I usually don’t write about things that don’t affect me, because as a reader once said to me, topics that pique the author’s own interest create the best content. I’m making an exception here because it’s important enough if by chance you happen to be able to take advantage.
I’m talking about making non-Roth after-tax contributions to your 401k or 403b plan, followed by rolling the money over to your Roth IRA. Jim Dahle at The White Coat Investor coined it as the “mega backdoor Roth.” I’m going with that. If your plan cooperates, you can put up to an additional $43,500 a year into your Roth IRA! If you are married and both of you have a cooperative plan, you can put up to an additional $87,000 a year into two Roth IRAs!
Before you get super excited, I have to warn you that not everyone can do it. Neither I nor my wife can. Sadly if your plan doesn’t cooperate, there’s nothing you can do about it. You are completely at the mercy of your employer’s 401k or 403b plan. If your plan doesn’t allow it, you are simply out of luck.
Employers that allow it tend to be large employers. Being in a large plan is still not a guarantee. For example, the federal government’s TSP is huge but it doesn’t allow it.
Between my wife and me, we worked for 8 different employers in the last 20 years. None of the 8 employers allowed non-Roth after-tax contributions. If as Vanguard said that 40% of the plan participants can do it, we would have a 98% probability of hitting at least once (1 – 0.6^8 = 0.98), but we struck out 8 out of 8.
It’s similar to having access to a 457 plan. Some people can contribute to both a 403b plan and a 457 plan, which gives them double the annual contribution limit. My wife and I never once had access to a 457 plan. I doubt we will ever. Meanwhile, some people always had one even when they move from one employer to another.
Feeling Lucky?
How do you know if you are lucky or not? Check two things:
1. whether your employer’s 401k/403b plan allows non-Roth after-tax contributions; and
2a. if it does, whether such contributions can be distributed while you are still working there (“in-service distribution”); or
2b. if the plan also offers a Roth 401k option, whether the non-Roth after-tax contributions can be rolled over to the Roth 401k part of the plan (“in-plan Roth rollover”)
#1 is the most critical piece. If you don’t have #1, you are dead out of luck. You can tell by the way you set your payroll deduction for your 401k or 403b plan. Typically you always have the choice of pre-tax. Some plans allow Roth contributions, but that’s NOT what we are looking for. You want after-tax contributions that are not Roth. Roth is after-tax, but after-tax isn’t necessarily Roth.
If you score, you then ask about the “in-service distribution” or “in-plan Roth rollover” rules of your plan. The law allows rolling over non-Roth after-tax contributions and earnings thereon while you still work at the employer. Most plans simply follow the law and they don’t place further restrictions. If you score on #1, chances are you will score on #2 as well. Make sure whomever you ask clearly understands you are talking about taking out non-Roth after-tax contributions, not taking out pre-tax contributions or Roth contributions, which is prohibited by law before you terminate or reach age 59-1/2 (or die or become disabled).
Some plans can be more restrictive. Some plans would suspend the employer match if you take money out. Some plans don’t allow taking any money out until you terminate or until you reach age 59-1/2. Some plans limit the frequency of these in-service distributions, for instance no more than once a year. Some plans charge a fee for each distribution. You will want to know whether your plan is more restrictive than the law.
Score!
Suppose you get lucky and you score on both points. Now what? You choose to make non-Roth after-tax contributions from your paycheck. Then you request a rollover of the non-Roth after-tax money and its earnings to a Roth IRA or to the Roth 401k part of the plan. Either way works. See Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA? The end result is that you have more money in your Roth IRA or Roth 401k. The maximum in 2023 is $66,000 minus your $22,500 pre-tax or Roth contributions minus your employer’s match and/or profit-sharing contributions.
If you can only do it once a year, so be it. Do it once a year. If you are able to do it more frequently and you don’t mind doing it, do it more frequently.
If you can only roll it out until you terminate or until you reach 59-1/2, which you expect to be in the next few years, it still would be worth it. Just contribute now and wait it out. See the follow-up article Mega Backdoor Roth Without In-Service Distribution.
You will pay taxes on the earnings of your non-Roth after-tax contributions between the time you contribute and the time you roll it out to your Roth IRA or Roth 401k. So be it. Pay taxes on the earnings. You can get fancy and have the earnings go to a traditional IRA or even maneuver to roll the earnings back into the plan. I won’t bother unless the earnings are substantial. You already got lucky with being able to do the mega backdoor Roth, which many can’t do. You don’t have to push it further. The earnings usually won’t be much anyway.
Some say keep the non-Roth after-tax contributions in a money market fund before you take it out. I disagree. Not only is it difficult to do, because plans typically don’t allow you to designate funds by contribution type, but it’s also unnecessary. Paying taxes on earnings is better than not having earnings to begin with.
Discrimination Test
Plans that allow non-Roth after-tax contributions must go through a discrimination test to make sure they don’t disproportionately benefit highly compensated employees. If you are a highly compensated employee and your plan fails the test, the plan will have to return some of your contributions and earnings thereon to you the next year. If by that time you already took the money out, it can become a tax mess.
If you are not a highly compensated employee, you don’t have to worry about this. If you are not sure whether you are a highly compensated employee, ask your HR.
Your plan may or may not be at risk to fail the test. However, if you want to avoid this possibility altogether, wait until October 31 the next year to request your distribution for the previous year’s contributions. October 15 is the extended deadline for a plan to file its report to the IRS. By that time it should be clear whether the plan passed or failed the test for the previous year. You can also ask your HR whether the plan passed the test. Once you know it passed, you are clear to request your distribution.
