Questions for you Mega-Backdoor Roth'ers...
 

With the 30 June paycheck, I just hit the $55,000 415(c) limit. $17,700 from Delta and $37,300 in after-tax contributions from me. I've rolled the entire $37,300 into a Roth for the Mega Backdoor (done incrementally every two weeks). My questions...

1) Am I still eligible to contribute to a Traditional IRA this year?

2) If so, how much? $5500?

3) Can that amount also be rolled into the Roth?

P.S. I'm not old enough for catch-up contributions.

How were you able to put in 37,300 personally? I thought the limit was 18,500?

As always, I'm not a tax guy and it's always good to chat with one. However, I have done the exact same thing you did.

401k is limited to $18.5. You can continue to contribute to 401a up to $55k (401k + Company contributions + 401a). If you're interested in what he's talking about, google "Mega back-door Roth IRA." This is not to be confused (though often is) with the regular back-door Roth IRA.

I believe you can also skip over the 18.5 in 401k and go straight 401a. That way you don't have a split between Roth 401k and Roth IRA.

Love the financial knowledge on this forum. What's the advantage of doing 401a vs Roth 401k? Is it just because you can pull it out of the company account and roll it into your own Roth IRA (mega backdoor)?

Yes you can. I have contributed $0 to 401k. 100% of my contributions have been 401(a).

Thanks Crewdawg

I guess what I've failed to comprehend yet is what benefits does the Roth IRA have to the Roth 401k? I haven't pulled the trigger and switched from Roth 401k yet because I haven't been able to figure that out yet.


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-Roth 401k has required minimum distributions...Roth IRA does not.
-I can turn my Roth IRA into a SDIRA and invest in real estate...I can not directly do that with my Roth 401k.
-$55k/yr (401a -> Roth IRA) vs 18.5k/yr (401k).
-Roth IRAs are much more flexible wrt passing it on to your heirs.

what is the difference between a backdoor roth ira contribution (single- putting $5,500 in to regular IRA, paying one day of tax, and rolling it in to my roth IRA), and the mega backdoor roth ira contribution?

Mega backdoor refers to 415c limits of $55k vs the $5.5k IRA limit.

When you guys do the mega backdoor, does it make it any easier using a Fidelity Roth IRA, or is it the same process to move the money to a different company (and is it easy)? I currently have a Roth with Vanguard and just wondering how easy the transfer process would be..or if it'd be a headache every time I move money.

I have a Roth IRA with Vanguard as well. They have to cut you the the check in care of your Vanguard Roth IRA, then you have to send it to Vanguard. That seemed like a pain, so I just opened a Fidelity IRA, which they can just transfer over the phone.

Keep these income limits in mind;

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines

You’re likely over the income limit to make a deduction on a TRADITIONAL IRA contribution. HOWEVER you may make a NON DEDUCTIBLE contribution to a TRADITIONAL IRA. You make this non deductible by filling out a form 8606 at tax time. This money which you have contributed to a TRADITIONAL IRA can then be rolled over into a ROTH IRA. There is no income limit on doing this and is your BACKDOOR ROTH IRA contribution.

So;

-Contribute to a Traditional IRA
-Don’t take a deduction at tax time (assuming you’re over the income limit to do so)
-Roll to a Roth IRA

Extra tip; roll the money from the TIRA to RIRA sooner rather than later. Also leave it as cash when you contribute it PRIOR TO the roll over. This will avoid gains on the money while it sits in account that make your tax life a little bit more difficult come April 15th.

Another tip; open the TIRA and fund it, then close it after you roll it over. Repeat annually. It makes accounting MUCH easier. If you already have a TIRA open with a balance, you may want to see an accountant as a new set of rules called the “pro rata rule” now applies. If you don’t already have a TIRA with a balance, disregard and follow steps 1-3 above.

I find keeping all of this stuff in house a Fidelity to be the easiest way versus having multiple accounts at multiple brokerages. Fidelity is competitive with their commissions and expense ratios on their funds when compared to everyone else. I don’t see a huge advantage to going through the PITA of transferring money via paper check, personally. That’s your call though!

