Roth Contribution Flowchart Diagram

[sengsational]

It seems as if the topic of "how much can I contribute to a Roth" comes-up here every so often, I thought I'd post this diagram. I think they have an extra zero in one of the figures, but otherwise it looks as I expected.

 

[aja8888]

Thanks, so people over 70 1/2 years of age can contribute to a Roth if they have qualifying income?

 

[hnzw_rui]

Thanks, so people over 70 1/2 years of age can contribute to a Roth if they have qualifying income?

As long as the person or spouse has earned income, then yes.

 

[growerVon]

Thanks, Seng. There is also the "Mega Backdoor Roth IRA" route that this flowchart doesn't include: after-tax, non-Roth 401k contributions that can be in-service withdrawn and rolled into a Roth IRA. Requires a 401k plan that has these features.

 

[hnzw_rui]

Thanks, Seng. There is also the "Mega Backdoor Roth IRA" route that this flowchart doesn't include: after-tax, non-Roth 401k contributions that can be in-service withdrawn and rolled into a Roth IRA. Requires a 401k plan that has these features.

Question, if your plan offers it, wouldn't a rollover from a Roth 401k make more sense? Iirc, if you have both pre-tax and after tax dollars in your regular 401k, I think the amount you wish to rollover gets pro-rated between your pre-tax and after tax dollars. Roth 401k gets treated as a separate account so you can rollover just after tax dollars (and earnings).

Also, money rolled over from Roth 401k gets treated the same as Roth IRA rollover just without carry over of account age for 5-year vesting in case the Roth 401k is older than the Roth IRA. On the flip side, if you've had the Roth IRA for 6 years and the Roth 401k for just 1 year, the 6 years you've had the Roth IRA satisfies the 5-year requirement for distribution on rolled over Roth 401k funds.

 

[growerVon]

Question, if your plan offers it, wouldn't a rollover from a Roth 401k make more sense? Iirc, if you have both pre-tax and after tax dollars in your regular 401k, I think the amount you wish to rollover gets pro-rated between your pre-tax and after tax dollars. Roth 401k gets treated as a separate account so you can rollover just after tax dollars (and earnings).

Also, money rolled over from Roth 401k gets treated the same as Roth IRA rollover just without carry over of account age for 5-year vesting in case the Roth 401k is older than the Roth IRA. On the flip side, if you've had the Roth IRA for 6 years and the Roth 401k for just 1 year, the 6 years you've had the Roth IRA satisfies the 5-year requirement for distribution on rolled over Roth 401k funds.

My megacorp's 401k plan allows in-service distributions only from the post-tax, non-Roth portion and isolates basis to that sub-account; it also does not allow in-service distributions from the pre-tax & Roth 401k portions. From what I've read, this is a common configuration for plans that have these features. For me, since the 401k plan's funds are good but not great, going the 401k after-tax > Roth IRA route lets me gain some fund diversification that wouldn't be advantageous to hold in my taxable Vanguard account.

 

[hnzw_rui]

My megacorp's 401k plan allows in-service distributions only from the post-tax, non-Roth portion and isolates basis to that sub-account; it also does not allow in-service distributions from the pre-tax & Roth 401k portions. From what I've read, this is a common configuration for plans that have these features. For me, since the 401k plan's funds are good but not great, going the 401k after-tax > Roth IRA route lets me gain some fund diversification that wouldn't be advantageous to hold in my taxable Vanguard account.

Gotcha. We have a 457b plan and we're allowed to do in service distributions from both regular 457b and Roth. I don't think contributing post-tax income to the regular 457b was ever an option.

Alas, I think I might move funds out of the 457b into rollover IRAs. Our fund choices used to be pretty good. We used to be able to choose between passive/index and active funds and some of the passive options were Vanguard Institutional Plus funds with 0.02 ER. Now, the board has decided to simplify the funds into just one option per category (Bond, Large-Cap, Mid-Cap, Small-Cap, International) that's a mix of passive and active funds. Large-cap is still solely VIIIX so I'm gonna keep that but will probably roll over the rest to Vanguard or look into the self-directed brokerage option.

 

[karen1972]

yeh, wonder if they will ever close the back door method, its been around since 2010...if they are going to leave it in, then just get rid of the cap in the first place... I mean you can only put in $5500 anyway so really why have an income cap. btw, ironically I realized by quitting my job this year, I became eligible for the ROTH in the normal non-back door way for the first time in like 12 years. Nice not having to play the games and worry about making sure I meet all the IRA rules.

 

[Rothman]

One caution the chart does not tell the complete story on back door method even if you put the $5,500 or $6,500 (age qualified) in an empty traditional IRA account using all after tax money when you convert the tax is based on prorated pretax portion of all the traditional accounts in your name. This means the after tax you just put in is averaged over all the pre-tax and earnings of other accounts. If you are in the situation of a traditional IRA with pre-tax money and are still working you can transfer all of it to the work 401k leaving just the after tax money in the traditional IRA and then do a tax free conversion to a Roth IRA. Did I mention I like Roths, the superhero of retirement choices.


