Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Backdoor megaroth: not best option for high income & high savings rate?
Old 04-27-2016, 08:16 AM   #1
Full time employment: Posting here.
 
Join Date: Jun 2012
Posts: 691
Backdoor megaroth: not best option for high income & high savings rate?

General situation: high income, high savings rate, solo 401(k)

Assuming one doesn't expect a massive increase in marginal tax rates at lower incomes down the road, am I correct that in the above situation, the backdoor megaroth really isn't likely to be a good option? One would want to use all of the $53K/year max toward tax-deferred (ie traditional employee + employer contribution solo 401k) contributions. The only exception would be if net income isn't high enough to cover the employer contribution all the way to 53K. Am I right? Missing anything?
someguy is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-27-2016, 08:28 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 2,511
would you define what you mean by "backdoor megaroth".

Also, do you have any existing traditional IRAs that exist and have either tax deferred contributions or investment gains?
bingybear is offline   Reply With Quote
Old 04-27-2016, 09:29 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 17,055
Without knowing your current savings mixture (regular accnts, IRA, ROTH) its pretty hard to answer your question.

Assuming you have lots of savings, then the solo401K Roth could turn out to be a winner.
Sure you pay tax now, but all gains will be tax free later, so if you are not old, then this could be really sweet.

You will run into the tax torpedo when RMD's start if you build up the solo401K IRA to a huge amount.

Calling it Backdoor megaroth is wrong as it's not a Backdoor (that has different ROTH meaning)
Sunset is online now   Reply With Quote
Old 04-27-2016, 09:36 AM   #4
Thinks s/he gets paid by the post
Fedup's Avatar
 
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
I usually do both. I need the immediate deduction for non Roth portion, once I reach that limit I go for the Roth.


Sent from my iPad using Early Retirement Forum
__________________
Just another day in paradise
Fedup is offline   Reply With Quote
Old 04-27-2016, 10:17 AM   #5
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,391
The question for normal IRA or ROTH accounts is...

IS my current marginal tax rate higher than my expected average tax rate when I (eventually) pull money out. If the answer is yes then take the deductible IRA account. If the answer is no then do the ROTH.

It's pretty hard to make a case for a non-deductible ROTH when you are paying high marginal rates now.

The back-door ROTH could be a good deal depending on how long until you pull the money out. Many companies plans though won't let you convert until you are older or are moving assets out of the plan upon retirement etc. Before you convert the back-door ROTH though any gains will go into the regular IRA income taxable account.

Compare that to how non-IRA capital gains taxes are handled. So for example, If you are married, file the standard deduction, and have (taxable) stocks or mutual funds that when liquidated have 50 percent capital gains. Then you could take out around $185k a year and pay no federal income taxes. In that case after tax accounts look pretty good.
MasterBlaster is offline   Reply With Quote
Old 04-27-2016, 01:26 PM   #6
Full time employment: Posting here.
 
Join Date: Jun 2012
Posts: 691
Since we're talking solo 401(k), I control where the plan lives (currently VG) and, within the parameters of what they allow, what plan options are available. I can do traditional deductible 401(k) or Roth 401(k). I also have a tax deferred IRA rolled over from a former employer's 401k.

I should have better defined what I was asking. Let me try again. I currently max out $53K/year each for me and my SO (who also contributes to the business the solo 401k is under). This is all currently tax deferred. A large amount of additional savings goes into a post-tax account at VG.

Given the high-income+high-savings rate scenario, what I'm currently doing seems to make the most sense since that $106K/year reduces my taxable income by that amount at my current high marginal rate. Am I missing anything obvious here? Also, is there anything else I should be doing? Obviously I'm ineligible to do a normal Roth IRA. I imagine I could do a nondeductible IRA contribution and then roll it into a Roth (I think this is a "Regular backdoor roth" in common online terminology) but would run into issues with the existing tax deferred R-IRA. Is it worth the hassle of trying to pull that R-IRA into the Solo 401(k), especially given the relatively tiny percentage the $5,500/year represents?

I imagine the "backdoor megaroth" wouldn't really apply in my case since I could put some of the annual $106K toward a Solo Roth 401(k). And doing that doesn't make sense due to the presumably much lower marginal rate I'll have in retirement vs. now?
someguy is offline   Reply With Quote
Old 04-27-2016, 01:31 PM   #7
Thinks s/he gets paid by the post
Fedup's Avatar
 
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
As long as you don't have a t-IRA. It's a pain tax wise.


