patrick.net

Actually, there's two ways that I know of. First, you contribute After tax dollars (versus the normal pre-tax dollars) to your 401K (if it allows it), then you rollover (backdoor) that amount come January into the Roth. That's what we do.

Or, you take pre-tax dollars from your standard IRA or 401K and roll them over to the Roth. In this situation you'll get taxed that same year on that contribution, as it's considered income, but in a long enough time period, it can work in your favor based on investment growth.

MrMagic says

Actually, there's two ways that I know of. First, you contribute After tax dollars (versus the normal pre-tax dollars) to your 401K (if it allows it), then you rollover (backdoor) that amount come January into the Roth. That's what we do.

Or, you take pre-tax dollars from your standard IRA or 401K and roll them over to the Roth. In this situation you'll get taxed that same year on that contribution, as it's considered income, but in a long enough time period, it can work in your favor based on investment growth.

I think my 401k plan does allow it, but given the date, I had to wait until 2019 to take advantage of that.

--- I was thinking of the latter, but will do more looking into the former.

Has your experience been a good one? (Thanks very much!)

There are people who get obsessed with funding Roths. I think it's fine to fund them when it is convenient to the max allowed with after tax money that you have extra. However, the advantage lies in whether you will have future tax rates that are significantly higher.

I ran some of the Monte Carlo calculators about shifting money into Roths, and it mostly came out a wash on a time and age basis unless there was a really much higher tax rate in the future, so the catch up and break even points weren't as attractive as they seemed. So, I have just funded Roths when it is convenient to do so.

I suppose I could be wrong, but I just didn't spend much time worrying about them after I did that.

CL says

--- I was thinking of the latter, but will do more looking into the former.

Has your experience been a good one? (Thanks very much!)

Actually, it's been a great move, we got into it late, I wish I found out earlier. For one, we fund the front end of the Roth with the max contribution, then wifey sends a lot more through after-tax to the 401k, which we backdoor to the Roth in January. We end up with tens of thousands in the Roth each year this way.

We have a full selection of stocks, money markets and ETFs to invest it in with the Roth too, versus the limited funds in the 401K.

Ceffer says

I ran some of the Monte Carlo calculators about shifting money into Roths, and it mostly came out a wash on a time and age basis unless there was a really much higher tax rate in the future, so the catch up and break even points weren't as attractive as they seemed. So, I have just funded Roths when it is convenient to do so.

The one big plus to the Roth, is that's it's tax free on the withdraw. Remember, in retirement, depending on your taxable income amount, it can make a percentage of your Social Security taxable too. So you get a double tax hit if you're pulling retirement funds from your pre-tax 401K or IRA. The Roth money pulled in retirement won't make the S.S. taxable.

I see no reason not to do a backdoor Roth. You don't have to withdraw it every year though. I am not sure where that part comes from. Definitely need to research that part.

I recently rolled over stuff from an old employer 401K to my personal IRA, and some of it (a very small amount) went into my Roth IRA. I didn't do this intentionally, but was told that it was not a taxable event. I suspect that the original amount of the overage that went into 401K that was after tax might have been the only part that went into the Roth.

Ceffer says

unless there was a really much higher tax rate in the future

By the time I retire yes I think taxes will be through the roof. Probably little to no social security available too. So I back door 401K money when I switch jobs which on average is about every 2 years. It goes from 401K -> rollover IRA -> roth. I take an income tax hit each time however some of those job changes are layoffs and if I somehow don't get a job or don't make much money because of it that year then the tax hit theoretically would be low. I always end up with a higher paying job too soon though!

I explained the roth to a Millennial guy I work with and after his first year on the job he's already considering quitting to 'take a year off' and 'roll over his 401K to a roth' and avoid the tax consequences while he either plays video games or travels.

Booger says

I see no reason not to do a backdoor Roth. You don't have to withdraw it every year though. I am not sure where that part comes from. Definitely need to research that part.

That's exactly right. You never have to touch the Roth and there's no RMD at 70-1/2 either, like with the 401K or IRA. If you saved a big chunk of money in the 401K or IRA, that forced RMD can send you up to the next tax bracket.

Booger says

I recently rolled over stuff from an old employer 401K to my personal IRA, and some of it (a very small amount) went into my Roth IRA. I didn't do this intentionally, but was told that it was not a taxable event.

That could have been some of the after-tax that went into the 401K. That gets rolled to the Roth, while the pre-tax 401K gets rolled to the IRA.

just_dregalicious says

I take an income tax hit each time however some of those job changes are layoffs and if I somehow don't get a job or don't make much money because of it that year then the tax hit theoretically would be low.

That's a good time to do the Roth conversion, when your tax rate is lower. Plus, if you're younger, it has years to grow before retirement. The break even from the tax hit can be around 4 years or so, depending on your investments, then after that, is all growth with no future taxes.

