Mega Backdoor Roth: What It Is and How It Works
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Can you do a backdoor Roth with a 457?
Hiya Brian and Bo, super love your show and have learned so much since I’ve been following the channel. I know it’s been mentioned in bits and pieces, but this particular episode reminded me of a not enough explained part of mega back door Roth and regular back door Roth. Your both really good at breaking down complexity so regular folks like me can understand . I’m lucky in the sense that I normally have $0 dollars in my traditional Ira, and only have to use it for non deductible funds to pass through on the way to the Roth IRA. I’m also lucky to be able to take advantage of the mega strategy…my plan only allows 5%…but 5 more than nothing. Unfortunately it doesn’t allow for in plan conversions, hence I use the mega with the in service distributions. Where I seem to have difficulty is explaining to my friends easily about the pro rata rule . Just a suggestion of course, but this I figure could make great content for a show of its own. I serve as a volunteer on our retirement committee to help explain our 401k plan to folks if they ask, yet I’m not a financial advisor nor a silver tongue devil that possesses the magic to convey easily the fine details of tax implications that are associated with these strategies as I see you guys do regularly. Perhaps you could help us out. Again, thank you both for your efforts, you’ve really helped shape my way of thinking on this financial journey…and life in general really.
Tim
Even though I plan to stick with it, inflation is wasting my money and my portfolio is losing gains every day, so I need a cure right away. My main concern is how to raise the value of my cash reserve because it has been lying there for a very long time with little to no increases and inflation is currently about 10%.
As someone who uses their bonus to fund their 401k+megabackdoor Roth, I'd recommend doing it the opposite way: ie, fund your MBR with your regular paycheck contributions, and use your bonus to fill in your 401k.
Note that we get our bonuses in March for the previous year, so it's fairly easy to figure out how much is going into the various bax buckets for that year, though – I can see how this strategy might not work as well if you get the bonus in December, or something.
Mainly, I do this in order to keep from getting taxed on my bonus. Yeah, I'll get a refund at the end of the year, but I'd rather not bother – it keeps me from being tempted to spend it on something else. (I think it also gets more heavily taxed, as your paycheck for that period looks like you're getting a huge pay increase.)
My last employer's plan had an "Auto Roth In-Plan convert" option. If you made that election, After-tax contributions would automatically be converted to Roth in-plan. The automatic conversion ensured you never had a taxable portion in the conversion, at least as long as your After-tax subaccount as $0 when you turned it on.
And since the plan's investment options were really good and because the Roth In-plan Conversion subaccount as also in-service distribution eligible, there wasn't a good reason to roll the money over into a Roth IRA before you really needed it.
My last employer's (before I retired) plan simply capped After-tax contributions to the IRC Section 415(c) limit minus the IRC Section 402(g) limit times 150%. The 402(g) limit being the elective employee contribution limit and 150% being the employee contributions plus the maximum match. This always allowed employees to contribute the maximum to the Mega backdoor Roth without worrying about crowding out employer matching.
Does employers pension contributions count toward the $66,000 limit?
Great content, as usual! Is it required that you do the backdoor Roth conversion in the same year the original contribution to the after-tax 401k was made? I ask because I contributed to after tax 401k last year, but, for various reasons, I didn't do the backdoor Roth conversion last year. Can I still backdoor convert last year's after-tax 401k contribution this year if I'm careful to only convert that portion that was the actual contribution and not any earnings?
Good content gents. Couple clarifying points. Yes, Roth 401(k) contribution limit is subject to $22,500. However, contributions to Roth 401(k) is after tax (around 1 min into video). With Roth 401(k) qualified distributions are tax free for contributions and investment earnings.
This can be done alot easier. Hopefully a expansion of the secure act will make it more of a push button operation. Interested in what the plans charge to do this. I bet the plans charge a pretty penny.
Is there anything on why this exists? Why does this back door exist?
Is it for professionals switching jobs or just consolidating your retirement? Seems weird and very beneficial if you have the money and job for it.