Self-Employed
What if you are self-employed? No mainstream solo 401k providers such as Vanguard, Fidelity, Schwab, TD Ameritrade, or E*Trade allow non-Roth after-tax contributions in their plans. You can pay a service provider a modest fee for a custom plan that allows it. I hope the publicity on the mega backdoor Roth will prompt the mainstream solo 401k providers to add this feature, but I’m not holding my breath. I went ahead and got my own plan. See Mega Backdoor Roth In Solo 401k: Control Your Own Destiny.
Priorities
If you are able to do this, where does it stand in terms of priorities? I see it this way:
- Max out pre-tax or Roth 401k/403b, including age-50 catch-up contributions if applicable
- Max out deductible traditional IRA or Roth IRA
- Max out non-Roth after-tax 401k/403b rolled over to Roth IRA (“mega backdoor Roth”)
- Regular taxable account
If you are not maxing out the first two items yet, don’t worry about this mega backdoor Roth. If you are in a position to max out all three, take full advantage before you mess with regular taxable accounts.
Let’s just say I’m jealous of you if you are able to do the mega backdoor Roth.
For more on mega backdoor Roth, please read:
- Mega Backdoor Roth Without In-Service Distribution
- Mega Backdoor Roth Without a Big Paycheck
- Mega Backdoor Roth and Access To Your Money Before 59-1/2
- Mega Backdoor Roth In Solo 401k: Control Your Own Destiny
- Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA?
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Caleb says
With the Backdoor Roth IRA, the tax implications are a bit trickier if you have money in a traditional deductible IRA, as you point out int he article on the Backdoor. With the Megabackdoor, does money in a traditional deductible IRA have any tax impact on the rollover.
It seems to me there shouldn’t be because any money in an after-tax 401(k) is not mixed with any before-tax dollars. Can you confirm?
Thanks for your thoughts.
Harry Sit says
It doesn’t as long as you rollover money from the after-tax 401k directly into a Roth IRA. Don’t make an interim stop in a traditional IRA.
Dm221 says
After reading more about this it seems like a good idea since its available to me.
What is your take on the “step doctrine” though. Should we be leaving after-tax contributions for many months before rolling-over to roth IRA?
Also from what I understand this is prefered to an “in plan roth” conversion option from a tax standpoint which seems to always run into the pro-rata rule even if your plan accounts separately for all your piles of money. Do you agree?
Harry Sit says
You naturally contribute by payroll deduction over a span of time before you do the rollover maybe once a year. I agree it’s better than in-plan Roth rollover.
$iddhartha says
Regarding the step doctrine… I completely ignore it personally.
As far as leaving the money in the account for a few months before rolling over: this can actually be beneficial if your investments go down during the period before you roll over. Your losses over such a period would be averaged with the gains of the subsequent period thus lessening the taxes you would pay overall on a rollover. Again, waiting to roll over only makes sense if your current period investments you intend to roll over have gone down in value.
John Dsouza says
Thank you for the great article Harry. My company finally started offering the after tax 401(k) contributions mid-year but it does not let me set sub limits on what is in the pre-tax, employer match and the after tax contributions.
So in theory one could end up with less pre-tax and more after-tax within the 53K limit.
I assume to avoid losing on pre-tax, I should first fill this bucket and then the after-tax contribution. Challenge is that my company does a match of $6000 and it provides a true-up next year.
If the 6K match is provided next year, does it mean I can put more than 29K after tax in my 401k or is it counted against my 2016 limit?
How do I setup the various contributions so that I have $18K pre-tax, $6K match and then $29K after-tax?
Harry Sit says
The true-up match paid next year still counts toward this year’s limit. Most plans let you specify your contributions by percentages of pay: X% pre-tax, Y% after-tax. Just make the percentage for pre-tax high enough to clear $18k. It will stop automatically at $18k. Maybe the company is also smart enough to stop the after-tax automatically at $29k. In that case you just make the Y% high enough to clear $29k.
John Dsouza says
Thanks Harry. As per the Fidelity rep; my company plan does not automatically stop at $29K so I’ll have to figure the last contribution % accurately.
Also Fidelity allows either in-plan conversion or rollover of earnings to rollover IRA and rollover of pre-tax contributions to ROTH IRA with a $20 fee. The fee is charged even if it in-plan conversion so I assume it makes sense to roll it out of the account?
Is the idea to do more frequent rollovers to ensure that the earnings grow in ROTH instead of rollover IRA? I will need to balance the frequency benefits with fees.
Harry Sit says
Double-check with payroll. They control whether to stop your contributions. If they don’t stop it now, maybe you can suggest they consider doing so. Taking it out to a Roth IRA is better, for some minor reasons which may or may not apply to you. I won’t bother with more frequent rollovers than once a year, but yes, the motivation for doing it more often is to get the money sooner to Roth and accrue earnings there.
Corey says
I’ve contributed to the AT 401(k) my employer offers and they offer an in-service withdrawal option with no suspension. The amount available for rollover from the servicing website (Your Total Rewards from Aon) does not match the value of the shares purchased through my AT contributions.
I have called the plan provider to discuss this, and apparently they also allow (force) you to rollover before tax company matching contributions that are older than 24 months old (allegedly the 24 month rule applies to those who have been in the plan less than 5 years).
