The 10 year Plan

[gauss]

Really, can you elaborate a bit more? I think any excess contribuitions are treated like a normal IRA, but I can check on that. Im assuming thats the gist of this. Are there any limits to this?

Kevin;

My 401(k) administrator is Fidelity. I can send you a copy of the plan document via PM if you like.

IRS limits pretax contributions to about $16.5k per year or so (in 2011).
There is a second IRS limit, that's discussed less, on total contributions (including pretax, after tax, employer match etc) that is around $49k per year. I believe it is referred to as the section 415 limit on Defined Contribution plans.

Our plan allows us to send up to 50% of salary to the 401(k).

I have been doing all pretax contributions for most of my career so, since 2010, I started doing all After Tax and then saving the max of 50% but being sure not to exceed the $49,000 per year limit.

The plan also also allows in-service withdrawals (ie you don't have to quit your job to take $ out of your 401(k))

I make a withdrawal once or twice a year and then roll the money over to my traditional IRA.

Once the money is in my traditional IRA, I do a Roth conversion with the same IRA custodian (Vanguard).

When tax time rolls around, I get 2 1099-R's one from Fidelity for my 401(k) withdrawal/rollover and one from Vanguard for the IRA Roth conversion. At this point, the only tax that is due is on the growth of the principal between the time it was invested in the 401(k) and the time the Roth conversion is executed.


If your plan allows this and you are interested in looking into it further, there is one BIG issue that you need to be aware of. In general when you make these withdrawals, the withdrawals may be considered pro-rated between your Pre-Tax contributions and your After-Tax contributions. You don't want to find this out after the fact when you are doing your taxes!

The trick is to make sure that you isolate your basis. Do a Google search on "isolating the basis" and "'Roth conversions" to get the details/requirements to sequence these transactions the first year to do this properly. You might want to work with a financial professional who is fluent in this technique. (I did a lot of homework the first year before I did this myself back in 2009 before the income limits were lifted for Roth conversions in 2010 -- more homework than most are probably willing to do)

On the other hand, if you wanted to do a Roth conversion of all your Pre-tax contributions and pay the appropriate tax (probably on the order of $100k in your case) , then this would not be an issue.

 

[Steel Rain]

My 401(k) administrator is Fidelity. I can send you a copy of the plan document via PM if you like.

IRS limits pretax contributions to about $16.5k per year or so (in 2011).
There is a second IRS limit, that's discussed less, on total contributions (including pretax, after tax, employer match etc) that is around $49k per year. I believe it is referred to as the section 415 limit on Defined Contribution plans.

Our plan allows us to send up to 50% of salary to the 401(k).

I have been doing all pretax contributions for most of my career so, since 2010, I started doing all After Tax and then saving the max of 50% but being sure not to exceed the $49,000 per year limit.

The plan also also allows in-service withdrawals (ie you don't have to quit your job to take $ out of your 401(k))

I make a withdrawal once or twice a year and then roll the money over to my traditional IRA.

Once the money is in my traditional IRA, I do a Roth conversion with the same IRA custodian (Vanguard).

When tax time rolls around, I get 2 1099-R's one from Fidelity for my 401(k) withdrawal/rollover and one from Vanguard for the IRA Roth conversion. At this point, the only tax that is due is on the growth of the principal between the time it was invested in the 401(k) and the time the Roth conversion is executed.


If your plan allows this and you are interested in looking into it further, there is one BIG issue that you need to be aware of. In general when you make these withdrawals, the withdrawals may be considered pro-rated between your Pre-Tax contributions and your After-Tax contributions. You don't want to find this out after the fact when you are doing your taxes!

The trick is to make sure that you isolate your basis. Do a Google search on "isolating the basis" and "'Roth conversions" to get the details/requirements to sequence these transactions the first year to do this properly. You might want to work with a financial professional who is fluent in this technique. (I did a lot of homework the first year before I did this myself back in 2009 before the income limits were lifted for Roth conversions in 2010 -- more homework than most are probably willing to do)

On the other hand, if you wanted to do a Roth conversion of all your Pre-tax contributions and pay the appropriate tax (probably on the order of $100k in your case) , then this would not be an issue.

