That seems like a pretty great benefit to me, but your employers rules may vary. Are you going to take advantage of this strategy? Also, there are limits on a second i401k. I thought you could only do the conversion once per year? Yes! If so, was the deadline 4/15? This is a big deal for people who can make in-service distributions (i.e. Your 401(k) contribution is usually only in the form of a deduction from your paycheck, so I do not see how you could hope to fund your 401(k) with more than your income. I’m not aware of any limits on how many conversions you can make, though your specific plan’s Summary Plan Document (SPD) might have restrictions. I don't hear about new ideas very often, but here is one that a few people might find very useful. Prorated they say. But then you’d have the problem I mentioned previously where you’d have money in a Trad-IRA. If I wish to do a mega-backdoor Roth, I could theoretically front load the $37k with 401(a) money and (again theoretically) hit the 415(c) limit early in the year. Sidebar: if I go over the 52k, my employer refunds the overage as income…not sure in which tax year though. A suggestion for the blog. This is a great way to boost the roth ira balance. However, instead of an employee, you are now the owner and responsible for the match and any profit-sharing contributions due to your employees. Any amounts you may have in other Traditional IRAs, pre-tax amounts in other subaccounts of the 401(k), or any other 401(k) accounts, simply don’t enter the calculation. If the plan is written properly, you do not, and in fact cannot, withdraw the tax-deferred employee contribution. In 2013 when I changed companies and rolled the account over, Vanguard knew exactly how to handle everything. I was under the impression that they did not. Although regular backdoor roth is a good idea regardless. Same reasons a non-deductible IRA isn’t usually worth doing unless you’re doing a backdoor Roth IRA. What that means is that if you are covered under two employer sponsored 401(k) plans In total you cannot defer more than an aggregate of $54000 between both plans. I call it the “Mega Backdoor Roth IRA.” There are several variations. We might also consider not using terminology like “loophole” and “backdoor” as it implies we’re up to no good. As Employer he can contribute 20% of 40,000K – right? We would like to show you a description here but the site won’t allow us. MF, you never cease to amaze me with how well you find and explain strategies to minimize tax burdens and how to execute a strong plan for financial independence. All employees have this option. Thanks so much for the feedback! In 2013 when I switched companies, I rolled the 401(k) into an IRA and Roth IRA. While she might not be able to do a backdoor Roth, you still might be able to. You should read the comment thread started by 1dirtypanda. Since a solo 401k is technically a different plan (not just a different account). I guess the next step is to read the fine print on the 401k documentation while keeping the fingers crossed. The fees were low and their website actually discussed the Mega Backdoor Roth IRA in detail. You can do a Roth employee contribution into a solo 401(k) (but not if you use your employee contribution at your main job’s 401(k)). 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. Now I have a small 1099 side gig and want to create an i401k. I guess the best we can do via TSP is to max out the tax deferred contribution, then rollover to a traditional IRA upon retirement, and slowly convert over to a roth ira depending on our income and tax bracket at that time. The first account can be rolled over into a traditional IRA without tax implications. Will the Optimized Guinea Pig be able to do this? 3. If so, worth doing? I wouldn’t do it though – instead just add the Roth feature to the 401k plan, and you are good to go. Contribute your $52K to a SEP-IRA like usual. I usually recommend that a self-employed physician use an Individual 401K instead of a SEP-IRA. Possibly, ideal time/month of the year to put the funds? I was trying to front load my contributions for the year and hit the 401(k) deduction limit by mid year. $15,900 is the employee portion and 233% (max allowed) of that or $37,100 is employer contribution for a $53,000 total. I used this method on accident in 2012. See point #2. When you take a distribution from an after-tax 401k account, the portion representing contributions is “after-tax” and the portion representing gains is “pretax,” so you can apply this guidance in the context of a rollover of funds from an after-tax 401k account to allocate the amounts accordingly between a Roth IRA and a traditional IRA. This is a great deal for someone who has limited tax-protected (and asset-protected) accounts but would like to save more for retirement. If your plan allows it, don’t expect your typical customer service rep at your 401k administrator to know anything about it. Then, wait till the end of December and rollover into Roth IRA and pay minimal tax on the conversion. The target