How exactly do you convert it to the Roth IRA? All at once at the end? Immediately after you put the money into the 401a? If you could enlighten the rest of us exactly how to do this I would appreciate it!!

- I currently direct Delta's 16% into Fidelity BrokerageLink.
- I also direct 24% individual contribution and 100% of profit share into BrokerageLink. ALL of the individual contributions are AFTER TAX or 401(a).

- Delta's contributions cannot be moved out of the 401k.
- Every two weeks, immediately after I see the after tax money sitting in my BrokerageLink account, I call Fidelity and tell them, "I'd like to transfer all the after tax money into my Roth IRA. (You want to do this right away, because if that after-tax money has a chance to gain earnings, they become taxable, and the earnings cannot be moved into the Roth IRA.)

- From there, it is actually a two-step process. First, it must be moved from the BrokerageLink side to the DPSP side. After that is done, it is moved from the DPSP to the Roth IRA. Fidelity handles both of those steps. It usually takes 2-3 days from my phone call before it is sitting in the Roth IRA. (As a side note, you may be able to get this down to a single step if you direct your money directly into the DPSP, but my process works for me.)

- The best way to think of this (and how it was explained to me), is that you are in a race against Delta. Delta is putting in money every two weeks (based on the number of hours you fly). The TOTAL combined limit is $55,000. The goal is to get to $55,000 as quickly as possible. The quicker you do it, the greater YOUR percentage of $55,000 is, and thus, the greater amount you can get into your Roth IRA each year. Some guys get there in February with Profit Sharing and contributing 75% of their pay.

Great information here. I had no idea about this.

A few questions:
-After you have maxed out the "Mega Backdoor Roth IRA" what happens to the rest of the money from your employee+Co. direct contribution? Is it just the same scenario as if you hit the 401(k) max and have the extra money deposited as cash?

-If it's just cash, what are you guys doing with that money? Are there other tax-advantaged things to do with it?

-Am I undestanding correctly that you can also contribute $5500 to a Roth IRA in addition to the "Mega"? Assuming you don't hit the $189k earnings limit and have the $5500 reduced.

Thanks

A few questions:
-After you have maxed out the "Mega Backdoor Roth IRA" what happens to the rest of the money from your employee+Co. direct contribution? Is it just the same scenario as if you hit the 401(k) max and have the extra money deposited as cash?

.....it’s pushed to DPSP Cash, so it goes into your pocket.

-If it's just cash, what are you guys doing with that money? Are there other tax-advantaged things to do with it?

....great question, a lot of people do real estate, a lot of people out it into their brokerage accounts and invest it, some save it. That’s your call but do have a plan for it. Otherwise, you may just be better off timing your contributions and company contributions to hit the $55k limit towards the end of the year. In reality, all this is doing is moving numbers around the balance sheet. It’s a finite amount of money and you can choose to take less income at the start of a year for more and the end of a year or vice versa. Or you could space it out equally over the year. Whatever you choose, just have a plan for the money.

-Am I undestanding correctly that you can also contribute $5500 to a Roth IRA in addition to the "Mega"? Assuming you don't hit the $189k earnings limit and have the $5500 reduced.

......yes, in addition to the mega backdoor, you can also do the $5500 backdoor. This comes in handy when you are over the Roth IRA income limit. The backdoor essentially eliminates any income restriction by using the 3 step process I outlined above.

Yes. Roth IRA if you are under the income limit. Backdoor Roth IRA if you are over the income limit. If you will be close for the year, just do the backdoor Roth IRA to begin with.

My preference for the extra DPSP Cash from that point on is real estate. When the real estate or other outside investments start producing income, you can look into a SIMPLE IRA as an additional method of tax deferral.

MOST IMPORTANT STEP:
Get competent financial advice outside of APC keyboard warriors. There is a reason we fly airplanes instead of manage hedge funds.

You guys are Mega Backdoor smart....I may need a new Tax guy!!

Baja.

