bugman61

See RI Report 19-04 published 9/16/19

Sputnik

It's very clear and to the point.

To Bucks overall point, I would love ALPA to put out more information like that.

whiskeycharlie

That’s good info. Thank you!

DWC CAP10 USAF

Just to be clear, the R&I 19-04 is not talking about the Mega Back Door, it's talking about the Roth In-Plan Conversion which is slightly different.

1) Back Door Roth IRA: contribute to Traditional IRA, then convert to Roth IRA

2) In Plan Conversion: contribute to 401k using 401(a), then convert it to Roth 401k (can be setup to occur automatically)

3) Mega Back Door IRA: contribute to 401k using 401(a), then convert to Roth IRA (must make phone call )

StartngOvr

Does the in plan conversion (401(a) after tax -> Roth 401(k)) allow for exceeding $19k into the Roth 401(k)? I’m thinking the $19k IRS limit applies, but can’t confirm.

For example, I’ve maxed my Roth 401(k) for the year. I obviously want to roll the 401(a) money I can still contribute before any gains. Can this money in-plan convert, or does it have to go directly to a traditional IRA and then roll again to a Roth IRA?


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LeineLodge

I'm not exactly sure what you're asking but will take a stab. It sounds like you are confusing 2 separate things: the "normal" Backdoor Roth IRA maneuver and the "Mega Backdoor Roth" maneuver.

The short answer, is yes you can exceed the $19.5k limit with 401(a) contributions.

There are several IRS limits that come into play. It sounds like you're referencing 402(g) which for 2020 is $19.5k. This is the max contribution you can make to Roth or Pre-Tax and is known as your salary deferral. It can be a combination of Roth or Pre-Tax but the total combined cannot exceed this $19.5k limit (with the exception being 50+ catchups.)

Independent of your ​salary deferral you can elect to make 401(a) after-tax contributions, which can then be later converted (via what is known as an "in service" withdrawal) to either the Roth account within your 401k or an external Roth IRA.

Then there is the 415(c) limit, which for 2020 is $57k. Your salary deferral and after-tax contributions plus the company's employer contributions (which are equal to 16% of your pay) cannot exceed the 415(c) limit - again there is a 50+ catchup here.

There are some moving parts to this, but it is not overly complicated if you take the time to understand what you are doing.

I recommend reading it from the horse's mouth (IRS): 401k Plans Deferrals & Matching

Here is a good overview that puts it into layman's terms. What you are talking about is the so-called "Mega Backdoor Roth" maneuver: Mega Backdoor Roth

StartngOvr

Thanks for the very thorough answer. Yes, I was referring the 402(g) limit of $19.5k. I think I do have an understanding of the various limits, but couldn’t see clearly explained anywhere whether the in plan conversion to Roth 401(k) would be forced to stop at the 401(g) limit.

From an IRS perspective this seems silly. Might as well just lift the limit altogether since there’s a method to automatically exceed this number.

As a follow on then, I’ll ask a question I asked once before. People have referenced having to call every time you are paid to roll 401(a) money to IRA in order to minimize or eliminate capital gains. Why could you not simply automatically roll your 401(a) to Roth 401(k) and then, once you’ve hit the combined 415(c) limit make one phone call to roll the Roth 401(k) to Roth IRA? I’m done contributing for the year at that point and the DC money is paid as “401k Excess”


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LeineLodge

401a money in no way limits your 402g ($19.5k) limit. Theoretically you could put &19.5k in as an employee deferral and then the remainder as After Tax up to the 415c limit.

So in 2020 you could put $19.5k in as pre-tax or Roth and then put another $37.5k in as After-tax money.

In practice you can’t actually get all that into After-tax as the company is contributing 16% as well and the 3 buckets combined will take you to the 415c limit. Some guys will “race” the company by contributing the max to After-tax for the first couple months of the year, in an effort to get max dollars into a Roth account.

The reason most people make the phone call after each paycheck is to minimize earnings on the After-tax account. There is no tax due on the basis (what you contribute) but you will generate a taxable event if you take a distribution of earnings. There’s nothing wrong with waiting until the end of the year and doing it once, you just may end up with a small tax bill.

DWC CAP10 USAF

I'm having the Mega Back Door conversation with my CPA and Financial Planner, and they are not familiar with the Mega Back Door ability that our Delta 401k plan allows....they are asking is it just the basis? Does it create taxable conversions? A few other "technical" questions as well. I believe I know the answers but I want to show them in black and white.

Is there somewhere (Fidelity Net Benefits, Delta HR, etc) where I can find a plan document or something that spells out the Mega Back Door ability for my finance peeps?

Appreciate the point out!

RonRicco

I don’t believe you will find anything related to the a Mega on the fidelity website.

It can create a taxable event on any earnings that the 401a money generates the short time it is there until it is removed. For example, you have 2k go into you 401A. You wait 2 days to call fidelity and in the mean time that 2k has made 30 cents. You would get a tax statement for 30 cents on which you would have to pay tax. The key is to call the next day to limit any tax implications.