Sent from my iPad using Early Retirement Forum
__________________
Just another day in paradise
Fedup is offline   Reply With Quote
Old 04-27-2016, 01:40 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 2,511
I'm not personally familiar with the solo-401k and what is involved with rolling an Traditional IRA into it. I know many employer plans have stipulations as to what can be rolled into their 401ks.
All TIRA in your name are considered the same IRA. Same for your SO. So, if you can roll your TIRA into the 401k... then yes you can do a backdoor roth. If you can't roll the TIRA to the 401k, then you could convert part or all you TIRA to roth and pay the taxes on the pre-tax IRA contributions and earning on a prorated basis. If you contribute to a non-deductible IRA before doing this, it would just change your tax basis.
You note that you will be in a lower tax bracket later (RMD time?) Are you sure?
bingybear is offline   Reply With Quote
Old 04-27-2016, 01:43 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 2,511
Quote:
Originally Posted by Fedup View Post
As long as you don't have a t-IRA. It's a pain tax wise.
Is this much more of a pain than doing roth conversions with T-IRA that have a non-zero tax basis. I did my first of these this year.. TaxAct sorted in nicely. Now if you have not been tracking tax basis over the years, then yes this would be a pain.
bingybear is offline   Reply With Quote
Old 04-27-2016, 02:25 PM   #10
Full time employment: Posting here.
 
Join Date: Jun 2012
Posts: 691
Quote:
Originally Posted by bingybear View Post
You note that you will be in a lower tax bracket later (RMD time?) Are you sure?
If my RMDs end up being anywhere near current AGI I will be a VERY happy camper indeed.
someguy is offline   Reply With Quote
Old 04-27-2016, 02:52 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 17,055
Quote:
Originally Posted by someguy View Post
Since we're talking solo 401(k), I control where the plan lives (currently VG) and, within the parameters of what they allow, what plan options are available. I can do traditional deductible 401(k) or Roth 401(k). I also have a tax deferred IRA rolled over from a former employer's 401k.

.... This is all currently tax deferred. A large amount of additional savings goes into a post-tax account at VG.

.... Is it worth the hassle of trying to pull that R-IRA into the Solo 401(k), ...

I imagine the "backdoor megaroth" wouldn't really apply in my case since I could put some of the annual $106K toward a Solo Roth 401(k). And doing that doesn't make sense due to the presumably much lower marginal rate I'll have in retirement vs. now?
You can do both Roth and IRA in the solo401K per person per year.

I don't believe VG allows rollovers into the solo401K - correct me if I'm wrong as I'd love to do that.
Sunset is online now   Reply With Quote
Old 04-27-2016, 02:54 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 17,055
Quote:
Originally Posted by someguy View Post
If my RMDs end up being anywhere near current AGI I will be a VERY happy camper indeed.
Of course, but the issue is, will your RMD's push you into a tax bracket as high as you currently have, considering you are also saving a ton of $$$ in regular accounts (which probably throw off dividends).
Sunset is online now   Reply With Quote
Old 04-27-2016, 02:57 PM   #13
Full time employment: Posting here.
 
Join Date: Jun 2012
Posts: 691
Quote:
Originally Posted by Sunset View Post
You can do both Roth and IRA in the solo401K per person per year.

I don't believe VG allows rollovers into the solo401K - correct me if I'm wrong as I'd love to do that.
Right, but given my circumstances I don't see why I would want to do roth contributions since I'm 99% sure those also count toward the $53K/pp/year.

I plan to call VG and attempt that in the relatively near future. Will report on results.
someguy is offline   Reply With Quote
Old 04-27-2016, 03:08 PM   #14
Full time employment: Posting here.
 
Join Date: Jun 2012
Posts: 691
Quote:
Originally Posted by Sunset View Post
Of course, but the issue is, will your RMD's push you into a tax bracket as high as you currently have, considering you are also saving a ton of $$$ in regular accounts (which probably throw off dividends).
If my marginal rate now is the top bracket, isn't your point moot (assuming the top bracket doesn't go to Bernie Sanders type levels )? IOW, isn't the worst case scenario at 70+ that RMDs+divs push me into the top bracket making the tax a wash? If the RMDs+divs put my marginal at even one or two brackets down, then I'm coming out ahead by doing all pre-tax now, no?