A backdoor Roth sounds interesting and anything to have a Roth is probably worth it.

I have seen the problem of the Required Minimum Distribution of my father's IRA; he was taxed on the distribution which he didn't need or want. The Roth IRA didn't have an RMD problem.

I have a sneaky suspicion that someday in the future politicians will try something underhanded to tax our Roth IRAs; maybe have "means testing" or other things.

clambo says

I have a sneaky suspicion that someday in the future politicians will try something underhanded to tax our Roth IRAs; maybe have "means testing" or other things.

The only thing they might get away with taxing is the investment growth, as the initial contributions were already taxed. But it's not like most people are putting tons of money in a Roth. The maximum contribution was $5500 last year. Not many people know of the backdoor process.

The other way to bank some tax free cash is with a HSA account. This is better, as it's pre-tax money, but isn't taxed if you pull it out for medical expenses later on.

Is it just me or does Back Door Roth sound similar to Dirty Sanchez or some such to other people?

Another nice thing is you can take money out of the roth w/o any tax or penalty. If I remember right - You need to have a roth account open for 5 years to become eligible for hassle free withdrawals, but once that wait period is done you can take out your contributions at any time. Taking out investment gains will be subject to penalty though unless you're of proper age or have special circumstances. But, being able to take out principal lets it function somewhat as an emergency funds account, although, you can't later put it back in, so it's really a last resort option because you're reducing the size of your tax free money tree.

just_dregalicious says

Is it just me or does Back Door Roth sound similar to Dirty Sanchez or some such to other people?

You're confusing it with backdoor Ruth, she use to be the hit of the party.

Hircus says

Another nice thing is you can take money out of the roth w/o any tax or penalty. If I remember right - You need to have a roth account open for 5 years to become eligible for hassle free withdrawals, but once that wait period is done you can take out your contributions at any time. Taking out investment gains will be subject to penalty though unless you're of proper age or have special circumstances

There's a lot of confusion with the 5 year rule. You can take out your original CONTRIBUTIONS at any time before the 5 year point (since you already paid the tax on it). What you can't take out early is any INVESTMENT GROWTH (earnings) before that time. Many people think you can't touch any of the Roth for 5 years. It's just investment earnings that you can't withdraw early without penalty.

Also, Roths work on the first in - first out, so when you take any withdraw, it comes from the earliest contributions or investment earnings.

MrMagic says

Also, Roths work on the first in - first out, so when you take any withdraw, it comes from the earliest contributions or investment earnings.

I know nothing about "Backdoor Roth" but, if IRS sends a query, do you have records of your dates and contribution amounts. Your bank/broker have limited record keeping (I believe they should as they charges you), unless you save yearly statements with you (most don't).
We will never run out of stupid (sales) people who create catchy phrases like "Backdoor Roth", be cautious.
One might want to refer form 8606 at https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions

Blue says

We will never run out of stupid (sales) people who create catchy phrases like "Backdoor Roth", be cautious.

I deal with Fidelity, who are the BIGGEST in the industry, I'd doubt they're giving out catchy phrases and have stupid salespeople.

Blue says

I know nothing about "Backdoor Roth"

So, why are you commenting about them? Next time, try Google, it's amazing what you can learn! Knowledge is POWER!!!

https://www.rothira.com/what-is-a-backdoor-roth-ira

MrMagic says

So, why are you commenting about them?

Not sure you read my message completely.
I am not against, but as I mentioned be cautious when you see catchy phrases. Also I mentioned the reasons, do you have docs if IRS sends a query (most don't).
In my case I rolled over to new place, sadly the new online account show no contribution history. Now how can I convince IRS which portion is contribution and which portion is gain. I don't have a clue for my self. So this is not for everyone, especially if you don't have supporting docs.
btw, I prefer front door Roth than suspicious "Backdoor Roth" :)

Not a sales tactic:

https://www.rothira.com/what-is-a-backdoor-roth-ira

Maybe you could call it a tax loophole.

Blue says

btw, I prefer front door Roth than suspicious "Backdoor Roth" :)

Nothing suspicious about it, and 100% legal. Just because it's not known to many people, probably because they don't have the income to make it work, doesn't mean it's "suspicious". You need to be in the right financial position, so I doubt many Walmart workers fit that profile.

Blue says

I don't have a clue for my self.

Blue says

I am not against, but as I mentioned be cautious when you see catchy phrases.

There's nothing "catchy" about it. Please go do some research, once again, Google is your friend. Try it. Just because you don't know about something, doesn't make it a questionable tactic.

I thought this post was about something else

BayArea says

I thought this post was about something else

Bay Arean. Heh heh

ThreeBays says

Second (Mega Backdoor Roth) method is to make an after-tax contribution to your 401k and then roll that to Roth IRA. The limit is $56000 minus whatever you're putting in your 401k already. Not all employers let you do this while you're still employed, sadly.

