax-advantaged accounts.

[masterherm]

Except you can also contribute the difference to a regular taxable investment account. If you're making big law money and don't expect to make big law money forever, then a traditional is the obvious choice.

+1. The vast majority of biglawyers I know will do a pre-tax 401k versus a Roth 401k (with the exception being married folks that file jointly and are the sole earner, i.e. they are in a lower tax bracket). Also, if your firm offers the mega back door roth, then you'll have up to another ~37k of runway to stuff tax advantaged accounts.

It's of course fine to say that the difference in projected tax rates outweighs the higher cap, but it does seriously change the picture. If, say your marginal rate is 35%, you are putting in 30k in pre-tax money, compared to 19.5. True, you can take the extra 6.8k (after-tax amount of 10.5) and put it in a taxable account, but you lose the tax-benefit on that money due to your choice. If you are confident your rate will be much lower, maybe that's worth it--but it is materially less in your tax-protected account.

It's worth actually doing the calculation and seeing at what tax rate that makes sense. For example, if your tax rate now is 35%, your tax rate in retirement is 30% (and recall, t401k is ordinary income, not capital gains), and capital gains rate is 15% (this applies to the gains in the "difference" you set aside), you come out pretty much even. Are you confident your rate will be at least 5% lower in retirement?

That's not even considering: the additional income from your t401k might *change* the bracket you are in in retirement relative to the Roth (since you'll have that much more ordinary income), and tax rates are likely to go up, not down (especially capital gains rates). Also, are people actually putting the "difference" into a not-going-to-touch-it retirement taxable account? I'm skeptical people are doing this.

I don't doubt most people use t401k, but that doesn't sway me (I would wager that the Roth is more common among "personal finance-y" people, though it probably still is less than half). Most people probably aren't even maxing out all their tax-advantaged accounts.

There’s a lot that goes into it but basically optimal is to have both Roth and trad funds available for retirement so you can withdraw the trad (with a lower tax rate) and potentially convert in low income years. This article goes into it in more detail. Personally I do both but after starting only with Roth I’ve since switched to trad because it’s worthwhile to have the flexibility of both types of accounts. If just starting out Roth is defensible but I wouldn’t go all-in on only Roth, especially if you’re interested in potential early retirement or downshifting where you will have a lower income at some point. Basically the only reason to do 100% Roth is if you know you’ll be at a firm forever, otherwise at minimum you should split. Trad is more popular because it makes sense for more people.

https://www.biglawinvestor.com/should-l ... onal-401k/

[Jchance]

Potentially converting t401k to Roth 401k during low income years (including early retirement) is understated and often overlooked.