Mega Back Door Roth

[sevoflurane]

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Just in case none of you know what it is.

If you work for an AMC, you can do this to get up to 56k.

Can only do a conversion once a year.

Mega Backdoor Roths: How They Work, Limits - NerdWallet

A mega backdoor Roth is a way for people with 401(k) plans to put post-tax dollars into their 401(k) plan and then roll the money into a Roth IRA or Roth 401(k).

www.nerdwallet.com

 

[BLADEMDA]

If you work for an AMC full time then a regular backdoor Roth is all you will likely qualify for on an annual basis:

Backdoor Roth IRA: Definition, Rules and How To Open One - NerdWallet

A backdoor Roth IRA lets you convert a traditional IRA into a Roth IRA, which could save on taxes. Backdoor Roths are an option if your income is too high for a Roth IRA.

www.nerdwallet.com

Most (? all) AMCs will be very restrictive with their 401K plans. The path of least resistance is a regular backdoor Roth IRA.

 

[sevoflurane]

If you work for an AMC full time then a regular backdoor Roth is all you will likely qualify for on an annual basis:

Backdoor Roth IRA: Definition, Rules and How To Open One - NerdWallet

A backdoor Roth IRA lets you convert a traditional IRA into a Roth IRA, which could save on taxes. Backdoor Roths are an option if your income is too high for a Roth IRA.

www.nerdwallet.com

Most (? all) AMCs will be very restrictive with their 401K plans. The path of least resistance is a regular backdoor Roth IRA.

Nope

 

[linkin06]

I work for an AMC and am in process of doing mega backdoor.

 

[anes121508]

Just in case none of you know what it is.

If you work for an AMC, you can do this to get up to 56k.

Can only do a conversion once a year.

Mega Backdoor Roths: How They Work, Limits - NerdWallet

A mega backdoor Roth is a way for people with 401(k) plans to put post-tax dollars into their 401(k) plan and then roll the money into a Roth IRA or Roth 401(k).

www.nerdwallet.com

I contribute to the post tax space in 401k monthly then as soon as the money is there I request a penalty free withdrawal (I am allowed unlimited withdrawals) and send it to my vanguard Roth IRA. I do this monthly because I limit paying income taxes on the gains. I have discussed this with people at vanguard and my tax guy and they agree it’s legal.

 

[thinkorswim]

I'm curious, for those with the option to contribute either to a traditional 401k or Roth 401k, any insight on which one would be better? Would you consider splitting the contributions between traditional and Roth?

What about if your group offers a cash balance plan? Would that tip the scale more towards Roth contributions to build tax diversity?

 

[sethco]

I'm curious, for those with the option to contribute either to a traditional 401k or Roth 401k, any insight on which one would be better? Would you consider splitting the contributions between traditional and Roth?

What about if your group offers a cash balance plan? Would that tip the scale more towards Roth contributions to build tax diversity?

Depends on your current marginal tax bracket compared to what it will be when you take distributions from your 401k. If you are a super saver or you truly believe your tax rate will be higher, then go Roth contribution. Keep in mind that only the 19k employee contribution can be Roth, the rest have to be regular pre-tax. My feeling is that my marginal tax bracket will be a little lower in retirement, so I use pre-tax contribution. My Roth contributions come from outside my 401k plan, in the Back Door Roth. I would probably do the same regardless of if I had DBP/CBP or not

 

[aneftp]

What about pro rata rule?

 

[BLADEMDA]

Roth IRAs and The Pro-Rata Rule | Rodgers & Associates

Here’s what to know when using the pro-rata rule, an IRS calculation that helps distinguish pre-tax and after-tax funds.

rodgers-associates.com

 

[BLADEMDA]

The Pro-Rata Rule for Backdoor Roth IRA’s

There is no bigger proponent of Roth IRAs than yours truly. If compound interest is the 8th wonder of the world, tax-free growth inside a Roth IRA is, to me, the 9th. My blog post, Explaining Backd…

blog.foxwealthmgmt.com

 

[sethco]

What about pro rata rule?

