Anyone doing Mega Backdoor Roth IRA? Forum

[corgiterrier17]

If your firm's plan allows in-service distribution of after-tax to Roth IRA (not just in-plan rollover to Roth 401k), how are you managing this?

My understanding is, you want to roll over as soon as possible before tax hits, meaning I have to roll over every paycheck (every 2 weeks, as I'm paid semi-monthly). I think this might complicate my finance too much.

But my plan has the automatic in-plan rollover to Roth 401K, which I heard is quite rare and so that's probably why people are only talking about Mega Backdoor Roth IRA, as opposed to 401k.

Any tips or advice?

[Anonymous User]

It’s called Mega Backdoor Roth, not Mega Backdoor Roth IRA. I do Mega Backdoor Roth with automatic rollover to Roth 401k the day after each pay date to avoid the headache of manual rollover and the tax burden of late conversion. If/when I leave my current employer, I’d probably roll all that accumulated Roth 401k to my Roth IRA—just once and with no tax burden.

[Anonymous User]

It’s called Mega Backdoor Roth, not Mega Backdoor Roth IRA. I do Mega Backdoor Roth with automatic rollover to Roth 401k the day after each pay date to avoid the headache of manual rollover and the tax burden of late conversion. If/when I leave my current employer, I’d probably roll all that accumulated Roth 401k to my Roth IRA—just once and with no tax burden.

This is exactly what I do.

[corgiterrier17]

It’s called Mega Backdoor Roth, not Mega Backdoor Roth IRA. I do Mega Backdoor Roth with automatic rollover to Roth 401k the day after each pay date to avoid the headache of manual rollover and the tax burden of late conversion. If/when I leave my current employer, I’d probably roll all that accumulated Roth 401k to my Roth IRA—just once and with no tax burden.

Yes, in your case it's Mega Backdoor Roth because you're rolling into Roth 401k, not Roth IRA as some people do. Those who do the manual rollover would be doing Mega Backdoor Roth IRA.

So you chose to roll the after-tax to Roth 401k, even when your plan allows in-service distribution to Roth IRA. So I presume you're saying the inconvenience of the manual rollover outweighs the benefits of rolling over to Roth IRA while being employed?

[Anonymous User]

So you chose to roll the after-tax to Roth 401k, even when your plan allows in-service distribution to Roth IRA. So I presume you're saying the inconvenience of the manual rollover outweighs the benefits of rolling over to Roth IRA while being employed?

What benefits does Roth IRA offer that my employer's Roth 401k doesn't have? I usually like 401k's mutual funds offered by biglaws better (e.g., lower expense ratio) so I might end up just keeping it in the Roth 401k even after I leave.

[corgiterrier17]

So you chose to roll the after-tax to Roth 401k, even when your plan allows in-service distribution to Roth IRA. So I presume you're saying the inconvenience of the manual rollover outweighs the benefits of rolling over to Roth IRA while being employed?

What benefits does Roth IRA offer that my employer's Roth 401k doesn't have? I usually like 401k's mutual funds offered by biglaws better (e.g., lower expense ratio) so I might end up just keeping it in the Roth 401k even after I leave.

I thought the difference would be minimal, too. But check this out blog post on Mega Backdoor Roth IRA.
https://www.biglawinvestor.com/mega-backdoor-roth-ira/

Any thoughts?

[Anonymous User]

Stopped worrying about it since I assume congress will shut it down with the next tax bill

[Anonymous User]

I do megabackdoor Roth IRA. I first max the pre-tax 401K over the course of the year, and then make the maximum remaining contribution to after-tax 401K entirely with EOY bonus money ($38,500). Once it hits the after tax 401K account, I immediately request that 401k servicer cut a check for the full balance of the after-tax 401k account payable to my IRA account at Vanguard. Done. You have to pay tax on any gains in the after-tax 401K account when the withdrawal is made to deposit in the IRA. This is why I do it all with the bonus money and have the withdrawal made as fast as possible. If you make after-tax 401K contributions more episodically, it will increase your taxes if there are considerable gains while the money sits in the after-tax 401k, unless you can make unlimited withdrawals (my servicer only allows 2 per year). Doing it with the bonus money requires only one check / transaction.

[Anonymous User]

So you chose to roll the after-tax to Roth 401k, even when your plan allows in-service distribution to Roth IRA. So I presume you're saying the inconvenience of the manual rollover outweighs the benefits of rolling over to Roth IRA while being employed?

What benefits does Roth IRA offer that my employer's Roth 401k doesn't have? I usually like 401k's mutual funds offered by biglaws better (e.g., lower expense ratio) so I might end up just keeping it in the Roth 401k even after I leave.

The Roth 401k I believe has RMDs. I don’t have the option of in service distribution, but when I leave this job I’ll be rolling my Roth 401k into my Roth IRA solely because of that.

