There is a third option you are missing. The employer can allow for in-service in-plan ROTH rollover. Meaning money can go from an "After-Tax 401(K) account" to a "ROTH rollover 401(K) account" both accounts being within the 401(K) at the employer.
But does the money supposed to end up in a Roth IRA? I thought that’s what the mega backdoor was. Is Roth 401k essentially the same? Can you manage your own individual investments with a Roth 401k?
Fantastic explanation of a seemingly complicated mechanic that you make really simple. I especially like how you explain how to practically do it instead of just the theory, that part is left out in so many articles!
I'm really happy it's been helpful. In the description I have a link to a follow-up video I made, that might make things even easier for you. Thanks for watching!
Just got my first job at 20 that'll be paying me a boatload of money (I plan on maxing out all my retirement accounts early so I can get that delicious compounding) and the visual animations here were super useful to understand.
This was a great video that clearly walks through the benefits of the backdoor Roth and you also walk through the steps to make it happen. Many of the other videos on the same subject talk about the benefits but don't walk you through the steps to make it happen and just refer you to the video owner for paid advice. Thanks for this excellent video!
Excellent- I started doing this and was surprised by how Wells Fargo customer support couldn’t understand what I wanted to do but very good idea at the end to write out instructions to the receiver
Yeah I've found it's really "hit or miss" with the customer support staff. Some people instantly understand what you are trying to do, other's don't get it
I have been dollar cost averaging into my trad IRA for several years and converting the full balance to Roth. Your video helped me figure out I have been doing it wrong, dang! It looks like I will need to pay tax on the trad earnings or contribute one lump sum. Bummer!
Thanks for making this! The visuals really helped me understand this. My company just added that we can convert pre-tax 401k dollars to roth..so I think I can finally use this approach.
I do the traditional 401K with my company and a Roth IRA. I'm putting in the max for both of those and that is already taking a pretty big chunk of my current income, which is a good thing since I am young and it can grow overtime. Maybe it depends on how much you are making and what your income goals are in life, but with the two investment accounts I have, I think that is more than enough for the average person. If you are maxing that out for however long you can for both accounts and if you are putting in as much as you can after that, you'll probably be living very comfortably in retirement or whenever you decide to take that money out, if you start pretty young to let it grow. Good video too and is good information to have for those who want to save even more money in life. 👌🏼
Hey Will! Knock out video bro. I'm guessing this doesn't apply for the tsp but it's certainly a very valuable tool to look into and if nothing else, have in our toolbox. Thanks for sharing! I'm subscribing and binging more content!
This is by far the best video I've seen on the topic -- thanks! One question. If we assume the person doing this is a high-income earner who can't otherwise contribute to a Roth, would it then work to also subsequently convert that IRA (with the earnings from the after-tax non-Roth funds) into their backdoor / mega-backdoor Roth IRA? Or is that too devious lol... surely they have to get their tax on the earnings somewhere.
Converting the (untaxed so far) earnings in the tIRA into a Roth IRA would be a taxable event. That year you would be taxed on the amount of the conversion. If that's what you want, then you actually can simplify this whole process. Just roll the WHOLE amount from your afer-tax 401k (contributions + earnings) directly to the Roth IRA. You'll be taxed on the earnings (just as if you had done what you suggested: first sent the earnings to a tIRA, then converted them to Roth) I'm glad you found it useful!
I imagine that you could use the Roth conversion ladder later on though to roll your tIRA funds (incl. the untaxed earnings) into a Roth IRA account when your income that year is low enough that you would effectively not pay any taxes on those conversions and then wait 5 years for the money in the Roth to season before withdrawing tax free.
Good explanation Will, it helps. Here is my suggestion : if you explain something like when you can withdraw the money with penalty and without penalty from different accounts, that would be cool.
Great to see other millennials doing this! Only difference for me is I just pay income tax on the earnings and convert them to Roth, this way I can still do the "back door ira to roth" conversion as well.
