Thursday, January 16, 2014

Backdoor Roth, Over contribution to Roth and After tax 401k

Over at Bogleheads we read: Back Door Roth + After Tax 401Kby panther2014 » Tue Jan

14, 2014 3:16 pm

hello all,
I have a couple of questions about the Backdoor Roth, Over contribution to Roth and After tax 401k. Hopefully, you guys will be able to help me out on this.

1. BackDoor Roth – This year me and my spouse maybe (depends if my spouse gets a high paying job) over the limit for contributing directly to Roth hence wanted to try the back door roth. For this, I have opened Traditional IRA with Fidelity and funded with $5500 each. The money is currently in cash. Can I just do a “cash” transfer to Roth IRA from this tIRA account or do I have to buy index funds and then transfer the shares of the index funds to the Roth IRA.
1a. Suppose if my spouse did not find a high paying job then I will be in below the limit and can contribute to ROTH IRA directly, is there any penalty for using back door roth conversion ? My spouse will only change job mid-year and I want to contribute to our roths asap.

2. Last year, we were in the phase-out of contributing directly to roth IRA which I did not know until Dec 2013. I contributed to our 2013 Roth in January of 2013 for $5500 each. So looks like we will have to adjust our contributions. I checked the limits and for each $1000 in extra income, we lose $550 worth of Roth contribution. Does this $550 apply to both spouse or just one ?

3. My work offers an after tax 401K (not roth) and I could contribute upto $10000 to it per year. I was thinking of fully contributing it,and then doing a conversion to Roth. Is that allowed since I will have already contributed 5500 to roth this year as per point 1 above.

Thanks in advance.

Panther
Posts: 4
Joined: 14 Jan 2014

Re: Back Door Roth + After Tax 401Kby Raladic » Tue Jan 14, 

2014 5:49 pm

Hi.

1) Neither, you click "Select Action" and "Convert to a ROTH IRA" on the Portfolio screen on Fidelity.
There is no penalty for using the backdoor contribution.

2) Assuming you're filing jointly, it applies to both.

3) 401k and ROTH IRA are separate things, so you can contribute to your 401k as well as to your ROTH IRA.
As for the conversion - does your employer allow in plan rollovers? Otherwise you can't roll over your 401k until you leave your employer.
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Joined: 3 Jan 2014

Re: Back Door Roth + After Tax 401Kby panther2014 » Tue 

Jan 14, 2014 8:32 pm

Thanks for your reply.
Posts: 4
Joined: 14 Jan 2014

Re: Back Door Roth + After Tax 401Kby Alan S. » Tue Jan 14, 

2014 11:15 pm

Most plans that allow after tax employee contributions allow in service distributions. If so, you can convert the contributions and their earnings periodically before the earnings build up. Check with your plan for your in service options. It generally would be better to roll over the after tax sub account to your Roth IRA rather than doing an in plan Roth rollover. That is, unless you need the ERISA protection.
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Re: Back Door Roth + After Tax 401Kby panther2014 » Wed

Jan 15, 2014 4:06 pm

Yes, I checked with my after-tax 401k provider and they mentioned that I could rollover to a ROTH. I do not think ERISA is applicable to me. So to summarize, this is what I will be doing

1. Backdoor roth $11000 (myself + spouse)
2. Pre-tax 401K $35000 (Myself + Spouse) + 10K company match
2. Contributing 10K to my after-tax 401 and immediately rolling over to roth. So I could contribute 10 + 5.5 = 15.5K to Roth.

Makes sense ?

~Panther
Posts: 4
Joined: 14 Jan 2014

Re: Back Door Roth + After Tax 401Kby Drage13 » Wed Jan 

15, 2014 4:21 pm

Makes perfect sense.

Does your plan specifically limit your after-tax contributions to $10,000 annually? The IRS allows you to contribute more than that, so it seems odd to me that a plan's rules would choose to be more restrictive there, but they certainly have the right to. If, by chance, that was incorrect information and you can contribute more to the after-tax portion, I would consider maxing that out, even to the point of possibly reducing pretax contributions, once you're put in what you need to for the match.
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Joined: 9 Jan 2014

Re: Back Door Roth + After Tax 401Kby panther2014 » Wed

Jan 15, 2014 4:24 pm

yes I double checked and confirmed that there is a limit of $10k annually.
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Joined: 14 Jan 2014

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