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

[brianmanahan]

i cant believe this works, but my 401k allows it. yours might too!

i can contribute after-tax (but not roth) money to it, up to 34.5$k per year. then i can roll that money over to my roth ira, even though i am still working for the company.

so instead of being limited to 5.5$k in a roth ira per year, i could do almost 40$k in a roth ira AND 17.5$k in a 401k.

not that i can save that much now, but it does allow for some extra roth. every little bit helps!

 

[DCal430]

Don't forget you there is 5 year lockout on monies rolled over into a Roth IRA for widthrawls.

You could also set up a Roth 401K that has the same advantages, but also a 5 year lockout of contributions.

 

[brianmanahan]

yeah but if i did the roth 401k, then i would be limited to 17.5$k between that and the traditional 401k

this way you can still do the traditional 401k (or roth 401k) up to 17.5$k, and still have up to 35$k more of roth ira you can do.

 

[MomentsofSanity]

Don't forget you there is 5 year lockout on monies rolled over into a Roth IRA for widthrawls.

You could also set up a Roth 401K that has the same advantages, but also a 5 year lockout of contributions.

The 5 year rule also only applies to profits, not contributed/converted funds and then it's only 10% (possibly federal and state as well) of any distributed profits after contributions/conversions have been withdrawn. Not that big of a deal really.

 

[Hacp]

The 5 year rule also only applies to profits, not contributed/converted funds and then it's only 10% (possibly federal and state as well) of any distributed profits after contributions/conversions have been withdrawn. Not that big of a deal really.

5 year rule for rolling over roth is applied to everything. It basically prevents you from rolling a 401k into a roth ira and withdrawing that money avoiding the 10% penalty.

 

[brianmanahan]

the 5 year rule is a nonissue since im not gonna use it till 55 anyway

 

[FelixDeCat]

I'd be careful with 401k money.

 

[DCal430]

Actually this doesn't work, because if you do a partial rollover all amounts are based on a prorata of the pre and post tax, unless roll over the entire 401K. There was a recent IRS guideline affirming this. You cannot selectively declare the roll over are from the post tax contributions.

 

[brianmanahan]

Actually this doesn't work, because if you do a partial rollover all amounts are based on a prorata of the pre and post tax, unless roll over the entire 401K. There was a recent IRS guideline affirming this. You cannot selectively declare the roll over are from the post tax contributions.

well technically its not a rollover, its an in-service withdrawal of the after-tax portion only

 

[DCal430]

well technically its not a rollover, its an in-service withdrawal of the after-tax portion only

Irrelevant, if you do a partial withdrawal and contribution to the an IRA, it must be calculated on a prorata basis as well. You cannot simply say you are only withdrawing after-tax monies. This is not permitted. Disbursement aka withdrawals are always calculated on a prorata basis, not you selecting.

The only way to do is to withdrawal the entire amount, and convert the pre-tax monies into a Traditional IRA or post-tax into a Roth IRA. In fact a few weeks it was questionable if this could be done too.

 

[brianmanahan]

they allow it though - in-service withdrawal of after-tax contributions only. pre-tax and roth contributions remain in the 401k.

 

[DCal430]

they allow it though - in-service withdrawal of after-tax contributions only. pre-tax and roth contributions remain in the 401k.

oo you are right. This can be done.

 

[DCal430]

Upon further reading, it seems some plans actually do allow this. Very few do though. So take advantage of it.

I was mistaken.

 

[stlc8tr]

Forbes had a short article about this a couple of years ago.

http://www.forbes.com/sites/financi...1k-option-that-youve-probably-never-heard-of/

 

[tranceport]

Is this in attempt to get around the income limits on a ROTH IRA?

 

[brianmanahan]

Is this in attempt to get around the income limits on a ROTH IRA?

not the income limit, but the 5500$ per year limit

instead of 5500$, its possible to put almost 40$k in a roth ira in one year

 

[pete6032]

Wtf. That's all I can say.

 

[IronWing]

From the Forbes article, it sounds like you still have to pay taxes on the interest/earnings derived from the rolled over post-tax contributions. Unless there is a fee/investment choice advantage with a particular investment within the Roth IRA I'm not seeing the advantage over a regular post-tax investment account. Are the capital gains holding rules different?

 

[brianmanahan]

From the Forbes article, it sounds like you still have to pay taxes on the interest/earnings derived from the rolled over post-tax contributions. Unless there is a fee/investment choice advantage with a particular investment within the Roth IRA I'm not seeing the advantage over a regular post-tax investment account. Are the capital gains holding rules different?

if the after-tax contributions stayed in the 401k, then yeah you'd have to pay income tax on any gains once you withdraw

but if you distribute from the after-tax 401k, pay those taxes, and then roll over the money into a roth IRA, then any gains after that will be tax-free

you cant get the money out of the roth ira for 5 years after the rollover though. and any earnings in the roth IRA cant be withdrawn til 59.5.

 

[Engineer]

Damn, I don't have a 401k. Company is small and only has a Simple IRA, which is limited to $12,000 (which is bad enough as it is). Is this a 401k only thing or can it be done with other types of tax deferred accounts (Simple IRA or regular IRA in example)?

 

[DCal430]

not the income limit, but the 5500$ per year limit

instead of 5500$, its possible to put almost 40$k in a roth ira in one year

I can do 17.5K in 401K Roth + 17.5K in 457b Roth + 5500 in IRA Roth, but the problem is my 401K and 457b do not allow for any withdrawals. I can also do an additional 35K in 457b roth for any 3 consecutive years as a catch up.

The IRA Roth allows contributions to be withdrawn at any time without penalty, but my other two plan do not allow. I don't contribute anything now though.

The nice thing about a 457b plan is you can withdraw without penalty at any age once you leave government service. There is no in-service withdrawals. So if you get laid off and need money you can withdrawals without penalty any amounts.

I contribute nothing though now, as we have our pension, which gives me 65% of my income when I retire at 55.

 

[brianmanahan]

I contribute nothing though now, as we have our pension, which gives me 65% of my income when I retire at 55.

thats pretty nice. mine would be about %50 if i put in 30 years, but right now i am shooting for retiring at 45 or 50 so that would be about %30 (probably wouldnt take it till 65 though). luckily it is inflation indexed.

wish i had a 457 in addition to 401k as i would prefer to defer more, but then again roth IRA will make things simpler because of no RMD.

i suppose i could do the roth 401k, but traditional takes me down a tax bracket which is handy.

 

[DCal430]

thats pretty nice. mine would be about %50 if i put in 30 years, but right now i am shooting for retiring at 45 or 50 so that would be about %30 (probably wouldnt take it till 65 though). luckily it is inflation indexed.

wish i had a 457 in addition to 401k as i would prefer to defer more, but then again roth IRA will make things simpler because of no RMD.

i suppose i could do the roth 401k, but traditional takes me down a tax bracket which is handy.

Do you happen to work for the government as well, as you mention a pension. If so, they don't have a 457b plan too?

 

[brianmanahan]

Do you happen to work for the government as well, as you mention a pension. If so, they don't have a 457b plan too?

no its a private company, but in finance industry. all the finance/insurance companies i have worked for still have pensions.

 

[Scarpozzi]

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.