If you plan to retire early, it makes sense to take advantage of as many pre-tax contributions as you can (click here to learn why). This allows you to tax-protect and asset-protect just as much money (more on an after-tax basis) as you would with a profit-sharing plan ($52,000 per year, more if you're over 50). :-). If they do let you use the 401(k), you can put it in there (living off it actually, and putting earned income into the 401(k)), then convert it when you leave (you could use the taxable account to pay for the conversion.). When completed, you end up with $17,500 in the 401K and $34,500 in a Roth IRA. Thanks! Will not run into a contribution limit problem because of the tIRA? Mega Roth 401k! 401(k)-to-IRA transfers while still employed) or those of us who plan to leave our full-time employer soon because this allows us to dramatically boost our Roth IRA contributions! When I enter this form in my tax program, it tells me that there is no tax consequence. The total contribution made would be in excess of his W-2 income for the year. I’ve recently been exposed to the Backdoor and the Mega backdoor options and wanted to see if you can help clarify a couple of things The pictures in the article itself seem to imply that both after-tax contributions and its associated gains can be rolled over into a Roth IRA – which I don’t think is true. Not all of them do. Most plans, unfortunately, don’t allow inservice rollovers. Here is the relevant information: Box 1 (Gross Distribution): $10,259 1. The reason I’m concerned is that in the MBR strategy, we create a Traditional IRA to hold the pre-tax portion of our in-service 401k distributions. I am currently in the 15% tax bracket with about 30K room before hitting the 25% bracket. Are there any other strategies I can look into if I’m already maxing out my 401K, Roth IRA but cannot participate in the MBR strategy? (we live in California). So the conclusion: that custodial will move as much as you want, and you just have to file the 8606 form to determine your pre-tax and after-tax liability. •pretax amounts to a traditional IRA or another eligible retirement plan, and I would be worried that you would only have $4000 of eligible comp as they could state that your comp as a contract employee isn’t eligible as you weren’t covered under the plan when you earned that. 1. After reading the HSA article we jumped on that last year but always looking for more ideas beyond that and the 401k. Most of us have limited incomes, how do you decide in what order to do things? Me and my wife make about 100k/year and I don’t think my or her 401k is anything special. I am still looking into whether to do sep IRA or solo 401 k- can you advise what should we do on top of what we are already doing? I am lucky that my employer’s 401K plan is probably the most flexible out there, I can tell you how it works for me. you have to look at your specific plan rules on in service distributions. This got me stoked. But again my question is how can these be after-tax sources when the contribution is largely ER and made on a tax-deductible basis? If you max out your company 401 k (I do my personal contribution 17 with Roth 401k and the balance regular 401k)…. Conversely, if you earn too much to get the Traditional IRA tax deductions, you’d also be better off contributing to a Roth, a Mega Backdoor Roth, or simply a taxable account. take the $35,000 and put it into the 457 plan. Nonetheless, thanks for the education MF! But in determining my minimum total contribution limit, would’t it be based on both types of wages for that year, since both contracts were with the same employer, same W2 EIN? Now consider a 401k plan with a mega back door Roth where the annual employer match is $10,500 57,000 - 10,500 - 19,500 = 27,000 You can thus contribute $27,000 to your after tax 401k and either convert it to Roth 401k or roll it over to Roth IRA. Are they mutually exclusive? I feel very fortunate that our benefits are above average in many areas. Does this Mega backdoor roth contribution include the (IRA backdoor to Roth IRA)? My question is would you recommend rolling over the after-tax portion ever year to the roth 401k every year so that the earnings grow tax deferred. 3. Great question. So basically even though the 5-year conversion rule applies, if you take out the roth ira money corresponding to the after-tax 401(k) rollover within the first 5-years, there should be no taxes whatsoever. It’s very helpful. A downside of splitting the gains to a traditional IRA is that it invalidates the “backdoor Roth IRA” strategy, because that only works if you have no pre-tax funds in traditional IRA accounts. Afterall the 53K limit is per plan, not per person. That’s exactly what you want to isolate the basis. Can you do that? I called fidelity and they do not offer this option. I maxed after-tax (non-Roth): $27,250. Again, this is only if you have the luxury of additional deferral sources above the pre-tax/Roth limit of $18,000 annually and whatever your employer match and possible profit share contributions come out to. Can anyone confirm? The government requires your employer to put 9.5% of your salary into a superannuation account for you. After-tax deferrals were big years ago before Roth 401(k) provisions were created. Still trying to figure it out. One is contributing to a Roth IRA via the backdoor (always a good move) and the other is pre … What each of them said is that any contributions made to the after-tax 401K can be converted to a Roth IRA, but gains on these funds would be taxed once I requested the rollover. Now I’m thinking we should put it in the pretx account, roll to an ira and roll to the roth so it can grow tax free. I set up payroll to and