[The Lsat Airbender]

So you chose to roll the after-tax to Roth 401k, even when your plan allows in-service distribution to Roth IRA. So I presume you're saying the inconvenience of the manual rollover outweighs the benefits of rolling over to Roth IRA while being employed?

What benefits does Roth IRA offer that my employer's Roth 401k doesn't have? I usually like 401k's mutual funds offered by biglaws better (e.g., lower expense ratio) so I might end up just keeping it in the Roth 401k even after I leave.

To the contrary, the fund options you have access to with your own IRA (whether you want Vanguard's cheap target-date funds, Fidelity's zero-ER funds, etc.) are going to be at least as good as what your 401(k) offers and 401(k) options generally range from mediocre to bad. Never mind that you have unlimited flexibility rather than a fixed menu of choices. I would take personal control of my 401(k) in a heartbeat.

[hoos89]

So you chose to roll the after-tax to Roth 401k, even when your plan allows in-service distribution to Roth IRA. So I presume you're saying the inconvenience of the manual rollover outweighs the benefits of rolling over to Roth IRA while being employed?

What benefits does Roth IRA offer that my employer's Roth 401k doesn't have? I usually like 401k's mutual funds offered by biglaws better (e.g., lower expense ratio) so I might end up just keeping it in the Roth 401k even after I leave.

To the contrary, the fund options you have access to with your own IRA (whether you want Vanguard's cheap target-date funds, Fidelity's zero-ER funds, etc.) are going to be at least as good as what your 401(k) offers and 401(k) options generally range from mediocre to bad. Never mind that you have unlimited flexibility rather than a fixed menu of choices. I would take personal control of my 401(k) in a heartbeat.

Not necessarily true. Some 401(k)s include institutional funds with lower expenses than you can realistically access in IRA.

[Anonymous User]

I thought the difference would be minimal, too. But check this out blog post on Mega Backdoor Roth IRA.
https://www.biglawinvestor.com/mega-backdoor-roth-ira/

Any thoughts?

Josh Holt is not talking about ROTH 401k. The difference between Roth IRA and ROTH 401k is a wash. Re MRD of Roth 401k, you can always roll Roth 401k to Roth IRA at a later time, like in your 50s, but it's a one-way street and the other way is not possible.

What benefits does Roth IRA offer that my employer's Roth 401k doesn't have? I usually like 401k's mutual funds offered by biglaws better (e.g., lower expense ratio) so I might end up just keeping it in the Roth 401k even after I leave.

To the contrary, the fund options you have access to with your own IRA (whether you want Vanguard's cheap target-date funds, Fidelity's zero-ER funds, etc.) are going to be at least as good as what your 401(k) offers and 401(k) options generally range from mediocre to bad. Never mind that you have unlimited flexibility rather than a fixed menu of choices. I would take personal control of my 401(k) in a heartbeat.

Not necessarily true. Some 401(k)s include institutional funds with lower expenses than you can realistically access in IRA.

+1. I like my Roth 401k better than my IRA 401k for the sole reason of lower expense ratio, which adds up in the long-run.

[corgiterrier17]

I thought the difference would be minimal, too. But check this out blog post on Mega Backdoor Roth IRA.
https://www.biglawinvestor.com/mega-backdoor-roth-ira/

Any thoughts?

Josh Holt is not talking about ROTH 401k. The difference between Roth IRA and ROTH 401k is a wash. Re MRD of Roth 401k, you can always roll Roth 401k to Roth IRA at a later time, like in your 50s, but it's a one-way street and the other way is not possible.

What benefits does Roth IRA offer that my employer's Roth 401k doesn't have? I usually like 401k's mutual funds offered by biglaws better (e.g., lower expense ratio) so I might end up just keeping it in the Roth 401k even after I leave.

To the contrary, the fund options you have access to with your own IRA (whether you want Vanguard's cheap target-date funds, Fidelity's zero-ER funds, etc.) are going to be at least as good as what your 401(k) offers and 401(k) options generally range from mediocre to bad. Never mind that you have unlimited flexibility rather than a fixed menu of choices. I would take personal control of my 401(k) in a heartbeat.

Not necessarily true. Some 401(k)s include institutional funds with lower expenses than you can realistically access in IRA.

+1. I like my Roth 401k better than my IRA 401k for the sole reason of lower expense ratio, which adds up in the long-run.

I never said Josh Holt was talking about Roth 401k lol. What I was saying is the author talks about rolling into Roth IRA through in-service distribution, rather than to Roth 401k that your automatic in-plan rollover allows.

[corgiterrier17]

I do megabackdoor Roth IRA. I first max the pre-tax 401K over the course of the year, and then make the maximum remaining contribution to after-tax 401K entirely with EOY bonus money ($38,500). Once it hits the after tax 401K account, I immediately request that 401k servicer cut a check for the full balance of the after-tax 401k account payable to my IRA account at Vanguard. Done. You have to pay tax on any gains in the after-tax 401K account when the withdrawal is made to deposit in the IRA. This is why I do it all with the bonus money and have the withdrawal made as fast as possible. If you make after-tax 401K contributions more episodically, it will increase your taxes if there are considerable gains while the money sits in the after-tax 401k, unless you can make unlimited withdrawals (my servicer only allows 2 per year). Doing it with the bonus money requires only one check / transaction.