Wow, this is awsome informaion Gauss. I really appreciate it. I need to talk to the plan administrator and see about this. Nothing on our website that is clear about this. This place is a boon of information

Stell

 

[Finance Dave]

gauss, when you put the $49k into an IRA, is it a non-deductible IRA?

If so, why not go straight there with it rather than going into the after-tax portion of your 401k first?

I'm confused.

 

[gauss]

gauss, when you put the $49k into an IRA, is it a non-deductible IRA?

If so, why not go straight there with it rather than going into the after-tax portion of your 401k first?

I'm confused.

The $ ends up in a Roth IRA as opposed to a taxable account --> no taxes on future growth under current tax law in the Roth IRA.

Also, this technique allows up to $49,000 of new money to get into the Roth IRA each year as opposed to the normal $5000 limit for new contributions.

If you can structure the transactions so that you can isolate the basis, you end up continuing to defer the taxes on the taxable portion, and just move the after tax portion to the Roth IRA, but this is the tricky part.

Lots of discussions/analysis of this over at fairmark.com. See strategy 3 and strategy 4 at this post.

I also found the online "withdrawal modeler" that was available at my 401(k) plans' site useful to confirm how my withdrawal would be treated (ie how the distribution will be allocated between pre-tax and after-tax dollars) before I executed it. DW's plan had a similar tool available.

You might also want to do just a small amount the first year and then file the taxes the following April to confirm that everything goes as expected.

 

[Animorph]

Can't make after-tax contributions or in-service withdrawals in DW's 401k, so I guess that simplifies things for me.

 

[gauss]

Can't make after-tax contributions or in-service withdrawals in DW's 401k, so I guess that simplifies things for me.

I had always wondered, if our 401k plans became more restrictive, if I could accomplish the same goal by opening up a 'Solo 401(k)' designed for very small business owners.

 

[Animorph]

I had always wondered, if our 401k plans became more restrictive, if I could accomplish the same goal by opening up a 'Solo 401(k)' designed for very small business owners.

I do have a Solo 401k (with E*Trade), and I can select many of the options. Not sure I have the ability to contribute after-tax money, but pretty sure I have in-service rollovers. However, DW is working and I'm not, so it's not doing me any good.

 

[Finance Dave]

The $ ends up in a Roth IRA as opposed to a taxable account --> no taxes on future growth under current tax law in the Roth IRA.

Also, this technique allows up to $49,000 of new money to get into the Roth IRA each year as opposed to the normal $5000 limit for new contributions.

If you can structure the transactions so that you can isolate the basis, you end up continuing to defer the taxes on the taxable portion, and just move the after tax portion to the Roth IRA, but this is the tricky part.

Lots of discussions/analysis of this over at fairmark.com. See strategy 3 and strategy 4 at this post.

I also found the online "withdrawal modeler" that was available at my 401(k) plans' site useful to confirm how my withdrawal would be treated (ie how the distribution will be allocated between pre-tax and after-tax dollars) before I executed it. DW's plan had a similar tool available.

You might also want to do just a small amount the first year and then file the taxes the following April to confirm that everything goes as expected.

I'm sorry, I still don't understand.

First, you never answered my question about whether the IRA was a non-deductible IRA.

What I was saying is, why not directly deposit the money to a non-deductible IRA, then convert it to a Roth? Why do you need to go through the after-tax portion of your 401k?

Also, where do you get the $49,000? I don't see that quoted anywhere in the Fairmark link.

 

[Ronnieboy]

There is a big discussion now on waiting periods between contribution and conversion, so you might read up and decide what you're comfortable with.

Are there waiting periods?

I contribute to my tIRA then within a day convert to the Roth, I do this to avoid any possible gains on the contributions. Theoretically there is no tax due since I haven't made any gains.