Pro rata rule only applies when you have traditional IRAs, Simple IRAs, and SEP IRAs. Does not apply to Solo 401k, 401k/403b, or 457s

This is why when you change employers, you should try to move your old 401k to the new employer through a trustee to trustee transfer as opposed to rolling it over to am IRA. There are a couple exceptions to this though

 

[Shimmy8]

AMC employee. Company puts about $30k in each year through “profit sharing” but often it’s a big lump sum at end of year, and we don’t know exact amount until it’s deposited.

So my 19k plus their 30k puts me at 49k. In theory I should be able to “mega backdoor” another 7k, right? Our 401k does meet the requirements for such.

 

[BLADEMDA]

You do realize that ETFs and Index funds are very tax efficient and that translates into a low tax bill each year. Sure, a low tax bill isn't the same as zero taxes but the money is available anytime as well with no conditions.

Why jump through all these hoops? Simply do a regular backdoor Roth IRA for your wife and yourself each year and invest the rest in a low cost, tax efficient ETF.

 

[BLADEMDA]

Pro rata rule only applies when you have traditional IRAs, Simple IRAs, and SEP IRAs. Does not apply to Solo 401k, 401k/403b, or 457s

This is why when you change employers, you should try to move your old 401k to the new employer through a trustee to trustee transfer as opposed to rolling it over to am IRA. There are a couple exceptions to this though

Not all AMCs will accept a "rollover" and the largest AMC will tell you to get lost. So, you will have to pay taxes on that old 401K to do Roth conversions unless you leave it in place at your former employer.

The other option is a side-business as a "1099" where you open your own retirement plan and send that money from the former 401K to your new side business 401K.

 

[BLADEMDA]

AMC employee. Company puts about $30k in each year through “profit sharing” but often it’s a big lump sum at end of year, and we don’t know exact amount until it’s deposited.

So my 19k plus their 30k puts me at 49k. In theory I should be able to “mega backdoor” another 7k, right? Our 401k does meet the requirements for such.

Why bother? Just open a traditional IRA at Schwab or Fidelity and convert it to a ROTH IRA each year.

The annual Roth IRA limit is $6,000 in both 2020 and 2019, up from $5,500 in 2018 (if you’re 50 or older, you can add $1,000 to those amounts).

The maximum Roth contribution amount applies to all of your traditional and Roth IRAs, combined. (Don’t have an account? Here’s how to open a Roth IRA.)

 

[BLADEMDA]

Vanguard Patented a Way to Avoid Taxes on Mutual Funds
By Zachary R. Mider, Annie Massa and Christopher Cannon
May 1, 2019

How Vanguard Patented a Way to Avoid Taxes on Mutual Funds

Controversial heartbeat trades are helping mutual funds wash away taxable gains.

www.bloomberg.com

These days you can get great ax efficiency through ETFs and YOUR money is available anytime you need it. I do like backdoor Roth IRAs but even if your AMC won't help you out just do a regular backdoor Roth IRA and invest the rest of the after tax money in a solid, Vanguard ETF.

 

[FutureInternist]

Why bother? Just open a traditional IRA at Schwab or Fidelity and convert it to a ROTH IRA each year.

The annual Roth IRA limit is $6,000 in both 2020 and 2019, up from $5,500 in 2018 (if you’re 50 or older, you can add $1,000 to those amounts).

The maximum Roth contribution amount applies to all of your traditional and Roth IRAs, combined. (Don’t have an account? Here’s how to open a Roth IRA.)

If you wait a year to roll over from trad to Roth IRA, do you not have to pay taxes on the gains.

I get that it may be a small amount for any one year, but when I tried to have my taxes withheld thru Fidelity, it was a hassle.

It may be more efficient to (if able) put in a lump sum of 6,000 and convert 24 hours later.

When I didn’t have the whole amount to spare, I would just do monthly deposits on a Fri and then (because the system takes a while to update), convert on Monday.

 

[Shimmy8]

I already max out HSA and backdoor Roth. Just trying to maximize everything I can.