I said forced above because they will not let me split the rollover to be only my after tax contributions. In fact, I believe the BT company match must be rolled over first (e.g. 10k balance available for rollover with 3k BT match, if I withdraw 4k its 3k of BT match and 1k AT contribution).
Has anyone else encountered this? I imagine it’s pretty common with Mega Corp’s – the plan provider said any company match older than 24 months is available for rollover.
Harry Sit says
The IRS allows the match to be distributed in-service. Your plan can decide (1) whether to make it available; (2) whether to “force” it to be distributed before the after-tax contributions and earnings; and (3) whether to allow a split: pre-tax money to traditional IRA and after-tax money to Roth IRA. It sounds like your plan chose ‘yes’ for (1) and (2). Now ask about (3). Mention IRS Notice 2014-54.
raj says
Harry – I see you say ‘Plans that allow non-Roth after-tax contributions must go through a discrimination test’, is this also applicable for single member s-corp that setup a 401k plan with non-Roth after-tax contributions? If so, does the company HR is responsible to send the plan documents to IRS to see if they pass the discrimination test? Thanks in advance!!
Harry Sit says
It’s not needed for a one-person plan because there are no other employees to discriminate against.
raj says
Harry – Would you like to share the names of the companies offering non-roth after tax options on their 401k plans?
Harry Sit says
I don’t have a list. As I mentioned in the article, none of the companies I worked for offered this feature. However, according to readers who answered the poll (see link in the article), 60% of them have this option in their plan.
Gaujo says
Oh boy! I have been beating my head against the wall about how I am going to get all my Roth 401k contributions out, and totally ignored the after tax 401k I have access to! While I still can’t roll out the Roth 401k, this will allow me to still buff up my Roth IRA, with a 6 month contribution penalty. I need to confirm if that penalty is just to the after tax 401k though.
Thanks!
David says
I just checked my 401k plan information and realized I can contribute after-tax dollars to the IRS limit of $53k for all combined contributions. After-tax contributions can be withdrawn from the fund 24 months after contribution…so not immediately but not horrible.
I do not have a Roth IRA. I’ve been working abroad for many years and only recently moved back to the US. My wife’s and my joint income exceeds the IRS limit so I can’t directly make Roth IRA contributions.
Will I still be able to take advantage of this mega backdoor Roth conversion? Will I be able to roll these after-tax contributions into a newly established Roth IRA even if our income would not ordinarily qualify me to have a Roth IRA?
Harry Sit says
Yes. When you do the rollover, the earnings during those 24 months will come along. You pay tax on the earnings.
Charles says
Excellent content, Harry!
Your article indicates two tests. My mega corp starts to offer ‘after-tax 401k’ recently, so that passes the first test. As for the second ‘in-service distribution’, I did not see the term mentioned anywhere in the company-issued notice, but here might be the relevant parts in its FAQ:
Can after-tax contributions be withdrawn? Yes—amounts contributed on an after-tax basis can be withdrawn at any time, and for any reason.
Are amounts contributed on an after-tax basis convertible to Roth 401(k) monies? Yes—once after-tax contributions are deposited into your Plan account, they are eligible for conversion to Roth 401(k) monies within your Plan account at any time.
So can we have an attack plan like the following? As soon as the after-tax contribution is deposited, I can immediately ‘move’ it into my Roth 401K account; this way the earnings portion is not bothering since there is just not enough time for it to grow yet.
Harry Sit says
I edited the article with an option 2a and option 2b, together with a link at the end to the article comparing the two options. Either one works.
Jim says
Are there any adverse implications of doing this twice in a year, other than considering the step transaction doctrine?
Harry Sit says
From the article: “If you can only do it once a year, so be it. Do it once a year. If you are able to do it more frequently and you don’t mind doing it, do it more frequently.”
des999 says
do you ‘have’ to max out your pre-tax 18k first, before you can begin to contribute to the non-roth after tax?
Harry Sit says
You don’t ‘have’ to. Usually you are better off doing pre-tax first though.
John says
Harry, I have a different opinion and would say do the post tax before pre tax. If you switch to a different company (voluntarily or involuntarily) during the year; the probability that the new company has a pre tax option is much higher compared to post tax. Or am I missing something?
Harry Sit says
By ‘first’ I was referring to dollars, not time. When you have a limit of $53,000 minus the employer match, by doing pre-tax ‘first’ you will put in $18,000 as pre-tax and the rest as non-Roth after-tax, versus putting in 100% of your limit as non-Roth after-tax and zero pre-tax. As long as you still contribute $18,000 pre-tax, I have no problem with doing it in the second half of the year versus first half of the year. Keep in mind there is also the risk you may not find a new employer before the end of the year or the new employer doesn’t have a 401k or it has a waiting period preventing you from maxing out pre-tax for the year.
Onkar says
Hi Harry,
Reading this (especially the examples) — https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans — it seems like one cannot just rollover the non-Roth after-tax contributions and associated earnings; the whole account balance (pre + post tax contributions/amounts) needs to be taken into account.
Thank you.
Harry Sit says
You read it wrong. The associated earnings are the pre-tax amounts being addressed. It just said you must rollover the earnings. See the answer to the second question.
Onkar says
Thanks. I see what you say about the “Earnings associated with after-tax contributions are pretax amounts in your account.”, but the example (1st one) that talks about considering both pre-tax and after-tax amounts, threw me off.
But then I don’t understand what are after-tax amounts, and (if amounts means earnings from contributions) how can they (i.e. after-tax amounts) ever appear in a 401k account?
