ROTH 401(k) Mega backdoor

Submitted by Jeff leary on Fri, 2020-05-01 16:55

Can you please describe and provide an example of how this can work for a non-owner employee making $200,000 annually and already making the maximum regular 401(k) maximum contribution. The company plan does permit after-tax contributions.

Thanks



Submitted by Alan - IRA critic on Fri, 2020-05-01 17:26

The EE should check with the plan to determine how much in after tax employee contributions are allowed. Total contributions cannot exceed 57k plus age 50 catch up, but that includes the company match and forfeitures, and possibly some restrictions to avoid failing the ACP test. The after tax contributions and their earnings go into a separate sub account within the plan. The plan will typically allow either an IRR (in plan Roth rollover) to the Roth 401k account within the plan, or to a Roth IRA outside the plan. Sometimes, the EE has a choice.  These rollovers are non taxable except to the extent of gains in the after tax sub account, therefore it is helpful if the plan allows frequent rollovers before gains can build up in the after tax sub account. The EE should be very specific to limit these rollovers to the after tax sub account to avoid taxation of other pre tax amounts in the plan. A 1099R is then issued showing the taxable amount of these rollovers (if any), and this is reported on lines 4c and 4d of Form 1040.

Submitted by Renee Grey on Mon, 2020-05-04 17:42

If the After Tax 401k doesn’t allow for in-service rollovers, can the after tax account be rolled into a Roth IRA upon separation from service? Or are the after-tax contributions and earnings on after-tax treated differetntly? 

Submitted by Alan - IRA critic on Mon, 2020-05-04 18:05

  • After separation, a Notice 2014-54 split direct rollover can be done in which the after tax balance in the plan is rolled to a Roth IRA, and the pre tax balance (including the earnings in the after tax sub account) is rolled to a rollover TIRA. 
  • Another option if the plan post separation allows the partial distribution of the after tax sub account only, the above transaction could be done for only the after tax account (split rollover), or the entire after tax balance including the earnings could be rolled to the Roth IRA, but earnings would be taxed.

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