polareagle wrote: ↑Tue Sep 15, 2020 11:04 am
Anonymous User wrote: ↑Tue Sep 15, 2020 10:57 am
polareagle wrote: ↑Tue Sep 15, 2020 10:54 am
Anonymous User wrote: ↑Tue Sep 15, 2020 4:32 am
STB’s plan allows for a MBDR to a Roth IRA.
Wait, I'm confused by this. To be a "mega backdoor" Roth, it has to involve the 401(k) because you need the higher contribution limit (hence the "mega"). Anyone with income can contribute $6k to a Roth IRA using the regular backdoor. Do you mean that at STB you can contribute $19k or whatever to your 401(k) and then roll it over into a Roth IRA? (If so, great! You've got a mega backdoor Roth!)
I'm not the OP, but I believe OP is referring to the fact that STB will allow for (i) $19.5k to a traditional or Roth 401(k) and also (ii) an additional $37.5k of after-tax contributions to their 401(k), which can then be immediately rolled into a Roth IRA (i.e. "in-service distributions [from your 401(k)] to Roth IRA").
Got it. To my understanding, that's the most traditional, bread and butter MBDR, but I guess saying to a Roth IRA isn't redundant because there's a Roth 401(k) version of this as well. Thanks!
Yep! Agreed.
For the folks following at home, the bread and butter MBDR involves the ability to immediately go from your after-tax 401(k) --> Roth IRA. The keywords here are that your plan allows for after-tax contributions and in-service distributions to a Roth IRA. This will allow you to avoid any taxable growth within your after-tax 401(k) account because you can immediately shove your contributions into your Roth IRA, where they will grow tax-free and where the principal can generally be withdrawn without penalty. This is the gold standard.
However, some firms will allow after-tax contributions but allow for you to effectively facilitate the same planning by immediately going from your after-tax 401(k) --> Roth 401(k). In other words, there are types of plans that (i) do allow for after-tax contributions, (ii)
do not allow in-service distributions to a Roth IRA, and (iii) alternatively
do allow for an "in-plan conversion to a Roth 401(k)." Here, your money will grow tax-free once it's within the Roth 401(k), which is why this iteration of the MBDR
also works. However, you won't be able to move this money from your Roth 401(k) to your Roth IRA until you leave the firm (or until the firm otherwise changes plans to allow for in-service distributions), so the drawback is that you will not be able to withdraw your principal without penalty until your money is actually in the Roth IRA. This distinction shouldn't matter if you're not planning on having to withdraw principal before you leave your firm.
Of course, if given the choice, your appetite for the above options may differ if your available investment options and expense ratios differ wildly between your 401(k) and your IRA, with the latter usually providing a greater variety of options with lower expense ratios.