THank you.
Harry Sit says
When your plan allows non-Roth after-tax contributions, those contributions become the after-tax amounts. Read the first example as you contributed $20k as non-Roth after-tax many years ago and now it grew to $100k.
Onkar says
“Read the first example as you contributed $20k as non-Roth after-tax many years ago and now it grew to $100k.” — this clears it up for me. Thanks Harry.
tanvi says
So my husband is a physician makes 500k with his full time employement
he maxes out at 18k at his day job with no match
we additionally put 5500 in the backdoor entry roth (using the non deductible after tax contribution and then conversion to roth at Vanguard).
This year he will have 40k in self employed income.-
1) is solo 401k better or can we do SEP IRA 20% (pre tax) from the self employment income on top of the backdoor entry after tax roth 5500 that we have been doing for past 2 years.
2) Also considering to have mega roth at some point- is it too late for 2016? and if so would that affect the decision of solo 401k versus sep IRA…?
3) income may change mostly increase- if it does stop in the future- how would you handle 401k versus SEP IRA investments?
Harry Sit says
I replied to your other comments under the self-employed article. Solo 401k is better. It may not be too late if you do it quickly. When self-employment ends (not just pauses temporarily), he can terminate the plan and roll over the balance to an IRA just like employees do when they leave a job.
Johnson says
Guess I’m the lucky one, who has both 403b and 457.
My question is does the 53000 limit include all pretax or just 403b?
e.g. I’m maxing out 18k 403b and 18k 457.
How much can I do the mega backdoor?
53k – 18k(403b) = 35k
or
53k – 18k(403b) – 18k(457) = 17k
Harry Sit says
457 doesn’t count.
Jim says
Hi Harry – great info, thanks!
It appears (?) my 401(k) allows this without needing a back door . My 401(k)’s web site lets me split my paycheck contributions between the pre-tax and Roth portions of the plan. So I can (apparently) contribute up to $18K into the pre-tax portion, my employer matches up to $5K, and I can contribute up to an additional $30K into the Roth portion, to a combined max of $53K. Am I missing out on something by not doing the after-tax-contribution-rollover thing?
Harry Sit says
It doesn’t cut it with only pre-tax and Roth, which share the $18k limit. If you contribute $18k to the pre-tax portion, your limit for the Roth portion becomes zero. You need the non-Roth after-tax option to use the full $54k maximum in 2017.
Anonymous says
I need to clarify a few possible misconceptions about the “mega-backdoor Roth” after reading some of the earlier posts.
1. According to the IRS, you CANNOT just rollover ONLY the after-tax 401(k) contributions to a Roth IRA. You must rollover the entire after-tax account which consists of pre-tax earnings and after-tax contributions.
2. The pre-tax earnings can be rolled into a traditional or rollover ira and the after-tax 401(k) contributions can be rolled into a Roth IRA without paying any taxes. The pro-rata rules that used to apply before the IRS clarification in notice 2014-54 no longer applies to these types of distributions.
Some of the earlier posts seem to misinform people that you can just rollover the after-tax portion to a Roth IRA. The only way to accomplish this would be a in a 2 step process. First, you roll the entire after-tax account as described in the 2 steps above, but make sure that the pre-tax amounts go to a Rollover IRA, not a traditional IRA. Second, after the required time period, roll back the pre-tax amounts into the original 401(k). There are usually frequency limits on the number of rollovers allowed in a given year and it depends on your employer so if it’s every 3 months, then you would have to wait 3 months and then roll back the pre-tax amounts into your 401(k). I wouldn’t recommend this unless you have a large pre-tax balance and intend to do regular back-door Roth conversions.
Harry Sit says
Which earlier posts misinform? This is the first post in the series on this topic. The word “earnings” appear 11 times in this post, not counting comments. It’s super clear earnings must be rolled over at the same time.
Anonymous says
When I say “earlier posts”, I’m referring to posted comments, NOT your blog post, Mr. Harry Sit. I understand that this is your first blog post in the series on this topic. Your blog post is well written, but some of the early comments by other people were not as clear about earnings.
Anonymous says
You are correct Mr. Harry Sit. In many posts, you and other people clarify that pre-tax earnings must also be rolled over. I only read a few misleading posts that were unclear and came to the wrong conclusion. One section copied from Dec. 8th, 2014 from Paul is shown below:
“Now that the IRS has stated they are in agreement with cleanly moving only the after tax contributions to a Roth (IRS Notice 2014-54) I have moved up to a 50% contribution of my salary to my 401k.”
This is misleading because it is alluding to the idea that you can cleanly move ONLY the after tax contributions to a Roth which is NOT what IRS Notice 2014-54 says.
sachagravett says
Can I have a Solo 401k and a SEP-IRA? And a SIMPLE-IRA?
sachagravett says
Considering using a provider such as https://www.401kcheckbook.com/ to get Solo 401k guidance and docs. May engage in transactions that are alternative investments and need guidance regarding “prohibited transactions.” Any suggestions?
Harry Sit says
Don’t. Too easy to mess up. Keep your solo 401k clean. Use your other money that doesn’t have restrictions.
sachagravett says
Harry,
Thanks for the perspective.
It does seem that avoiding anything that “has the taint of self-dealing will keep things clean and prevent prohibited transactions, though.
sita says
Can we take home mortgage loan out of this if the plan allows it and what is the reporting does IRS expect from employer/trustee?