for the rollover is a Traditional Ira. A very high-income physician who expects to still be well into the top bracket in retirement (i.e. If I continue to max out a traditional IRA for the tax benefits now and funnel excess into after tax 401K (pre-tax maxed of course) I can then, since my plan administered by Vanguard permits, complete in service withdrawals and roll directly into the Roth IRA also with them? Hi – I am little confused by this article too. Given my low income (60,000$) per annum, whats the optimal order of investment. Could be a good way to crowd-source additional information generated from your post via the comments section. From what I’ve read elsewhere, if you have after-tax gains in your current 401k, they can be rolled into your traditional IRA. Does this also apply to the 401(k) -> Roth IRA conversion? So when you do the conversion, there is nothing to pro-rate since it is all after-tax. Income limits don’t apply. Now If I decide to do a 25K rollover on 01/01/2019 from my 401K: Thanks jexy. I wonder if I should take advantage of this strategy or if the inability for in-service rollovers would result in 1) too much tax on the growth as income at withdrawal and/or 2) too much risk that the Roth rollover would no longer be an option in 5-7 years. Ex. The problem is that in my plan I have a pre-tax 401K (Traditional 401K) and then the after-tax voluntary option. We weren’t able to take advantage of the mega back door roth, although we did have $72,000 of tax deferred/HSA space that knocked our federal tax liability to almost zero on our $150k combined incomes. It’s still an interesting thought experiment for how much one can tweak the rules. My MBR strategy seems to be in jeopardy. # 1 are you doing Roth 401(k) or tax-deferred 401(k) contributions. Would the after-tax to roth conversion within the 401(k) be subject to any tax because of the pro-rate rule? Some of my colleages seem to be using the after tax 401k but I’m not convinced they understand why either. Bottom line on IRAs is they too work collectively for the overarching deferral limits, and most people don’t realize that the IRA is the same IRS code that governs both Traditional and Roth thereby limiting you to the max aggregate deferral between the two types. I have a traditional IRA which I rolled over to Vanguard from a 401k with a previous employer. You can just leave the pre-tax contributions and their gains in the 401k and transfer the after-tax portion to the Roth IRA. I usually recommend that a self-employed physician use an Individual 401K instead of a SEP-IRA. Do you have the ability to make after-tax contributions? My after-tax will be limited to something like $5,000/year due to the 25% limit. Very smooth. Just your Roth? However, his old plan custodian will only do a direct rollover of the pretax and will make a check out to him for the aftertax. Very cool, especially for the average white goat guy or gal who are relatively naive about the business of business and investing. In regards to your second paragraph. (contribution amount is a % of revenue, This works just like the Backdoor Roth IRA, and you need to make sure you do not have any other traditional IRA, SEP-IRA, SIMPLE IRA money as of December 31st of that year. See: http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/basis-recovery-from-employer-plans/, http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/using-new-basis-isolation-rules/. I plan to stay with this employer 5-7 years until FIRE. This isn’t exactly new news – the option has been there for a while, and I’ve used it for a few years now. Exactly what does that apply to? Required fields are marked *. 6th: And assuming anything is left – then what? A commenter above mentioned they just did it. If you have a big bonus check or something around the beginning of the year you might be able to put that in your 401(k) to reduce the number of contributions over the year. you say the pension will cover your expenses, so why would you even consider laddering and possibly increasing your taxable income due to converting assets so soon? Completely max out my 2017 401k: 18k 401k pre-tax + 9k match + 27k mega backdoor Roth … Also my company’s 401(k) plan allows you to roll over the full balance to a Roth IRA with a few clicks on the website, while any of the other strategies would require a phone call and paperwork. Your email address will not be published. Those would be considered excess contributions and the ER will have to determine their corrective actions. One question I have is : I hear that creditors can’t go after a 401k but can go after an IRA. Also, many states have better asset protection for assets inside a 401k compared to an IRA. I already max my own traditional 401k plus megabackdoor and backdoor Roth contributions. Perform AfterTax401k rollover to Roth (401k or IRA, up to you). I was hoping to then use the backdoor option by contributing 6k to a separate traditional IRA and then converting those funds to a Roth IRA immediately. 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