after-tax 401k + backdoor roth ira rollover = weird trick

[DCal430]

I need to look at this. I'm split between traditional 401k and 401a (privately managed pension) + Roth.

My wife spent a few years catching up, but we're about to start getting more serious about saving. I considered 457, but if I could roll that much into a Roth, that would rock. I'm going to do some reading on this tomorrow and check my 401k vendor tomorrow.

Thanks.

Don't forget the amount in a 457 is in addition to what you can do with a 401K, so you if your plan allows in-service withdrawals like this (most do not), you can still do an additional 17.5K in Roth in a 457.

 

[PowerEngineer]

Well, it's a "weird trick" in the same sense that pre-tax contributions to a traditional 401k have always provided a "backdoor rollover" to a traditional IRA.

Many 401k programs are adding a special "Roth 401k" into which you can make after-tax contributions and get Roth-like treatment (and presumably rollover into a Roth if you want). I recently transferred some after-tax contributions that I made to my 401k years ago over to the Roth side. Something that others may want to look into.

 

[s0me0nesmind1]

You guys are just now learning about a Backdoor ROTH?

Really?

I would consider a backdoor roth but I just don't see the point for diversify reasons. I'll keep my IRA strictly ROTH and my 401k strictly traditional for now.

 

[brianmanahan]

backdoor roth typically means just a 5500$ contribution to a roth IRA when you exceed the 120$k income limit

this is different, it allows you to put up to 35$k in a roth ira per year if you want

 

[Hacp]

You guys are just now learning about a Backdoor ROTH?

Really?

I would consider a backdoor roth but I just don't see the point for diversify reasons. I'll keep my IRA strictly ROTH and my 401k strictly traditional for now.

You have a lot to learn noob.

 

[brianmanahan]

oh shoot, i just realized that they even let me lump sum the after-tax 401k contributions!

 

[mrjminer]

oh shoot, i just realized that they even let me lump sum the after-tax 401k contributions!

Nice. I just learned that the percentage of tax brackets only applies to the income made between the lower and upper boundary of that specific bracket.

You win

 

[brianmanahan]

Nice. I just learned that the percentage of tax brackets only applies to the income made between the lower and upper boundary of that specific bracket.

You win

you learn something new every day!

 

[Engineer]

Could it work this way:

Over-contribute to regular 401k
Contribute $5,500 to regular IRA
Roll over excess from 401k to Roth IRA

?

Does this work with a SIMPLE IRA (my employer doesn't have a 401k plan - too small)?

Probably not!

Edit: Although I did find out that my wife has a 403B plan that I didn't know about. She has a pension and for some reason, I assumed no other benefits. There is no match but we can put money into that on a tax deferred basis and we can then put money into a Roth IRA instead of a regular IRA.

 

[stlc8tr]

Forbes really likes this option. They have another article on it a few months ago. http://www.forbes.com/sites/ashleaebeling/2014/10/15/aftertax-401k-rollovers-advanced-version/

 

[brianmanahan]

Could it work this way:

Over-contribute to regular 401k
Contribute $5,500 to regular IRA
Roll over excess from 401k to Roth IRA

?

i don't think you can over-contribute - at least in the plans i have had, you have to specify that you want to allocate some money specifically to after tax

Does this work with a SIMPLE IRA (my employer doesn't have a 401k plan - too small)?

Probably not!

nope doesnt look like it does http://www.bogleheads.org/wiki/SIMPLE_IRA

my dad had a simple IRA and it has some limitations that were annoying. ie, have to wait 2 year to roll it over to a regular IRA or you get penalized

 

[xaeniac]

Feel sorry for you when the tax man cometh

 

[Engineer]

i don't think you can over-contribute - at least in the plans i have had, you have to specify that you want to allocate some money specifically to after tax



nope doesnt look like it does http://www.bogleheads.org/wiki/SIMPLE_IRA

my dad had a simple IRA and it has some limitations that were annoying. ie, have to wait 2 year to roll it over to a regular IRA or you get penalized

The biggest limitation is the $12,000 limit (up from $11,500 last year). Compared to $18,000 401k limit. That's why I need to look into my wife's 403B or whatever (457) it is (not publicized worth a snot).

 

[theeedude]

So you need 401k at your current employer that allows it?