Harry Sit says
If you are talking about withdrawing the non-Roth after-tax contributions and the associated earnings to buy a home, the plan doesn’t limit what you do with it. It won’t be a loan. It would be an outright withdrawal. The earnings will be taxable and subject to the 10% penalty when you don’t roll it over. The plan will issue 1099-R to report the taxable portion and the non-taxable portion.
sita says
Harry – I was talking about the pre-tax money to to purchase home, what is the role of trustee/employer in this case to report to IRS about the money withdrawal from pre-tax account to purchase the home., I understand it’s our responsibility fix the terms (5/15/30 year) of loan and how much to pay back (Principle & Interest based on amortization calculator);
Does plan administrator report IRS about this withdrawal? what kind of record keeping generally to maintain??
Harry Sit says
What does it have to do with mega backdoor Roth then? It’s a regular 401k loan. A loan is not a withdrawal. No reporting to the IRS is required unless the borrower defaults on the loan.
LB says
Thanks for the informative article, but I think there is some clarity that is still needed from IRS
because over at another finance website, someone posted this link which says that you cannot just rollover the after tax amount from a 401K
https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans
Harry Sit says
See comments #48 and #64.
Curious says
I am no longer an employee of the large company i have a 401k program which contains a small portion that is after tax non Roth money which was my contribution. i do plan to rollover the pre tax amount which is a non issue to an already existing traditional roth ira i have with a financial institution , as well as the gains generated on the after tax non roth money ( which is pre tax). My question is since taxes were already paid on the after tax non roth money – would there be any penalties incurred if that after tax non roth money stays as cash since as i understand i was told that after tax non roth money needs to be cut in a check to me when i transfer my 401k from my previous employers custodial account
Jake says
What’s the right way to evaluate the benefit of the Mega Backdoor Roth? I realize there are lots of tax related variables involved, but how does one start? How much more would I have to make at company B with no Mega Backdoor Roth to match the benefit of having a Mega Backdoor Roth at company A?
Harry Sit says
I made this spreadsheet to calculate the advantage of doing a mega backdoor Roth versus just putting the money in a regular taxable account. Although it was made for self-employed, it works equally well for employees working at a company.
DJ says
Great discussion!
Making max. contributions to pre-tax 457(k) employer plan. Separately, making max. post-tax contributions to Fidelity Roth IRA. All good.
But, want to minimize tax liability from future 457(k) RMD’s. Doesn’t seem the ‘backdoor’ Roth conversion is a vehicle to achieve this end — sans hefty conversion tax liabilities — but I may have missed this in this (or other) threads?
Harry Sit says
A 457 plan has nothing to do with backdoor. If you’d like to minimize RMDs from a pre-tax account, there are only two ways: (a) Don’t let it grow as fast; (b) Take money out of it over a longer period of time before 70-1/2. Not letting it grow as fast is counter-productive. You’d rather make money and pay taxes than not making money in the first place. So if you think RMD is going to be a problem, take the money out sooner and convert it a Roth IRA over more years (governmental 457 plans only).
DJ says
Harry,
Thank you! That’s what I thought.
I agree it’ll be a “good problem” to potentially have excess assets in the 457 down the road, so definitely focused on maximizing contributions and investment returns everywhere I can.
Best,
DJ
Mark says
How should the after-tax 401k contributions split with earnings going into a traditional IRA and basis going into a Roth IRA be reported on Forms 5498? Should the basis amount rolled into a Roth IRA show up as both a rollover and a conversion (both box 2 and box 3)? Should the traditional IRA Form 5498 show the earnings as a rollover in box 2?
Harry Sit says
Sounds correct to me. Have you looked at 5498 instructions to the institutions?
Mark says
Where do i find “5498 instructions to the institutions”?
Harry Sit says
Together with 1099-R instructions to the institutions. https://www.irs.gov/pub/irs-pdf/i1099r.pdf
Harry Sit says
Instructions for Box 3 of 5498:
“Enter the amount converted from a traditional IRA, SEP IRA, or SIMPLE IRA to a Roth IRA during 2017. Do not include a rollover from one Roth IRA to another Roth IRA, or a qualified rollover contribution under section 408A(e) from an eligible retirement plan (other than an IRA) to a Roth IRA. These rollovers are reported in box 2.”
The money coming from a retirement plan into the Roth IRA falls under the “qualified rollover contribution …” part. It should only be in box 2.
Mark says
Thank you Harry. This is very helpful!
Mark says
You should consider making a post on how the Mega Backdoor Roth should be reported on a 1099-R, 5498 and 1040 forms. I’m sure i’m not the only one wondering if everything is being reported correctly and if i’m reporting it correctly. I wasn’t able to find any clear online resource that concisely described what this reporting should be.
In light of your response above, it looks like my IRA custodian messed up and incorrectly classified it as a conversion instead of a rollover.
Lee says
Hi Harry,
I noticed a few comments over last year about doing both the Mega Backdoor Roth and regular Backdoor Roth in the same year.
I’ve been contributing up to the federal maximum ($55000 = $18500 401K + Company Match + After-Tax Contribution) and rolling over the after-tax portion + earnings into my Roth IRA for the past four years. I’ve been curious about whether doing the additional $5500 non-deductible IRA contribution and subsequent rollover into my Roth IRA during the same year was allowed or not. I haven’t really found any definitive info on the subject other than a few comments here and there. Are there any caveats about doing both in the same year? Does timing matter (do the Mega first then the regular)? Has anyone written about the specifics of doing both during the same year?