I am the only employee. My employer offers in-service withdrawl but I am not sure where I can open an IRA which will be happy to receive this money. Join over 100,000 others on the Mad Fientist email list to get access to exclusive content and software! Also, there are limits on a second i401k. Yes, it’s a very good benefit. My After-tax 401(k) contributions would go to my Roth IRA and the gains on the After-tax 401(k) contributions would be rolled over to traditional IRA. Should I just continue to invest in a taxable account or is there some way I can take advantage of the after-tax portion of my plan? For example: After working there for 3 years I have roughly 75000 in employee contributions, 50000 in match, and 25000 in after tax. 2) 11k 2013 & 2014 non-deductible TIRA (zero investment gains) I don’t know. There are always ways to save more, but sometimes we have to be creative. Then, wait till the end of December and rollover into Roth IRA and pay minimal tax on the conversion. Looks like IRS only allows $17,500/$23,000 Roth contribution. 3) If my new contract to become a “regular employee” is signed, what do you think would typically need to be the latest date, in order for me to be able to make 2015 contributions? My question is – are the after tax contributions to the 401K “discoverable” when filling out the FAFSA? How to do the Mega backdoor Roth at Microsoft into your personal Roth IRA. I used to run these and it is so cool to be able to see people effectively able to sock away $18000 to their 403(b) while also doing $18000 to their 457 at the same time. I suppose you could setup the 401(k) as only allowing after-tax dollars if there are no matching funds or employer contributions made. I don’t know if this is done at Folio Investing during the Conversion process or another IRS form needs to be filled out for tax year 2014 to declare this type of conversion.”, Folio Investing IRA Dept Response: A great tip I will maximize going forward. So unfortunately no automation at this time for me. Thanks for this article. Sorry I’m still very new to all this. How do you know if/when you’re able to transfer the balance from 401k after tax to the Roth? 2) My employer does not offer a 401k until I change from “contract employee” to “regular employee”. Instead of only being able to contribute $5.5K per year, all of a sudden you can contribute $34.5K (plus the $5.5K in your personal and $5.5K in your spousal IRA.) Given my low income (60,000$) per annum, whats the optimal order of investment. Ex. In my case, I waited until the end of the year and now I have a small taxable event on the gains that were made this year. I ran them for 12 years. Would I owe some kind of penalty? After every pay period, my husband calls to convert the after-tax portion of our contribution to a Roth 401K, since this can’t be done online. However I can already contribute quite a bit to Roth through the mega backdoor method regardless. Yes! From the IRS: “A rollover occurs when the participant receives a distribution of cash or other assets from one qualified retirement plan and contributes all or part of the distribution within 60 days to another qualified retirement plan or traditional IRA.” (Source: http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401(k)-Resource-Guide—Plan-Sponsors—General-Distribution-Rules). And if you have access to do this in a 403(b) and 457 at the same time, you actually can use each plan for its own deferral limit. By using the MB Roth conversion I can contribute up-to $36.5k to a Roth IRA which allows for investments that DO generate dividends, yield or have high turnover, without generating taxable gains. That seems to be a good idea. Great source of truth here. My understanding is that the law does not allow in-service distributions of pre-tax or Roth balances before 59½, but pre-59½ in-service distributions of after-tax (not Roth) balances are legal. Curiously, the total amount I can do is exactly equal to the total amount of all my after-tax 401k contributions over the years. – Salary deferrals to Roth 401(k)s have age 59 ½ restriction (unlike basis available after 5 years in a backdoor Roth IRA) A Health Savings Account (HSA) is the ultimate retirement account because it provides the best benefits of a Traditional IRA and a Roth IRA in one account! I have been thinking about this for a while and wanted to ask you in person when you came to Tucson, but didn’t want to interrupt other people and take over the conversation. My after-tax will be limited to something like $5,000/year due to the 25% limit. Is it ok to just make a yearly one time contribution to your after tax 401k and then withdraw and move the entire amount to a Roth IRA the next day and pay taxes on the gains if any? My 401K is at Vanguard along with a personal 100K Roth IRA funded since 1998-2014. If you make $100,000, then you can contribute a total of $15,500 in 2017. Your email address will not be published. Or setting up an IRA conversion ladder for early retirement? The source is Notice 2014-55 itself, which says that in a situation where there is a direct rollover Plus, if your money is still in when your company does their NDT testing and they fail, you could then remove your excess and they will still remove the excess contributions attributable to your portion of the failure. This month I received my 1099R from my retirement account administrator and it doesn’t seem to have any amount as taxable income. I’m with Fidelity also for my 401k, and I have a question about this. Vanguard 401 ( k ) are available to you as to where you ’ re able to plan it now…... An individual 401 ( k ) $ 6000 ) tax the assets and apply penalty... 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