 

[sethco]

AMC employee. Company puts about $30k in each year through “profit sharing” but often it’s a big lump sum at end of year, and we don’t know exact amount until it’s deposited.

So my 19k plus their 30k puts me at 49k. In theory I should be able to “mega backdoor” another 7k, right? Our 401k does meet the requirements for such.

Correct. The limit will increase next year to 57k total contribution

 

[sethco]

Not all AMCs will accept a "rollover" and the largest AMC will tell you to get lost. So, you will have to pay taxes on that old 401K to do Roth conversions unless you leave it in place at your former employer.

The other option is a side-business as a "1099" where you open your own retirement plan and send that money from the former 401K to your new side business 401K.

Just so we don't have any miscommunications, which AMCs don't allow trustee to trustee transfers? Which AMCs don't allow after tax contributions and in service distributions? What is the largest AMC?

 

[Ezekiel2517]

How are you supposed to do a Mega Backdoor Roth if your company's 401k does not allow after tax contributions? As the article posted above even states, most 401k's offered by companies do not allow them.

 

[sevoflurane]

Explor

How are you supposed to do a Mega Backdoor Roth if your company's 401k does not allow after tax contributions? As the article posted above even states, most 401k's offered by companies do not allow them.

Some AMC’s allow it. Some don’t.

 

[caligas]

So if I’m maxing out group profit sharing plan at $56k, than this is not an option, right?

(just keep doing backdoor Roth and HSA)

 

[sethco]

So if I’m maxing out group profit sharing plan at $56k, than this is not an option, right?

(just keep doing backdoor Roth and HSA)

Not able to do this. Sorry, only if you weren't meeting the 56k IRS limit

 

[BLADEMDA]

IMHO, a regular backdoor Roth IRA would still be a good option for most people while bypassing the hassles of the AMC entirely. Then, simply invest after tax money in a tax efficient ETF or several ETFs or Index funds.

 

[doctalaughs]

I did mega-Blackdoor Roth for the first 8 years of my career when I was w2 (now I can’t as a practice owner in a different specialty because there are even better options). It’s amazing - I estimate by the end of my career it will be close to an extra million bucks over fully taxable, same investment (not sure about etfs and tax advantages investment comparison).

 

[Ezekiel2517]

I did mega-Blackdoor Roth for the first 8 years of my career when I was w2 (now I can’t as a practice owner in a different specialty because there are even better options). It’s amazing - I estimate by the end of my career it will be close to an extra million bucks over fully taxable, same investment (not sure about etfs and tax advantages investment comparison).

Sorry but you may want to check the math on that. I doubt you'll be that much ahead over a taxable account. Blade is correct, when you invest tax efficiently in a taxable account, it can be very effective.
How a Taxable Brokerage Account Can Be as Good or Better Than a Roth IRA - Physician on FIRE

Plenty of other articles online about this topic as well.

 

[sevoflurane]

Tax burden flexibility. That is where the back door roth helps out during retirement. All pre-tax is a better... but when u have no options, it makes sense.

 

[anes121508]

AMC employee. Company puts about $30k in each year through “profit sharing” but often it’s a big lump sum at end of year, and we don’t know exact amount until it’s deposited.

So my 19k plus their 30k puts me at 49k. In theory I should be able to “mega backdoor” another 7k, right? Our 401k does meet the requirements for such.

What AMC do you work for?!?!?

 

[Ezekiel2517]

Tax burden flexibility. That is where the back door roth helps out during retirement. All pre-tax is a better... but when u have no options, it makes sense.

The Roth gives you the upfront tax break. But it also makes you pay taxes at your regular income tax rates. With taxable, you pay the lower capital gains tax rates when you cash out.

 

[sevoflurane]

The Roth gives you the upfront tax break. But it also makes you pay taxes at your regular income tax rates. With taxable, you pay the lower capital gains tax rates when you cash out.

You are paying taxes on that either way (roth or not/etf).