Thanks for your feedback.
Harry Sit says
It’s allowed and the two are independent of each other. Just go directly from the plan to the Roth IRA, with earnings, no split, no interim stop at a traditional IRA. It appears you are doing that already. If there’s any possibility you will withdraw from the Roth IRA before 59-1/2, keep good records and documentation for the money going into and out of the Roth IRA: when, how, how much total, how much taxable. See Maintain A Roth IRA Contributions and Withdrawals Spreadsheet.
AW says
Harry,
Great post. One quick question (that you perhaps touched on in 20 and 51)
1.) Individual has $100,000 in a Traditional IRA (100% deductible)
2.) Individual has $300,000 in a Traditional 401(k)
3.) Individual makes a $25,000 after tax contribution to their 401(k)
4.) Individual performs an in-plan Roth conversion within the 401(k)
I want to confirm that the pro-rata rules do not apply to the after-tax dollars in the 401(k) being “converted”, and specifically, if there is any IRS documentation supporting this. (In case rules may be different if we’re talking about separation of service or rolling assets out of the 401(k) with an in-service distribution vs. in-plan conversions.)
Thanks so much for all your help on the topic!
Harry Sit says
The IRS page on In-Plan Roth Rollover:
https://www.irs.gov/retirement-plans/designated-roth-accounts-in-plan-rollovers-to-designated-roth-accounts
“The amount includible in gross income for the year of the rollover is:
* the amount rolled over, less
* any basis in the amount transferred.”
No requirement to aggregate with traditional IRA there.
Dan says
Harry,
I’ve been utilizing the mega backdoor ROTH strategy for the last three years maxing out my 401(k) to the annual maximum contribution limits with no issues until 2018. Just recently I was contacted by my HR Department stating that I over contributed for the most recent plan fiscal year (July 1, 2017 – June 30, 2018). The HR Department explained that my pre-tax & post tax contributions during the fiscal year were added to the 2018 employer match for the fiscal year (which was made in August 2018; outside the fiscal year) were in excess of the $55,000 plan contribution limit by approximately $500. I have always manually managed my pre-tax & post-tax contributions with the employer match on an annual basis to ensure that I don’t overcontribute beyond the maximum contribution limits but was caught off guard that I would need to manage the plan’s fiscal year in addition to the calendar year. Was also surprised to hear that the employer match made in August 2018 counted towards the recent fiscal year that ended June 1, 2017. I’m assuming the plan will refund the $500 overcontribution from my 2018 after-tax contributions and I will only be responsible for any gains. Luckily, I don’t rollover the previous fiscal years after-tax contributions to my ROTH IRA until I’m certain that the plan past all the NDTs (non-discriminatory tests). Once I receive the refund, I believe that I will be OK to rollover the balance of the 2017/2018 After-Tax Contributions.
Thanks,
Dan says
Correction:
Was also surprised to hear that the employer match made in August 2018 counted towards the recent fiscal year that ended June 1, 2018.
Harry Sit says
That’s correct. An employer can choose to contribute the match or profit sharing several months after the plan year ends and still have it count as the contribution for the previous plan year.
Kai says
Does this Mega backdoor roth contribution include the (IRA backdoor to Roth IRA)? Or It’s different? In other words, Besides $56k, I still can do IRA contribution and backdoor conversion (another $6000).
Harry Sit says
It’s different and separate from regular IRA contributions and conversions.
Jessica says
Hi Harry,
Thanks for this helpful article. My employer allows the non-Roth after-tax contributions through Fidelity, and they can be distributed while I am still working there (“in-service distribution”). Someone at work recently mentioned hesitating to enroll in this plan because of the fear or possibility that the government may in the future decide to tax the earnings of the converted contributions, thus taxing on both contributions and earnings. Is this highly unlikely and so should be of no concern at all? Wanted to hear thoughts. Thanks!
Harry Sit says
If you don’t do this, the contributions and earnings are taxed anyway. How can it be worse?
T says
Thanks for this great resource. My employer offers a defined benefit plan (to which they contribute with some mandatory employee contributions from us), 403(b), 457, and an after-tax 401(a) defined contribution plan (DCP). I’m 53. I have been at the same employer for over 15 years and have not contributed to the 403(b) previously. I have some confusion about how much I can contribute to each of the optional employee-contribution plans. What I’ve come up with so far is $19,000 + $6,000 age > 50 catch-up provision + $3,000 special provision catch-up for the 403(b) and $19,000 + $6,000 for the 457 (the 457 has a catch-up provision of its own, but more for when one is close to retirement, so I’m ignoring it). The after-tax DCP contribution limit for 2019 is $56,000. The employer, fund manager (Fidelity), and my CPA all seem to agree that I could contribute a theoretical upper maximum of $28,000 (403(b)) + $25,000 (457) + $56,000 (after-tax DCP) for a total of $109,000 (they say the after-tax DCP is treated as a separate account, esp. given that the funds being placed there are after-tax). Whether we could actually do that type of amount is unclear, but before we explore that, I wanted to make sure this upper contribution limit is correct? If it makes a difference, from examining my monthly pay statements, it seems the employer is taking out around $12,000 a year in mandatory pre-tax contributions to the defined benefit plan.
