Back Door Roth IRA’s

Submitted by Peter Tilkin on Sat, 2018-10-27 18:10

The maximum 401k contribution annually is $55,000. Let’s say that the employee contributes the maximum pre tax of $18,500 to the 401k. Also the employer match is $12,500. Total contributed pre tax = $31,000. Then let’s say that the 401k plan allows 1. employee after tax cash contributions, and 2. allows In Service Distributions or Non Hardship Distributions. Then the Employee directs distribution of the $24,000 after tax contribution to a roll over Roth IRA.

In this transaction, do all existing IRA’s have to be first rolled over into the 401k Plan, to avoid the “pro rata” rule, which comes into play when you contribute the maximum non deductible IRA contribution of $5,500, and then convert that IRA to a Roth IRA?

Thank you very much.



Submitted by Alan - IRA critic on Sat, 2018-10-27 19:39

  • You would be doing a direct rollover to an IRA of your after tax contributions and any earnings on those contributions. Only the earnings would be taxable and earnings would be very small in relation to the 24,000. This transaction is not affected by your IRA balance.  Now if you are also doing a back door Roth ND TIRA contribution and conversion, any pre tax IRA balance in your IRA at the end of the year would cause this TIRA to Roth IRA conversion to be mostly taxable, but it would NOT affect the taxes due on the Roth rollover from the 401k plan. In other words, these Roth rollovers and conversions are coming from two different types of plans, and taxation of these rollovers are separate from each other.
  • Note that even if your 401k allows these after tax contributions, it is very possible that they would put a cap on your total contributions less than 55k. Two reasons for that is that forfeitures of non vested matches for departing employees may be allocated to current employees and these forfeitures apply toward the 55k limit. Another reason to limit the after tax contributions is the ACP discrimination test that applies to after tax contributions and to avoid excess contributions some plans put a cap on after tax contributions. You would have to determine if your plan limits the amount of annual after tax contributions. You should also determine how often you are permitted to roll out your after tax contributions. The sooner you roll them out to a Roth the less chance of gains that would be taxable or losses that would reduce the balance of your Roth rollover.

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