Invest early, let it grow and use your roth in retirement to limit your overall tax bracket is the way I see it.
10-ish years is a good doubling time.

It makes no sense to do if you are 10
years from retirement.

I am budgeting for 200k/year early in retirement. I want to use my roth to bring my taxable income down from there/pull it tax free.

 

[sevoflurane]

Take this thread with a grain of salt.
Do your research.
Point is for those who have terrible retirement benefits to know what is available to them.
This is more of an informative discussion.

If someone thinks a Mega Back Door Roth is not beneficial over a 25 year career period of time AND pulling 150-200k in retirement, please let me know.

 

[sevoflurane]

The Roth gives you the upfront tax break. But it also makes you pay taxes at your regular income tax rates. With taxable, you pay the lower capital gains tax rates when you cash out.

YOU ALWAYS max out pre-tax first and take the tax hit when your income is lower. If you have the option to max out 56k pre-tax then that is ALWAYS the right move. Maybe i didn’t make myself clear.

 

[doctalaughs]

Sorry but you may want to check the math on that. I doubt you'll be that much ahead over a taxable account. Blade is correct, when you invest tax efficiently in a taxable account, it can be very effective.
How a Taxable Brokerage Account Can Be as Good or Better Than a Roth IRA - Physician on FIRE

Plenty of other articles online about this topic as well.

you are right the math was off — but the mega backdoor Roth money is still significantly better than most taxable investments (likely even the tax efficient strategy you linked). The only way you avoid that 15 percent capital gains penalty is living off less than 100k/yr after retirement (which I sure as hell am not).

So that 15% difference at the end when you pay the tax man isn’t a million over a 35 year career.... but it also isn’t peanuts.

 

[doctalaughs]

The Roth gives you the upfront tax break. But it also makes you pay taxes at your regular income tax rates. With taxable, you pay the lower capital gains tax rates when you cash out.

Also don’t forget you already paid taxes for BOTH the money going to the Roth and the money going into taxable investments upfront. Only difference is you don’t pay gains at the end on the Roth money (and I don’t believe most people here will make little enough in retirement to avoid that 15% —- may even end up higher the way this country politics is going).

Agree with the poster above that we are already assuming you maxed all pre-tax vehicles.

 

[pgg]

It seems very likely, to the point of near certainty, that capital gains will end up getting taxed as ordinary income in our lifetimes. The social justice narrative is simply too easy to sell to voters. The lower long term capital gains rate is THE reason billionaires pay lower overall tax rates than middle class workers, and of all the crazy **** getting thrown around by Sanders and Warren, this change will absolutely be supported by the public. Most of the public, by a large margin, will happy to stickitto rich people who own stocks.

A taxable brokerage account is better than no taxable brokerage account, but it should absolutely be last in line behind every bit of tax advantaged savings you can access. Exotic stuff like defined benefit plans and even government bonds may have a place before counting on that 15 or 20% long term capital gains rate you hope will be there post President Libby Socialjustice.

 

[sevoflurane]

IMHO, a regular backdoor Roth IRA would still be a good option for most people while bypassing the hassles of the AMC entirely. Then, simply invest after tax money in a tax efficient ETF or several ETFs or Index funds.

My understanding is that you can do both. (regular ira and mega back door).

 

[Mikkel]

Also don’t forget you already paid taxes for BOTH the money going to the Roth and the money going into taxable investments upfront. Only difference is you don’t pay gains at the end on the Roth money (and I don’t believe most people here will make little enough in retirement to avoid that 15% —- may even end up higher the way this country politics is going).

Agree with the poster above that we are already assuming you maxed all pre-tax vehicles.

Don't forget to prepay the mortgage too, since that tax advantage went away for the most part.

 

[BLADEMDA]

Sevo is correct that a Megabackdoor Roth is slightly better than a tax, efficient ETF. My point was that most people can't access their AMC 401K to do a megabackdoor Roth. So, don't sweat it. I encourage a regular backdoor Roth along with a tax, efficient ETF with whatever you can sock away. There is NO LIMIT on that tax efficient ETF so if you can afford another $30K (after tax) I highly recommend it.