I can't stress this enough...."Professional Financial Advice" is typically a licensed salesman. Now, I'm not saying APC should be your go-to resource. However, the financial services industry has created this facade that saving and investing for retirement is something we cannot handle as individuals. It's completely false, and if we spend time educating ourselves on this stuff we can make A LOT more money and save ourselves A LOT of BS advisory fees. Long-term buy and hold is really all we need to do. Invest systematically on a regular basis, sit on your hands and watch it grow. Hedge fund managers are highly paid salesmen and very few actually outperform a good benchmark. I'm guessing that sometime in the next decade hedge funds will cease to exist, they're simply too expensive for the performance they generate.

NOW, the actual complicated part of all of this is undoubtedly the tax side. A good fee-only tax advisor is absolutely necessary, in my opinion.

As far as picking investments and doing these financial "maneuvers" such as the backdoor Roth, it can be done on your own with a simple call to Fidelity, they won't lead you astray. Don't be afraid to keep them on the phone until you absolutely understand what is going on, I've spent many hours in the past on the phone with them. In fact, I've found many of the reps find this refreshing, seeing folks take control of their finances.

Just remember, most financial advisors do not have your best interest in mind. With that being said, they are out there, the good ones, it just takes a bit of legwork on your end. This place is a great start, but keep digging in and working towards financial literacy, I have no doubt it is going to pay off exponentially in the future.

Thanks for explaining this!! Awesome info. I assume you could just put the money into a money market with the dpsp to help the time factor of any gains. Also can fidelity transfer money into a vanguard Roth IRA? Or does it have to be Fidelity?

Fidelity can cut a check to you in care of vanguard. They would send you the check then you would send the check to vanguard. They may be able to send the check to vanguard directly. Either way it adds additional steps, I think you can find funds and etfs with competitive expense ratios at Fidelity, so it may simply your life to have fidelity move it to an account in house. Your choice.

More great info, thanks! Obviously I'm not going to base large financial decisions solely on what I've read on APC, but it's good to open your eyes to other options out there.

Agree. Do your homework. Avoid getting talked into a neighbor's or co-workers "get rich quick" scheme, or buying Iraqi dinar or Bitcoin on an exchange, to time the next market craze.

Read a book by John Bogle.

I didn't check to see if it had been mentioned before, but, I highly recommend you guys take a trip over to the bogleheads forum.

https://www.bogleheads.org/forum/index.php

That forum is full of physicians, attorneys and other professionals who are far along in their careers as well as starting out, that have, or expect to have in the future, (ask a poor ER resident ) a high-level of compensation and they need some advice on what to do to do with their compensation & retirement nest egg, just like you guys.

Instead of discussing contracts, cognac, and cockpit farts, they discuss the thriftiest ways to invest before and after tax, purchase a home, purchase investment properties, purchase a frugal car, send your kids to college, and the list goes on.

They won't lead you astray.

In fact, I'd be willing to wager that there is more sound financial information among those on that forum, than from the world's top 500 so-called "financial advisors" combined.

I've learned to stick with this mantra:

1) Invest you must
2) Time is your friend
3) Impulse is your enemy
4) Basic arithmetic works
5) Stay the course

Good luck with all your money.

Signed,

Poor freight trash

Another great read is "The Millionaire Next Door". This explains how a construction worker can have more wealth than a physician. Unfortunately, I believe many of our co-workers fall into this "highly paid and debt-laden" category. It's not easy to avoid keeping up with Joneses, but if we can we will have a lot more options than just flying the line in the future if we so choose!

This may be an outrageously stupid question, but why not use the 401k to defer tax til retirement when the income will be less? In other words, why have all the tax liability now during high income earning years?

I had the same question recently, and it was basically explained to me like this:

You shelter $18.5k from tax liability today via 401k, and it grows (for round numbers) to $200k...and you'll pay tax on the entire $200k as you make distributions from the account.

If you pay tax on the same $18.5k today and invest it via Roth 401k, and it grows to $200k...all you'll ever pay tax on is the initial $18.5k.

In "dumb pilot/round numbers" speak...35% of $18.5k is a LOT less than 25% of $200k.

Just for fun, here's some more specific numbers. If you invest your max 18.5k @ $1541/month for 20 years at a growth rate of 8%, you'll end up with just shy of $910,000. Of that total you'll have put in $370,000, the other $540,000 is growth. If it's all in a traditional you'll have saved around $150,000 in taxes on the 370k, give or take, but you'll end up owing taxes on the whole 910k as you draw it down. Or you pay that tax bill up front and get 910k tax free.