Sent from my iPad using Early Retirement Forum

 

[jebmke]

fixed it for you. Not all 40(k) plans allow rollovers from IRAs.

If you are in the situation of a traditional IRA with pre-tax money and are still working you [-]can[/-] may be able to transfer all of it to the work 401k leaving just the after tax money in the traditional IRA and then do a tax free conversion to a Roth IRA.


Sent from my iPad using Early Retirement Forum

 

[karen1972]

My understanding was that as long as I only had a 401k, then I was ok doing the backdoor method without tax issues.. ie so I only used a traditional IRA for this backdoor purpose. Then you only have to worry about if you "make" money from the time you put it in the traditional IRA and the time you move it to the ROTH.. which I didn't and moved it all for free. Now I'm not working so rolled all my 401k money to an IRA since the 401k had terrible options and terrible fees and now have no idea how to do the tax calculations, so have not bothered.

 

[MooreBonds]

One caution the chart does not tell the complete story on back door method even if you put the $5,500 or $6,500 (age qualified) in an empty traditional IRA account using all after tax money when you convert the tax is based on prorated pretax portion of all the traditional accounts in your name. This means the after tax you just put in is averaged over all the pre-tax and earnings of other accounts.

This is a point that I too often don't see highlighted in forums like Bogleheads and the ER Forum (or even financial 'articles'....although we all know the value of those whenever people mention doing a backdoor ROTH. Given that there are probably more people than usual who might have a number of retirement account-types (for self-employed work or various business ventures), the odds that they might have other accounts that they have to pro-rate their after-tax balances are higher than the population as a whole. And if you have any accounts that require you to pro-rate the amount, the value of doing a backdoor ROTH dwindles quickly.

 

[growerVon]

Gotcha. We have a 457b plan and we're allowed to do in service distributions from both regular 457b and Roth. I don't think contributing post-tax income to the regular 457b was ever an option.

Alas, I think I might move funds out of the 457b into rollover IRAs. Our fund choices used to be pretty good. We used to be able to choose between passive/index and active funds and some of the passive options were Vanguard Institutional Plus funds with 0.02 ER. Now, the board has decided to simplify the funds into just one option per category (Bond, Large-Cap, Mid-Cap, Small-Cap, International) that's a mix of passive and active funds. Large-cap is still solely VIIIX so I'm gonna keep that but will probably roll over the rest to Vanguard or look into the self-directed brokerage option.

hnzw_rui, I am also in that institutional VIIIX with the 0.02% ER - love it! When I warn coworkers about the front-load + high ER predatory funds in our megacorps' HSA fund selection, I love bringing up VIIIX as a rock-bottom contrast. Your 457b plan's in-service distributions of all contribution types is pretty generous.

 

[growerVon]

This is a point that I too often don't see highlighted in forums like Bogleheads and the ER Forum (or even financial 'articles'....although we all know the value of those whenever people mention doing a backdoor ROTH. Given that there are probably more people than usual who might have a number of retirement account-types (for self-employed work or various business ventures), the odds that they might have other accounts that they have to pro-rate their after-tax balances are higher than the population as a whole. And if you have any accounts that require you to pro-rate the amount, the value of doing a backdoor ROTH dwindles quickly.

Agreed and great cautionary points, Rothman & MooreBonds. Seems like a good reason to keep sheltered - or get-sheltered - the pre-tax funds in an employer-sponsored plan prior to any Roth conversion, and reason to sequence the rollovers to accomplish the post-tax into a Roth first when rolling out of an employer-sponsored plan.

 

[hnzw_rui]

hnzw_rui, I am also in that institutional VIIIX with the 0.02% ER - love it! When I warn coworkers about the front-load + high ER predatory funds in our megacorps' HSA fund selection, I love bringing up VIIIX as a rock-bottom contrast. Your 457b plan's in-service distributions of all contribution types is pretty generous.

Guess we're lucky to have the in-service distribution options then.

We used to have two Vanguard Institutional Plus options in the plan - Large-Cap and Mid-Cap both with 0.02% ER, iirc. However, the plan recently combined the Mid-Cap Index with actively managed Mid-Cap Growth and Mid-Cap Value funds in a 50/25/25 ratio. VMGRX and VASVX were both under consideration but from what I can tell, the funds that eventually got chosen had hefty fees (couldn't really find a lot of info). I think one of them even had a 0.8% management fee and 0.8% ER. I think the administrator is still implementing the changes, though. I pretty much never check my account. I just happened to be doing my yearly rebalancing and updating contributions and was shocked to find a lot of the ERs went up.

 

[sengsational]

The the link to image in the OP was changed. I was advised that it's better to link to the article, and not to an embedded image:
http://www.marottaonmoney.com/can-i-...to-a-roth-ira/
I think the reason the image URL changed was because they fixed one of the values (was 1,310,000 and they meant 131,000).

 

[Dog]

Thanks for reposting Sengsational. What this flowchart says to me is how ridiculous the system is. No wonder some people shrug, say screw it and spend their $ instead.