Can I do both Backdoor Roth IRA and Mega Backdoor Roth IRA?

[growerVon]

Is there a shared cap, limit or other mutual exclusivity between doing both a "traditional" backdoor Roth IRA and also a "mega" backdoor Roth IRA in the same year?

DW and I are earned-out of normal "front door" Roth IRA contributions and plan to do after-tax (non-qualified, is that the term?) IRA contributions this year and then do a rollover conversion into a Roth IRA. This is the "traditional" backdoor Roth IRA and the annual max defined by the IRS is $5500/year for 2015.

At the same time, my megacorp's 401k allows after-tax non-Roth contributions as well as in-service distributions of those after-tax non-Roth contributions. I can then do a rollover conversion of those after-tax non-Roth contributions into a Roth IRA. This is referred to as a "mega" backdoor Roth IRA because the 401k plan max, for me, is $20k/year.

Can I do both, resulting in a max possible amount of $25.5k into a Roth IRA? Do I have any of my assumptions above incorrect, or are there other gotchas you see? Thanks for your help!

 

[gauss]

• There are cumulative yearly limits on all of your 401k new contributions.
• There are cumulative yearly limits on all of your IRA contributions.
• There generally are not limits on rollovers.

At a quick glance your strategy looks good to me.

You may wish to limit the size of your strategy in the first year (say $1,000) just in case there is something that you didn't catch or execute properly.

-gauss

 

[thefinancebuff]

Can I do both, resulting in a max possible amount of $25.5k into a Roth IRA?

You can do both.

 

[growerVon]

Thanks for the confirmations, both. Also appreciate the suggestion to execute on a smaller initial amount the first go-around/tax year.

 

[gauss]

Great - glad we could help you out.

 

[growerVon]

I have a tax-related question about this scenario. For a normal "backdoor" Roth IRA, the tax burden in the conversion is calculated including all IRA funds, pre- and post-tax. This can be a real deal-killer or a very unpleasant surprise if one has a large amount of tIRA funds that haven't had tax paid on them yet. A strategy I've read to get around this is to "clear the deck" first of sizable pre-tax tIRA monies by rolling them into a 401k or other receptacle, or just bite the bullet and pay the tax on them to convert to Roth. Do this ahead of starting into backdoor Roth IRAs and the specific tIRA to Roth IRA conversion will generally avoid the large tax burden because the pre-tax tIRA money has already been "taken care of" and all that remains as taxable are the gains that may have earned between the post-tax contribution & the time when the rollover conversion is executed. Do I have that right?

My second question is, when doing the after-tax non-Roth 401k rollover conversions into Roth IRA, does the same breadth of IRA monies get included when determining the tax due? Or is it isolated from the IRA money because it is a 401k rollover conversion into IRA?

Thanks!

 

[kaneohe]

....................................... Do this ahead of starting into backdoor Roth IRAs and the specific tIRA to Roth IRA conversion will generally avoid the large tax burden because the pre-tax tIRA money has already been "taken care of" and all that remains as taxable are the gains that may have earned between the post-tax contribution & the time when the rollover conversion is executed. Do I have that right?

My second question is, when doing the after-tax non-Roth 401k rollover conversions into Roth IRA, does the same breadth of IRA monies get included when determining the tax due? Or is it isolated from the IRA money because it is a 401k rollover conversion into IRA?

Thanks!

gV.......I think you have the IRA part correct.

This article may be useful..........Isolating Basis for a Roth Conversion - Fairmark.com Fairmark.com
The article notes that IRAs are not affected by the 401K moves.

 

[NgineER]

The after tax portion is after tax... So taxes already paid. When I roll it over to a Roth IRA, I am given the choice to roll over the after tax contributions only or more than that, but with taxes taken out for the pre tax portion.

 

[growerVon]

Thanks for the replies and the Fairmark link! This is my first year doing these maneuvers