I’m also interested in the megabackdoor Roth strategy, which I’ve heard other employees here are using. If the $56,000 annual limit for the after-tax portion is in fact allowable even if the 403(b) and 457 have been maxed out, how much of that could be rolled over into a Roth IRA and would you recommend doing that on a frequent basis (i.e.., as soon as possible after the after-tax monies arrive into the after-tax account) or waiting until Oct. 31st of the following year? I don’t have any regular IRAs if that matters. Thanks again for this great blog and for tackling this topic. This is the first place I’ve seen it discussed in such depth and clarity.
MT says
So about the priority… do I have to max out $19K first, then I’ll be eligible to contribute after-tax non-Roth?
Harry Sit says
In some employer plans, you can make both types of contributions at the same time. Some employer plans make the non-Roth after-tax contributions a spillover — contributions become non-Roth after-tax only after you max out the regular contributions ($19k in 2019).
Dan says
I work for a major aerospace corporation that allows both after tax contributions and in service withdrawals and I’ve been contributing the annual plan limit and doing the mega back door roth for several years. It’s a nice perk that allows one to grow their Roth IRA balance much more quickly than with the backdoor approach.
Thank you for pointing out that it’s wise to wait until October 31st to withdraw the after tax money to avoid the possible problem of failing anti discrimination testing. What would happen if this happened and the employer failed the testing and one had already withdrawn the after tax funds and rolled them over to a Roth IRA at a brokerage? Could these multiple transactions all be unwound?
$iddhartha says
I’m contemplating some high level jujitsu Harry. Ideally, our family would do both backdoor Roth and megabackdoor, but we would be stretching financially to do so… three kids. 🤣
Anyway, I was contemplating forgoing the backdoor Roth and merely doing megabackdoor instead. Hear me out. This would allow me to rollover some before tax 401k funds to a traditional Vanguard IRA (for more flexibility with investment choices) and not have to worry about the regular backdoor rollover complications with such before tax funds (my current traditional IRA balance is zero because I’ve continually done backdoor Roth for a decade). i.e. It’s more complicated to do backdoor Roth when you have funds in a traditional IRA.
Instead, I would do megabackdoor after-tax 401k straight to Vanguard Roth IRA. Is there a flaw in this plan? It seems like a good option to me.
Harry Sit says
If you don’t have enough money to do both, doing only the mega backdoor Roth is fine. If you have investments outside the 401k and IRAs, you can liquidate some of those to supplement your cash flow. I addressed it in Mega Backdoor Roth Without a Big Paycheck. It applies to regular backdoor Roth as well.
Jess says
Hi Harry,
After contributing the maximum allowed for 401k and IRA, which plan is better to put extra savings into: Mega Backdoor Roth IRA (with Fidelity in-plan conversion) or the ESPP plan (10% discount without lookback option)? Was thinking of putting as much as possible into Mega Backdoor Roth IRA, since the money will continue to grow tax-free over the years; whereas if I opt for ESPP and sell asap quarterly, it would yield ~10% profit but the money would no longer grow in a tax-sheltered investment vehicle. What are your thoughts? Would be glad to hear. Thanks.
Harry Sit says
ESPP, because you only need money for one round of ESPP. After you sell the shares from the first round, the cash can be used to supplement the reduced paychecks for the subsequent rounds. You will only delay or reduce mega backdoor Roth for a few months. After that you will be doing both.
Jess says
Thanks, Harry – appreciate your replying. I realized I can do both and use the money from the sold shares into the Mega Backdoor Roth. I guess I was asking since I’m living off savings while on reduced paycheck (putting paycheck money as much as possible into Mega Backdoor Roth), so the money from the sold ESPP shares is sitting in savings account.
Harry Sit says
Suppose your employer’s plan allows additional $20k/year for backdoor Roth and you need another $5k for a round of ESPP every six months. If you can spare $25k/year from your paychecks obviously you will do both. But what if you don’t? Suppose you can only save another $15k/year. If you use the $15k/year for mega backdoor Roth, you will never have money for ESPP. If you do $10k/year for mega backdoor Roth and $5k for ESPP, after you sell the ESPP shares from the first round you can raise the contribution for mega backdoor Roth back to $15k/year. Now you will have $15k/year for backdoor Roth and $5k for ESPP continuously. All you need is one-time $5k to get ESPP started. Yes it will sit outside a Roth account, but it’s only $5k, and it earns a good return over and over.
$iddhartha says
In continuation, I think the question I was getting at is this: can you do a mega backdoor Roth if you have pre-existing money in a traditional IRA? i.e. The mega backdoor method bypasses your traditional before-tax IRAs therefore avoiding taxes on those funds.
In contrast, regular backdoor Roth is not ideal for people with pre-existing amounts in a traditional before-tax IRA because the IRS would require you to convert some of those funds.
As I understand it, the answer is yes, and would mean that the mega backdoor Roth has the additional advantage of letting individuals leave their existing traditional before-tax IRA balances in place.
Harry Sit says
Yes, when you send the money directly to a Roth IRA or do the in-plan Roth rollover. Just don’t make an interim stop in a Traditional IRA.
Caleb says
Hi Harry,
A follow up to this part of the post: “You can get fancy and have the earnings go to a traditional IRA or even maneuver to roll the earnings back into the plan.”
I am hoping to move my earnings back into my BT 401k plan with my employer. As they don’t allow me to move the earnings-on-after-tax contributions directly to the BT 401k account, but would allow it via depositing those earnings in a tIRA, and subsequently rolled into the BT 401k, should I be concerned with the step transaction doctrine? Curious if you or others have done this and the approach you took.