The best is to have all pre-tax advantaged plans like I do now. But, you need to be doing independent contractor work to truly benefit from all the tax loopholes or have a smart group where you area full partner. Believe it or not, some groups are financially "dumb" and leave tens of thousands of dollars on the table each year by not taking advantage of the tax laws.

 

[Ezekiel2517]

YOU ALWAYS max out pre-tax first and take the tax hit when your income is lower. If you have the option to max out 56k pre-tax then that is ALWAYS the right move. Maybe i didn’t make myself clear.

Make yourself clear? Lol. What are you talking about? When did I ever say you shouldn't take advantage of pre-tax retirement accounts first? That's common sense. I assumed everyone knows that. Who's not gonna do that? Lol. The article I posted doesn't say that at all either. The whole point of this thread to begin with was for people who specifically don't have good pre-tax options. All I wrote was that a taxable account is very effective bc of tax efficiency.

 

[Mman]

It seems very likely, to the point of near certainty, that capital gains will end up getting taxed as ordinary income in our lifetimes. The social justice narrative is simply too easy to sell to voters. The lower long term capital gains rate is THE reason billionaires pay lower overall tax rates than middle class workers, and of all the crazy **** getting thrown around by Sanders and Warren, this change will absolutely be supported by the public. Most of the public, by a large margin, will happy to stickitto rich people who own stocks.

A main reason that someone like Jeff Bezos doesn't pay a ton of income tax each year despite being a billionaire is because people talk about net worth (how much Amazon stock he owns) and not actual income. The billionaires are still paying taxes on their income even if much of it might be at capital gains rate, but they are not paying income tax on net worth. Warren Buffett actually gets a bit disingenuous when he talks about his secretary's tax rate compared to his own since he barely takes any salary.

 

[pgg]

A main reason that someone like Jeff Bezos doesn't pay a ton of income tax each year despite being a billionaire is because people talk about net worth (how much Amazon stock he owns) and not actual income. The billionaires are still paying taxes on their income even if much of it might be at capital gains rate, but they are not paying income tax on net worth. Warren Buffett actually gets a bit disingenuous when he talks about his secretary's tax rate compared to his own since he barely takes any salary.

I'm not really sure what you're arguing here.

Tax rates on long-term capital gains rate are much, much less than the rates on ordinary earned income. If my 2019 income had been all long-term capital gains, my rough estimate is that my overall federal tax rate would be about a third less. That's a huge difference and hard to justify. Raising the rate on capital gains to equal (or even exceed!) that of earned income will be the easiest of easy tax-hike pickings when Democrats run the government again.

I think it's overly optimistic to plan for a retirement in which capital gains enjoy any kind of tax advantage. That's all.

 

[Mman]

I'm not really sure what you're arguing here.

Tax rates on long-term capital gains rate are much, much less than the rates on ordinary earned income. If my 2019 income had been all long-term capital gains, my rough estimate is that my overall federal tax rate would be about a third less. That's a huge difference and hard to justify. Raising the rate on capital gains to equal (or even exceed!) that of earned income will be the easiest of easy tax-hike pickings when Democrats run the government again.

I think it's overly optimistic to plan for a retirement in which capital gains enjoy any kind of tax advantage. That's all.

I'm not arguing anything. I'm simply pointing out that much of what people rage about tax rates on billionaires is that the billions are in net worth but their income in any given year is much lower so by it's very definition the income tax they pay will be tiny relative to their net worth. I'm perfectly aware of LTCG rate being roughly 1/2 the top federal rate.

Elizabeth Warren doesn't want to just raise the tax rate on the $10M or $50M or $100M that Jeff Bezos takes in income in a given year is, even an effective rate of 75% of $100M is "only" $75M a year. She wants him to pay 2-3% on his $100B net worth each year which would be $2-3B in taxes each year.