 

[brianmanahan]

So you need 401k at your current employer that allows it?

yeah that's the thing that sucks, it is up to the employer and their 401k provider as to whether or not this is possible

which is stupid - it should be an option available to anyone who wants to use it

 

[theeedude]

Does Fidelity allow it?

 

[DCal430]

The biggest limitation is the $12,000 limit (up from $11,500 last year). Compared to $18,000 401k limit. That's why I need to look into my wife's 403B or whatever (457) it is (not publicized worth a snot).

A 403B and 401K count against each other, you can't contribute the max to both. A 457 plan is different though. A 457 plan is nice in that you can withdraw and use the money right when you retire and not wait until 59.5, a 403b allows the you to use it when you turn 55, or if you convert it to a lifetime annuity it can be used before 55. Assuming you have you left public service.

 

[brianmanahan]

Does Fidelity allow it?

i think it depends on whether or not the employer decided to get it

usually the only way to know for sure is to check with HR or possibly on your plan's documentation or features when you log in on your 401k provider's site

 

[Engineer]

A 403B and 401K count against each other, you can't contribute the max to both. A 457 plan is different though. A 457 plan is nice in that you can withdraw and use the money right when you retire and not wait until 59.5, a 403b allows the you to use it when you turn 55, or if you convert it to a lifetime annuity it can be used before 55. Assuming you have you left public service.

Neither of us have a 401k plan so it doesn't matter which one it is really. I have the Simple IRA and she has the (whatever it is) account that we just learned about. Just another place that we can park tax deferred money, allowing me to shift the IRA money to Roth IRA's and have some money ready for earlier retirement if needed (at least our contribution portions).

Of course, there is so little information about it that I'm going to have to dig to see what's up. The state promotes the pension system and mentions little about the other options. Have no clue what funds are even available to invest in.

 

[Genx87]

So am I understanding this correctly? Any money put into my 401k over the limit is after tax. But I can roll this into a Roth to get around the 5500\year limit?

 

[DCal430]

Neither of us have a 401k plan so it doesn't matter which one it is really. I have the Simple IRA and she has the (whatever it is) account that we just learned about. Just another place that we can park tax deferred money, allowing me to shift the IRA money to Roth IRA's and have some money ready for earlier retirement if needed (at least our contribution portions).

Of course, there is so little information about it that I'm going to have to dig to see what's up. The state promotes the pension system and mentions little about the other options. Have no clue what funds are even available to invest in.

Does she plan to leave civil service before 55? If so a 457 is a plus there with withdraw at any age when you leave civil service.

 

[Engineer]

Does she plan to leave civil service before 55? If so a 457 is a plus there with withdraw at any age when you leave civil service.

Probably so. She is 44 and said that she would quit after our youngest finished college. She is a freshman in high school currently. About 7.5 to 8 years hopefully. She might stay longer though.

I really need to look into what type of plan that's available.

<--- Goes to dig...

Edit: It's a 403b plan. Looking into details now....

Edit 2: The state must really not want people to use this option. You have to pick an investment provider (list of four approved providers is given), call them and set up an account (or to even see what type of investments that they offer). You must then call HR and get the forms filled out to start payroll withholding for the new account. Might call a few of them tomorrow and see what they are all about. Not promising names on the list IMO.

 

[brianmanahan]

So am I understanding this correctly? Any money put into my 401k over the limit is after tax. But I can roll this into a Roth to get around the 5500\year limit?

there are a few requirements, document pretty well on this page: http://whitecoatinvestor.com/the-mega-backdoor-roth-ira/

in some 401k's, any money you put in under the limit is pre-tax, then it converts to after-tax

but in others, they just stop you at the pre-tax limit, and if you want to contribute to after-tax you have to set that up separately

it takes some hard looking at your 401k documentation to see whether or not you can do it

 

[brianmanahan]

looks like the proposed budget would do away with this, if it passes as-is

http://blogs.wsj.com/totalreturn/2015/02/02/obama-would-block-strategies-to-pump-up-roth-iras/

 

[SSSnail]

Reminds me of when the IRS didn't know what to do with capital gains from Options trading, they just simply didn't have a category for it so anything gained was FREE OF TAXES. Took them a few years to closed that loophole for good.

Don't be overjoyed, the taxman will always find a way to get you. And, they probably will retroactively get their tax money, one way, or another. Don't be surprised if there comes a day when they come knocking.