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Confused about back door Roth from 401K
Old 02-13-2012, 09:57 PM   #1
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Confused about back door Roth from 401K

Currently I have no IRA's. I had never heard about a back door Roth using after-tax monies from a 401K until researching IRA's this last weekend.

My plan does allow in-service rollovers with after tax contributions. However, my after-tax contributions are limited to 5% of eligible compensation which would be $3,600.

Since the whole point (correct me if I'm wrong) of a back door Roth from after-tax 401K is to circumvent the (in my case) $5,000 limit am I correct to assume I could back door this $3,600 into a Roth IRA and still contribute another $5,000?

TIA, Liz
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Old 02-13-2012, 10:08 PM   #2
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Quote:
Originally Posted by tinlizzy View Post
Since the whole point (correct me if I'm wrong) of a back door Roth from after-tax 401K is to circumvent the (in my case) $5,000 limit am I correct to assume I could back door this $3,600 into a Roth IRA and still contribute another $5,000?
Yes, that's correct. One has nothing to do with the other. Note the small amount of earnings that $3,600 generates before you do the in-service withdrawal will still be taxable, although it'll be negligible.
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Old 02-13-2012, 11:02 PM   #3
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Yes it works. I did this the last few years. In my case I did it not only to circumvent the $5K limit on a Roth IRA, I also did it to circumvent the (then) $16,500 limit on 401K contributions. The $16,500 (now $17K) limit applies to before-tax + Roth 401k contributions. The limit for before tax + Roth + after tax + employer match 401K contributions is now $50K.

Of course those are federal limits - every 401K can have additional rules.
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Old 02-14-2012, 05:46 AM   #4
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One more thing to think about, there are limits to total contributions if you are considered highly compensated. I don't remember all the rules, but I hit this when I worked for a small company where many didn't contribute.
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Old 02-14-2012, 06:43 AM   #5
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Thank you everyone for the answers!


Quote:
Originally Posted by Aeowyn View Post
Yes it works. I did this the last few years. In my case I did it not only to circumvent the $5K limit on a Roth IRA, I also did it to circumvent the (then) $16,500 limit on 401K contributions. The $16,500 (now $17K) limit applies to before-tax + Roth 401k contributions. The limit for before tax + Roth + after tax + employer match 401K contributions is now $50K.

Of course those are federal limits - every 401K can have additional rules.
You touched on my next question. I did read about the 49K figure (imposed by the IRS) and that individual plans have limits of their own (5% for mine). So I could assume that people rolling over large amounts 1) have no limits imposed by their 401K or 2) have limits but their earnings are high so that the % in dollars is high or 3) does the roll over occur every time a person hits the after-tax limit imposed by the 401K up to the 49K?

I'll be happy squirreling away an extra $3,600 but I'm wondering if a plan's after-tax limit is reset to zero when the roll over occurs. I realize that you can't answer specifically for my 401K plan but is this one of the scenarios for contributing up to the 49K? In other words, is this a way around plan limits?

I hope that made sense. Liz
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Old 02-14-2012, 07:26 AM   #6
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This is just a guess on my part. I'm thinking your 401k doesn't really want you to contribute after tax $. Does your company have a matching program on up to you putting in 5% of your pay?

If so, then the intention of the 5% limit on after-tax contributions is probably intended for those that have met the $17K limit (or smaller limit if considered highly compensated) of before-tax contributions and wants to continue to make enough contributions to receive the full match.

I doubt that rolling out any of your contributions will have any effect on the 5% limit. I also imagine it is determined per paycheck and not annually. In other words, you probably can't wait until the last month of the year and put the whole $3600 (5% of annual pay) in - you would be limited to 5% of that months pay.
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Old 02-14-2012, 07:40 AM   #7
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One more thing to consider if you are trying to max out Roth contributions and don't mind "paying the tax now". There is no federal restriction on rolling out a company match from a 401k. So if you have a company match that you are vested in and your company allows you to roll it out - then you can roll that to a Roth IRA. No penalty but it will count toward taxable income for the year you do the roll over.

I've done this too.
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Old 02-14-2012, 08:47 AM   #8
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Quote:
Originally Posted by tinlizzy View Post
I'll be happy squirreling away an extra $3,600 but I'm wondering if a plan's after-tax limit is reset to zero when the roll over occurs. I realize that you can't answer specifically for my 401K plan but is this one of the scenarios for contributing up to the 49K? In other words, is this a way around plan limits?
No.
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Old 02-14-2012, 02:55 PM   #9
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Quote:
Originally Posted by Aeowyn View Post
This is just a guess on my part. I'm thinking your 401k doesn't really want you to contribute after tax $. Does your company have a matching program on up to you putting in 5% of your pay?

If so, then the intention of the 5% limit on after-tax contributions is probably intended for those that have met the $17K limit (or smaller limit if considered highly compensated) of before-tax contributions and wants to continue to make enough contributions to receive the full match.

I doubt that rolling out any of your contributions will have any effect on the 5% limit. I also imagine it is determined per paycheck and not annually. In other words, you probably can't wait until the last month of the year and put the whole $3600 (5% of annual pay) in - you would be limited to 5% of that months pay.
This is a 401K plan offered to hourly (union) employees. No match for anyone involved in this plan that I'm aware of. Salaried/mgmt have a completely different 401K plan. I have no clue why then they allow this 5%.

I'm in the 15% tax bracket filing head of household now but for a few years, before retirement and after retirement it will be 25 or 28%.

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Originally Posted by thefinancebuff View Post
No.
Thank you.

Can the money go directly into a Roth or does it have to go thru a tIRA first?

The 401K plan now offers a Roth401K also. I need to figure out which 401K is best for me also.
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Old 02-14-2012, 05:23 PM   #10
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Can the money go directly into a Roth or does it have to go thru a tIRA first?

The 401K plan now offers a Roth401K also. I need to figure out which 401K is best for me also.
Go directly. The after-tax portion does not take away the limit on pre-tax or Roth 401k. If you are not maxing out either pre-tax or Roth 401k, you should probably just increase the pre-tax amount or the Roth 401k amount.
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Old 02-14-2012, 09:47 PM   #11
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If it works out, use the traditional 401k to keep yourself in the 15% bracket just before retirement. Probably not too bad to contribute to the Roth 401k now as long as you can remain in the 15% bracket.
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