 

[deleted87051]

Another consideration is that people are unlikely to spend as much during retirement as they spend during years when they are raising kids and family. Housing should be taken care of outside of taxes and maintenance. If you draw just what you need or the required minimum distributions, then taxes will be at a lower marginal rate than during one’s prime earning years.

 

[pgg]

I'm not arguing anything. I'm simply pointing out that much of what people rage about tax rates on billionaires is that the billions are in net worth but their income in any given year is much lower so by it's very definition the income tax they pay will be tiny relative to their net worth. I'm perfectly aware of LTCG rate being roughly 1/2 the top federal rate.

Elizabeth Warren doesn't want to just raise the tax rate on the $10M or $50M or $100M that Jeff Bezos takes in income in a given year is, even an effective rate of 75% of $100M is "only" $75M a year. She wants him to pay 2-3% on his $100B net worth each year which would be $2-3B in taxes each year.

She wants that also.

People have been raging about rich people paying lower % taxes on unearned capital gains than working people pay on earned income since long before there was any serious talk of a wealth tax. No one was talking about their lower tax rate in the context of their total net worth. It was always a discussion centered on the fact that long term capital gains rates are a lot less than income tax rates, which heavily favors the wealthy.

 

[Mman]

She wants that also.

People have been raging about rich people paying lower % taxes on unearned capital gains than working people pay on earned income since long before there was any serious talk of a wealth tax. No one was talking about their lower tax rate in the context of their total net worth. It was always a discussion centered on the fact that long term capital gains rates are a lot less than income tax rates, which heavily favors the wealthy.

I guess I have just been reading different discussions over the years. The LTGC thing was always the low hanging fruit, but I've seen it go way past that even 10 years ago (and not just the carried interest thing for hedge funders).

 

[Justanesguy]

I would rather inherit a Roth account than a taxable, even though there is a step up basis for the taxable. Because of this, I build my retirement fund as Roth for my 19k 401k and 6k backdoor IRA. The balance of company Contribution (37k or whatever) is regular 401k for me, because it is easier and I assume laws will change in unpredictable ways.

I would probably recommend most young anesthesiologists hedge their bets like this due to the unpredictability of government decisions 30 years from now.

That said, I expect to have so much in taxable that I never need to touch my retirement money anyways, so almost all my decisions are based on passing it to kids and reducing the required distributions. In this setting I probably should buy into the mega backdoor roth more, but I just can’t convince myself to pay even more taxes now.

 

[gasdoc77]

Not all AMCs will accept a "rollover" and the largest AMC will tell you to get lost. So, you will have to pay taxes on that old 401K to do Roth conversions unless you leave it in place at your former employer.

The other option is a side-business as a "1099" where you open your own retirement plan and send that money from the former 401K to your new side business 401K.

On this note, has anyone asked their tax professional if you can open a solo 401k specifically to receive transfers from your traditional or sep IRA, emptying them so that they can then be used as pass through for the backdoor Roth (avoiding the pro-rata rule)?
Would the solo 401k have to be for an actual business that reports income?

 

[sethco]

On this note, has anyone asked their tax professional if you can open a solo 401k specifically to receive transfers from your traditional or sep IRA, emptying them so that they can then be used as pass through for the backdoor Roth (avoiding the pro-rata rule)?
Would the solo 401k have to be for an actual business that reports income?

As long as you have self-employed income that you report to the IRS, you can open a Solo 401k. It actually doesn't have to be much income even. As an example, getting a little income through taking surveys is enough to open a solo 401k. I would also get your own EIN to be safe. My wife uses Fidelity for her solo 401k. Vanguard use to not allow rollovers. Don't know if that has changed

Here is a dated, but good article from WCI comparing the major solo 401k providers...

Best Solo 401(k) Providers | White Coat Investor

There are nearly 20 companies offering individual or Solo 401(k)s. There are great options at Vanguard, Fidelity, Schwab, and TD Ameritrade. Find out which Solo 401(k) provider is best for you.

www.whitecoatinvestor.com

 

[sevoflurane]

Open an LLC and file an EIN. That is what my wife and I did when we were 1099’s.