Thanks!
AnonymousMoe says
Hi
I have struggled to figure if I am capable of doing a mega back door Roth IRA . Lets say I have a W2 job where I put in my personal 401k contribution of $19,500 and my job matches the profit sharing at $36,500. I also have 1099 income, of which is $100,000. If my 20% profit sharing contribution is $15,000 (pre-tax) after business deduction. Would I be eligible to put in an after tax Roth 401k contribution? If so, how do I calculate that amount?
Harry Sit says
See the paragraph under the Self-Employed heading and the link to the follow-up post.
Hao says
Hi Harry,
Thank you for the helpful article. Would you please tell what I could do with Roth in-plan conversions at Fidelity.
Background info:
Retirement contributions: $19,5oo to Roth 401k; $15,885 to non-Roth after-tax contribution; employer’s matching of $21,615 to traditional 401k –> Totalling $57K. The non-Roth after-tax contributions are automatically converted to “ROTH IN-PLAN CONVERSION” after each pay.
All the above plans and Roth IRA are at Fidelity.
Question:
1. Can I roll over my Roth in-plan conversions to my Roth IRA at Fidelity? during employment? after employment?
2. Can I roll over my Roth in-plan conversions to my Roth 401k?
3. Can I leave my Roth in-plan conversions as it is forever?
4. Will RMDs start for Roth in-plan conversions at age 72?
Thank you for your time.
Harry Sit says
1. The IRS allows during employment. The plan may or may not allow. You can certainly roll it over after employment.
2. For practical purpose, it’s already in your Roth 401k. It’s labeled differently only for tracking. For example, the plan may allow this part to be rolled over to a Roth IRA during employment but it doesn’t allow it for regular Roth 401k.
3. Yes, you can leave it as-is forever.
4. RMD is required at 72, but you can roll it over to a Roth IRA, just like regular Roth 401k.
Hao says
Thank you so much Harry. You are SOOOOO knowledgeable and helpful.
Joe says
Hi Harry,
I am under 59 1/2. I have a decent chunk of traditional 401-k funds (pre-tax) and plan to make an after-tax contribution this year for the first time.
My question is, if I leave my employer after I make the after-tax contribution and prior to converting it to Roth 401-k:
(1) For the traditional 401-k account, can I leave it as-is in the former employer 401-k plan or roll it over into an new employer 401-k plan?
(2) For the after-tax account, after leaving the employer, can I independently roll-over the after-tax account (after-tax contributions plus any earnings associated with such after-tax contributions) into my Roth IRA account that I have been using to do my backdoor Roth IRA without it impacting my traditional 401-k funds?
(I’m trying to ask a question about rollovers and the IRS 2014-54 notice as it pertains to my after-tax 401-k account.)
Thank you !
Harry Sit says
(1) The pre-tax account can be left in the former employer’s plan. A new employer’s plan usually accepts rollovers from another plan.
(2) After separate from service, some plans allow partial rollovers, and some plans treat it like all-or-nothing — leave everything in the plan or rollover everything out of the plan. You have to ask your plan administrator.
Patrick Aw-Young says
Hi Harry,
When you said “457b doesn’t count” in response to 67. Johnson’s example, then what is included in the $58,000 contribution limit for 2021? I was under the impression that all sources of Defined Contribution Plan are included in this contribution limit. Thanks for the clarification.
Harry Sit says
A 457 plan isn’t a Defined Contribution plan. It’s a deferred compensation plan.
https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans
That’s why it doesn’t count. 401(k) and 401(a) plans count toward the employer’s limit. 403(b), solo 401(k), and SEP count toward the self-employed’s limit.
John McDonnell says
Great stuff here. Question, My company plan is managed by Vanguard and seems to make Mega Backdoor easy. I can contribute After Tax dollars and have it rollover automatically to Roth with every paycheck. So easy. I am considering doing this first as opposed to a regular Backdoor Roth. In my case the Backdoor seems more complicated. I have to go through the steps of “hiding” my wife’s IRA and a fairly large Rollover IRA from a previous employer’s 401k. Then setting up Traditional IRAs and managing the contributions to those and the conversions to Roth. I already max out Traditional 401k and Catchup, so can’t afford that much more but with kids out of college looking to add another approx. $10,000. Am I missing something, with the Mega Backdoor being so easy in my situation, I think I should just do that first. Before the Backdoor. Maybe the only downside is access to the money from my company plan. Still need to research that part of it.
Ravin says
Hi Harry,
I didn’t find any reference to SECURE ACT 2.0 signed into law on Dec 29th, 2022 by the President. So posting it here… Pls let me know if there is another topic I should post it to.
As far as I can tell based on SECURE ACT 2.0 signed by the President on Dec 29th, 2022, it seems we can continue to do backdoor Roth and mega backdoor Roth funding if we don’t qualify for direct Roth contribution in 2023 per new income limits. The Secure Act goes until fiscal year end 9/30/23.
1. Should we go ahead and fund Roth IRA for 2023 thru backdoor and mega backdoor now in Jan ’23?
2. What are the chances they will revert after Oct 1, 2023 for 2023 contributions and conversions for the year 2023?
Thanks
Ravin
Harry Sit says
SECURE Act 2.0 doesn’t affect backdoor Roth or mega backdoor Roth in any way. It doesn’t end on 9/30/2023 either. A new law can always be enacted at any time. You deal with it if and when that happens.