Another way to look at it is that you're effectively investing more with your ROTH than with a traditional, assuming you're putting in the max 18.5k either way. With a traditional, when you factor in taxes, you're really only investing ~12k for yourself in the future. 18.5k put into a ROTH is as if you were investing ~24k into a traditional since the whole 18.5k is yours for the future.

I re-read this and it makes a lot more sense. Good short explanation. Thanks

One more dumb question. When you change your traditional contributions to Roth, does Fidelity break down the difference w pre-tax vs Roth contributions? The money all grows, but big difference at the end w RMD’s etc. Just wondering how it is accounted for.

Yes they do. I have an overall 401k balance and can expand it to see a traditional and a Roth balance.


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If you actually want to compare apples to apples on the two returns, you have to compare investing 24k in both scenarios since that's what an even comparison would cost you now. 24k results in 18.5 of Roth investment and the rest is gone to Uncle Sam. 24k invested into traditional yields 18k of pre-tax and 4k of post-tax (2k taxes paid now).

To make an actual comparison, you then also need to know what your tax rates will be in perpetuity. Since that's not possible, plenty of people (myself included) value diversified income streams approaching and into retirement.

There are several points to ponder regarding Roth vs Traditional.

-With a Roth you are effectively investing more for retirement, because the taxes are pre-paid. As Ted74 pointed out, 18k into a Roth is equivalent to 24k in a Traditional assuming equal income tax burdens now and at retirement.

-Roth IRA does not have a required minimum distribution (RMD), which provides flexibility in timing your withdrawals.

-Roth IRA is a better estate planning tool due to the lack of RMD.

-Having a mix between Roth and Traditional allows you to steadily withdraw from the traditional, but still take a boatload (or truck load, plane load, Porsche load, etc) all in one year without bumping up your tax bracket.

-If you expect your tax bracket will be substantially lower in retirement, a Roth may not be an ideal choice. This is often the case for those nearing retirement.

-Instead of paying the taxes up front on a Roth, it may make more sense to defer 18K in a traditional plan and invest the 6K tax savings elsewhere, like real estate, low turnover mutual fund, rare whiskey, antique guitars, collectible cars, etc.

-Like many things in life, just because you can (do a Roth), doesn't mean you should.

Agreed. Traditional accounts can make much more sense for people focused on early retirement. The Mega Backdoor Roth is an exotic product, but that doesn't mean it's best for every situation.

Reasons I choose Roth vs Traditional

1- Company already makes contributions to my 401k. They will be subject to RMDs and taxes eventually.

2- Roth accounts aren’t subject to the government telling me when I must withdraw the funds (no RMDs). This will work well with my company contributions that will eventually be subject to RMDs.

3- “Tax insurance”. While my income and expenses will probably be lower on retirement, I’m GUESSING that tax rates will be much higher in 30 years. Assuming Roth rules remain in tact, they will be shielded from those higher tax rates. In theory.

That being said there is some validity to the “bird in the hand” argument. The tax advantages we can have today are real, future tax advantages are subject to the whims of the gutterment.

If you're making $300K+/yr right now as a line pilot ...

...how on God's green earth can your tax bracket (ie: income) be higher when you retire and your income is nothing ore than 401k withdrawals (and maybe SS)?

What am I missing?

Because while you are paying a higher rate now, it is on a much smaller sum of money. After 20-30 years of steady investing the vast majority of money in your account will be growth, not what you actually put in. All that growth money is tax free at a cost of paying taxes on a much smaller amount up front.

It’s a wash. Take the hypothetical 10 bagger over 25 years assuming a 30% tax rate on $100,000.



Non Roth
100,000 x 10 = 1M x .7 = $700,000

Roth
100,000 x .7 x 10 = $700,000

Either leaves you with the same $700,000 at the end of the day. A 30% hit to the whole enchilada one way or the other.

Can your individual contribution be up to 55k as 401a vs the 18.5k individual limit with 401k and Roth 401k contributions?