I figure that is the best move to avoid tax consequences, but I haven't read or heard anything about suggested waiting periods.

 

[gauss]

Finance Dave,

IRA is Traditional - non-deductible in my case.

Some, but not all, 401k plans allow after tax contributions. The IRS sec 415 limit of total contributions to a Defined Contribution plan such as 401k in 2011 is 49,000. It sounds like many 401k plans do not accept these after tax contributions however.

 

[Animorph]

Are there waiting periods?

I contribute to my tIRA then within a day convert to the Roth, I do this to avoid any possible gains on the contributions. Theoretically there is no tax due since I haven't made any gains.

I figure that is the best move to avoid tax consequences, but I haven't read or heard anything about suggested waiting periods.

There are no official waiting periods. I haven't read the discussions about them very closely. But I believe there is some concern about "intent", and the wait is supposed to help with that. Something I would study before jumping into a backdoor conversion.

Forbes:
"There’s still time to make an IRA contribution for calendar year 2011 through April 17, 2012. You can double up and make your 2012 contribution too. How long should you wait to convert? “It’s a grey area,” says Robert Keebler, a CPA in Green Bay, Wisc. He suggests a waiting period of six months, although other advisors say to convert the next day to limit the tax bite on the conversion."

WSJ:
"There isn't a tax deduction for the contribution, but the law allows owners to convert such accounts to Roth IRAs. IRA expert Ed Slott says there isn't an official waiting period; he suggests a couple of weeks."


So, not much information, just speculation on what the IRS might think about it.

 

[Finance Dave]

Finance Dave,

IRA is Traditional - non-deductible in my case.

Some, but not all, 401k plans allow after tax contributions. The IRS sec 415 limit of total contributions to a Defined Contribution plan such as 401k in 2011 is 49,000. It sounds like many 401k plans do not accept these after tax contributions however.

OK, I give up lol.

I have not suggested putting it in the after-tax portion of a 401k....I suggested putting it in a non-deductible IRA, then convert it to a Roth. You don't need a 401k at all.

Granted, that would have a limit of about $6k/year...so that may be why you are doing it through the 401k....to get the dollar amount higher...I'll have to think about that.

Thanks Gauss.

 

[gauss]

OK, I give up lol.

I have not suggested putting it in the after-tax portion of a 401k....I suggested putting it in a non-deductible IRA, then convert it to a Roth. You don't need a 401k at all.

Granted, that would have a limit of about $6k/year...so that may be why you are doing it through the 401k....to get the dollar amount higher...I'll have to think about that.

Thanks Gauss.

Correct! If you want to stay within the standard yearly IRA contribution limits then there is no need to involve a 401(k).

OP wanted to invest about $4k/month. That was why I suggested this strategy if it was available to him.

Sorry about the confusion.

 

[Finance Dave]

Correct! If you want to stay within the standard yearly IRA contribution limits then there is no need to involve a 401(k).

OP wanted to invest about $4k/month. That was why I suggested this strategy if it was available to him.

Sorry about the confusion.

No problem Guass. I found a few articles on this...this was one of the better ones IMO for the items I was confused on.

http://www.paulweiss.com/files/Publ...-4420-b0bb-3904a8220d79/29-Oct-10RothMemo.pdf

Here's another with more details.
http://hwcdn.net/v3n9d4a6/cds/alwp/...ter-tax-conversion-4-11634680185434967153.pdf

There are some "gotchas", such as the fact that you must be 59 1/2, which I am not. Also, if you take from pre-tax, it's a taxable event if you take pre-tax money (makes sense), so that minimizes the chance high-earners would do this while working. If you take after-tax, there are some complications around pre-87 vs. post-86 monies.

Still may be useful for some.

Dave

 

[Steel Rain]

Well, I checked into doing this at work and its a no go So, i will have to use the backdoor IRA suggested above. I will get that going in the next couple of weeks, I belive its a 10k limit for married couples, so it will only be a small fraction of my plan. Thanks for all the great info folks.

Steel