Exactly how does one convert it? Don't you have to leave the company to get the money out???

ThreeBays says

Second (Mega Backdoor Roth) method is to make an after-tax contribution to your 401k and then roll that to Roth IRA. The limit is $56000 minus whatever you're putting in your 401k already. Not all employers let you do this while you're still employed, sadly.

Exactly right, you can "pound" a lot of money (see what I did there) into the Roth that way. Our max was $61,000 last year, being over 50. Tons more then the allowable front end contribution of $5500. But your 401K plan has to allow it. Not all do.

zzyzzx says

Exactly how does one convert it? Don't you have to leave the company to get the money out???

You don't have to leave. Instead of contributing PRE-TAX to the 401K (which is the normal way), you contribute AFTER-TAX to it. Like I said, some plans might not allow after tax, just pre tax. The issue with the After-tax is that you'll be taxed on that amount THIS YEAR as income, versus pre-tax, where you'll pay the tax when you pull it out in retirement. So, if you stick anlot in After-tax, it can affect your tax rate this year, depending where you fall in the tax charts.

The plus to After tax and backdoor Roth, is that if you have a long enough window (usually over 5 years to break even on the front load tax), everything grows tax free, so in the long term it becomes tax free withdraw in retirement.

zzyzzx says

Exactly how does one convert it? Don't you have to leave the company to get the money out???

You also can take any money currently sitting in your 401K and convert it to a Roth. Once again, you'll get hit with the tax liability as income THIS year, but depending on your long term window, it can make sense. Say you're in the 22% bracket, and move $100K from your 401K to a backdoor Roth, you're going to have a pretty big tax due amount on that $100K when you do your taxes next year. But, if you invest the $100K, and get a conservative 4% or 5% or more on the investments, how many years will it take you to break even, and get the tax liability back? Maybe 5...

Then, all future years are tax - free growth after that. Also, two other big benefits to the Roth. One there are no RMDs, so you're never forced to take anything out if you don't want to. Second, and this is the biggest in retirement, since the Roth withdraw is tax free, it doesn't count as taxable income (since you already paid the tax when it went in). When you start pulling Social Security and add that to the amount you pull from a Roth, the income will not make part of the S.S. taxable.

If you pull money in retirement from a 401K or standard IRA, that becomes taxable, which can make part of your S.S, taxable too, raising your tax liability.

MrMagic says

The plus to After tax and backdoor Roth, is that if you have a long enough window (usually over 5 years to break even on the front load tax), everything grows tax free, so in the long term it becomes tax free withdraw in retirement.

Also (correct me if I am wrong), but with traditional IRA and 401k, as you all have said above, the distributions are added to your income in retirement, so may bump you to another margin. The Roth allows you to pull from it as much as you want without taxation, so you can increase your cash without worrying about it being added to your income. This would be especially true if you have a one-off need for a large expenditure (a new roof, driveway, repairs, or if you wanted to buy a Winnebago and tour the country in retirement). If you pull 100K out of your Roth you don't all of the sudden become a 1%er and get taxed as such.

That sounds nice to me too!

CL says

Also (correct me if I am wrong), but with traditional IRA and 401k, as you all have said above, the distributions are added to your income in retirement, so may bump you to another margin.

That is exactly right, specially when talking about the RMD at age 70-1/2. If you HAVE to take the RMD, and it's $30k - $50K a year, that's going to leave a mark.

CL says

This would be especially true if you have a one-off need for a large expenditure (a new roof, driveway, repairs, or if you wanted to buy a Winnebago and tour the country in retirement). If you pull 100K out of your Roth you don't all of the sudden become a 1%er and get taxed as such.

That's the other good point. There's many situations where you might need to pull out a big chunk. Daughter's wedding, moving, vacation home purchase, RV, etc. it's all tax free when pulled from a Roth (including any investment growth).

Let's say you and your wife collect $36K a year from S.S., then you pull another $30K from your 401K or IRA to make ends meet. Not only do you pay income tax on the 401K money, but you'll pay income tax on a chuck of the S.S. money too. If you had to pull $100K from then for a large expense, then up to 85% of that S.S. money is also taxed, which will push you to an even higher tax bracket.

If you pulled that annual $30K from your Roth or even that special $100K expense from your Roth, there's zero income tax and probably zero income tax on that $36K S.S. too. Think about that for your 25 years of retirement.

I wish we started this Roth strategy years earlier.

Thanks all! Great info here, much appreciated.

2 other quick questions:
1) Is it your experience that employer sponsored 401ks that allow for the Mega-backdoor are rarities?
2) Can you do the regular backdoor for yourself, and do the same for your partner via a spousal contribution?
***2b) You may or may not have seen earlier that I posted a query re: Solo 401ks, which I have subsequently created for her 1099 work. Not sure if that impacts her eligibility on the IRA-Roth process. I plan on putting most-all of her compensation into the Solo.