That's a good plan. The problem is I'm a first-year so my bonus isn't quite there when I want to max out my after-tax contribution. Do you have any advice? Should I just have the after-tax rollover to Roth 401K and then roll it to IRA account quarterly (or once a month)?

[The Lsat Airbender]

So you chose to roll the after-tax to Roth 401k, even when your plan allows in-service distribution to Roth IRA. So I presume you're saying the inconvenience of the manual rollover outweighs the benefits of rolling over to Roth IRA while being employed?

What benefits does Roth IRA offer that my employer's Roth 401k doesn't have? I usually like 401k's mutual funds offered by biglaws better (e.g., lower expense ratio) so I might end up just keeping it in the Roth 401k even after I leave.

To the contrary, the fund options you have access to with your own IRA (whether you want Vanguard's cheap target-date funds, Fidelity's zero-ER funds, etc.) are going to be at least as good as what your 401(k) offers and 401(k) options generally range from mediocre to bad. Never mind that you have unlimited flexibility rather than a fixed menu of choices. I would take personal control of my 401(k) in a heartbeat.

Not necessarily true. Some 401(k)s include institutional funds with lower expenses than you can realistically access in IRA.

Lower than FZROX?

What you're saying was true as recently as 5-10 years ago but index funds have been fighting a fierce price war. Retail options are often top-of-the line and when they aren't they come very close. The spread between VTSAX and VITSX is literally one basis point, and if you care you can get that basis point anyway by buying the ETF version.

If my 401(k) gave me access to DFA funds or something that'd be swell but instead I'm looking at a mix of decent options like FXAIX and overpriced boomer nonsense.

[Anonymous User]

It’s called Mega Backdoor Roth, not Mega Backdoor Roth IRA. I do Mega Backdoor Roth with automatic rollover to Roth 401k the day after each pay date to avoid the headache of manual rollover and the tax burden of late conversion. If/when I leave my current employer, I’d probably roll all that accumulated Roth 401k to my Roth IRA—just once and with no tax burden.

This is exactly what I do.

So when you roll your gains in Roth 401k to Roth IRA when you leave your job, you don't pay ANY taxes?

[LawMaster97]

I do megabackdoor Roth IRA. I first max the pre-tax 401K over the course of the year, and then make the maximum remaining contribution to after-tax 401K entirely with EOY bonus money ($38,500). Once it hits the after tax 401K account, I immediately request that 401k servicer cut a check for the full balance of the after-tax 401k account payable to my IRA account at Vanguard. Done. You have to pay tax on any gains in the after-tax 401K account when the withdrawal is made to deposit in the IRA. This is why I do it all with the bonus money and have the withdrawal made as fast as possible. If you make after-tax 401K contributions more episodically, it will increase your taxes if there are considerable gains while the money sits in the after-tax 401k, unless you can make unlimited withdrawals (my servicer only allows 2 per year). Doing it with the bonus money requires only one check / transaction.

That's a good plan. The problem is I'm a first-year so my bonus isn't quite there when I want to max out my after-tax contribution. Do you have any advice? Should I just have the after-tax rollover to Roth 401K and then roll it to IRA account quarterly (or once a month)?

Every year, I first max out my pre-tax 401k ($19,500 this year) and then set up large after-tax contributions for the remaining paychecks (total of $38,500 for this year). After each pay period when the after tax money hits, I call my 401k provider and ask to convert all of my after tax 401k to my in plan Roth sub account. I do this as soon as possible (usually the next day) to minimize any gains in the after tax account, which are taxable income. Some plans allow automatic conversions to your in plan Roth sub account, but mine requires a phone call each time. It’s slightly annoying to call every two weeks in the middle of the year, but it only takes 5 minutes. I set a biweekly calendar reminder. Other people can confirm, but I think this is slightly easier than rolling over to Roth IRA each time. But I don’t think there is much practical difference between the two, other than slightly higher expense ratios in the 401k. When I leave my job, I’ll roll the Roth 401k to a Roth IRA anyway.

[LawMaster97]

It’s called Mega Backdoor Roth, not Mega Backdoor Roth IRA. I do Mega Backdoor Roth with automatic rollover to Roth 401k the day after each pay date to avoid the headache of manual rollover and the tax burden of late conversion. If/when I leave my current employer, I’d probably roll all that accumulated Roth 401k to my Roth IRA—just once and with no tax burden.

This is exactly what I do.

So when you roll your gains in Roth 401k to Roth IRA when you leave your job, you don't pay ANY taxes?

Yes, that is correct.