Backdoor Roth Conversion

Submitted by John Nielsen on Wed, 2022-07-20 14:23

I have a business client who sponsors a workplace 401(k) plan. Currently the plan does not allow for after-tax contributions, but is considering amending the plan to allow for this provision as since he and others in the business are HCE’s, they would like the ability to make those after-tax contributions and then immediately doing an in-plan Roth conversion of those dollars. What potential traps are out there to be aware of?

John.



Submitted by Alan - IRA critic on Wed, 2022-07-20 16:17

  1. The plan would probably incur higher record keeping costs due to the additional accounting requirements.
  2. If the additional after tax contributions result in failing the ACP test, there will be an excess contribution that must be returned. However, employees will have done IRRs before which drain the after tax sub account so the excess contributions wlll have to come from the Roth 401k and this process also adds to plan administrative costs.
  3. Some plans will limit the after tax contributions to reduce ACP testing failures and if so employees will not be able to contribute anywhere near the annual additions limit.


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