Stepping back for a moment, my general plan is that I would stop working long before my pre-tax plus post-tax accounts got to the point we're talking about above.
someguy is offline   Reply With Quote
Old 04-27-2016, 03:10 PM   #15
Recycles dryer sheets
Islandtraveler's Avatar
 
Join Date: Apr 2012
Location: Long Island
Posts: 141
My situation was similar. I had been contributing to a SEP IRA until 2016 as I ER this past August. Converting to a Roth made no sense to me being in a high tax bracket during my working years. Now that I am retired, I am living off of interest and dividends in a taxable account which puts me in a lower bracket. My plan is to put 125k into a QLAC which will defer part of the RMDs until God willing, I turn 80. In the mean time, I plan on drawing the maximum amount out of my SEP once I reach 59 ½ up to the maximum amount in the lower bracket. This will also give the taxable account time to hopefully grow.
Islandtraveler is offline   Reply With Quote
Old 04-27-2016, 03:16 PM   #16
Thinks s/he gets paid by the post
Fedup's Avatar
 
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
Quote:
Originally Posted by bingybear View Post
Is this much more of a pain than doing roth conversions with T-IRA that have a non-zero tax basis. I did my first of these this year.. TaxAct sorted in nicely. Now if you have not been tracking tax basis over the years, then yes this would be a pain.

I keep track of all my Roth and non deductible Roth. The pain is the ratio of non deductible to tIRA. So I decided to move to my 401k at work. Big relief. But do Google from the IRS on what to do. I figured, it's not worth my effort.


Sent from my iPad using Early Retirement Forum
__________________
Just another day in paradise
Fedup is offline   Reply With Quote
Old 04-27-2016, 03:24 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Nov 2013
Posts: 1,041
Quote:
Originally Posted by someguy View Post
Right, but given my circumstances I don't see why I would want to do roth contributions since I'm 99% sure those also count toward the $53K/pp/year.



I plan to call VG and attempt that in the relatively near future. Will report on results.

Yes, Roth or after tax 401k also count towards the $53k maximums
NgineER is offline   Reply With Quote
Old 04-27-2016, 11:42 PM   #18
Recycles dryer sheets
thefinancebuff's Avatar
 
Join Date: Dec 2008
Posts: 299
Quote:
Originally Posted by someguy View Post
One would want to use all of the $53K/year max toward tax-deferred (ie traditional employee + employer contribution solo 401k) contributions. The only exception would be if net income isn't high enough to cover the employer contribution all the way to 53K. Am I right? Missing anything?
Not missing anything. It's a great option for people who aren't able to hit $53k otherwise with just $18k plus employer contribution (self-employed at lower income or working for an employer who doesn't contribute $35k no matter how high their income is).
thefinancebuff is offline   Reply With Quote
Old 04-29-2016, 10:25 AM   #19
Recycles dryer sheets
 
Join Date: Nov 2011
Posts: 183
DW and I always made after-tax contributions to our 401Ks once we hit the pre-tax limit. Leaving these contributions in the 401K would subject future earnings/growth to ordinary income tax rates. So after ER, we did the mega backdoor Roth conversion, rolling these after-tax contributions to Roth IRAs. Future earnings/growth on these balances will now be tax-free forever, with no RMDs. If this was "not the best option", what would be the best option?
523HRR is offline   Reply With Quote
Old 04-29-2016, 10:44 AM   #20
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 2,511
Quote:
Originally Posted by 523HRR View Post
DW and I always made after-tax contributions to our 401Ks once we hit the pre-tax limit. Leaving these contributions in the 401K would subject future earnings/growth to ordinary income tax rates. So after ER, we did the mega backdoor Roth conversion, rolling these after-tax contributions to Roth IRAs. Future earnings/growth on these balances will now be tax-free forever, with no RMDs. If this was "not the best option", what would be the best option?
We had done after tax 401k contributions like you. However, when we moved employers over a decade ago one could move just the after tax contributions to a roth. So we now have IRAs with a fair amount of after tax contributions at this point. Now of days that law change is quite useful. Unfortunately where we are is less nice as backdoor roths were not really doable as the IRAs had quite a bit of earnings and pretax contributions... thus a backdoor roth is more like a roth conversion... not just moving $ you were paying tax anyway.
bingybear is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Can I do both Backdoor Roth IRA and Mega Backdoor Roth IRA? growerVon FIRE and Money 8 07-30-2015 01:04 AM
Noticed more people holding signs "need work or food" rayinpenn Other topics 3 05-03-2015 02:51 PM
Best Option for Children's Savings cscott711 Other topics 12 01-01-2012 02:20 PM
Why ER May Not Be Your Best Option Onward Other topics 31 02-15-2011 10:08 PM
Suggestion: Detailed data for 95% rule option and Bernicke option. Sam FIRECalc support 2 03-25-2007 07:16 AM

» Quick Links

 
All times are GMT -6. The time now is 12:04 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.