Great video man. As you can see I am 1 ½ year's late to the game and still found your video the BEST mega back door explanation around. I have been looking for weeks! 1 Question and 2 Video recommendations. Question: In the video, you keep mentioning “immediately” doing the transfer and then say “same year”. I don’t know if employers allow this every paycheck, but my company only allows in-service every 6 months. Therefore, my question is: 1) Since I can’t do immediately (6-month situation) would it be best to this in January for the prior year? So do the process in January 2020 for all the contributions saved Jan-Dec 2019? Or if the next year isn't possible, would late December be the only time someone is able to do this for funds saved Jan-Dec since you kept mentioning same year? Video Recommendations: 1) Roth Conversion Ladder 2) SEPP 72(t) Distributions
You could absolutely do it January the following year! The only reason I keep saying "immediately" or "the same year" is because ideally you want to move that money into the Roth ASAP, where all the gains will be tax free. Any gains you make while it still sits in the after-tax 401k are taxable. But the difference between a week and 6 mo or a year probably doesn't matter all that much! I usually do 2 a year: one after my bonus hits in March (25% of which I send to my after tax 401k) , and the other in January the following like you describe. Also thanks for the video ideas! I think I'll definitely take you up on that!
It is not very often that my mind is blown I was clueless about what I just watched sweet Jesus! So a little sketchy on specifics but now I gotta do some more research
Great video! Thank you for such a clear explanation, as well as providing an actual example of the letter. I’m in the same boat with my 401k at Fidelity and Roth IRA at Vanguard, so was wondering how to do this.
Best mega backdoor explanation wearing in tank ever! lol Thanks a million! Just out of curiosity, why you made $2,623 check only when you can contribute additional up to $30K? Wouldn't it be easier just rollover a big lump sum to Roth IRA before filing tax report? Or does that contribution need to stay in 401k for a while, so you transfer a portion of it once in a while?
Hey Gary! Two reasons one might do this: 1. My guess at that time, It took me to november or so to fill up my pre-tax $19000 bucket, and based on my budget I could only afford another $2,500 that year. So that's all the money that was in the after-tax account. 2. doing smaller, more frequent conversions minimizes the amount of taxable earnings accrued before you convert to Roth. If you haven't seen it yet, i just published a new video on this topic yesterday! check the pinned comment.
Nope! since the mega backdoor strategy doesn't ever involve money flowing through a traditional (pre-tax) IRA. (Money goes straight from after-tax 401k to Roth IRA or Roth 401k)
This video is by far the best explanation of how a mega backdoor contribution works. I get that i need to ask my employer 401k plan if they allow me to make an after-tax, non roth contribution. What do i ask my roth ira company to verify if they can do this?
+Lin Cui on that end there shouldnt be anything you need to confirm, from their end it's just a standard rollover. Pretty much guarantee that all IRA companies allow it
Very well-illustrated video, but could you please point me to your source for the Total Contribution Limit of $54,000. For Tx Yr 2019, every site I go to says 19K + 6K catchup.
See the IRS website here on overall limits. Looks like it's $57,000 for 2019 now: www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Thanks for the video! Great info! 2 quick questions. Can you do this after you have maxed out your Roth IRA contributions? Second, is the additional 30k you can put into the 401k coming from cash? Or it has to be deducted from your paycheck? Thanks again!
I love the topic. I"m trying to understand it. Can you do the same talk going slower with more examples. I'm extremely interested but could not follow or understand even though you did a fantastic job. There is just to much information going by me too quickly. I suppose lots of others are in the same category as me.
Thanks Will, this was a great explanation. Could you share a way to automate this transfer between fidelity and vanguard? In my case it’s fidelity and Chase. I’m wondering if I should open a second IRA account with fidelity for these rollover contributions and maintain Chase IRA for my own contributions. I am not sure if that would have any tax complications.
Unfortunately I don't think there's any way to automate it when you are dealing with two different providers. Your idea of opening a new IRA with fidelity is fine, and will probably eliminate the need for paper checks. Also check out my most recent video which offers some new advice on the mega backdoor Roth: ruclips.net/video/HsZCqtRhBFQ/видео.html
$6000 for under age 50. There's no distinct limit for backdoor contributions, the limit on regular IRA contributions is what applies (since the first step of the backdoor is contribution to a regular IRA, which you happen to not take a deduction for).
Some companies allow this to be done automatically if they have a Roth 401k option. So if you’re already maxing out your regular 401k contributions you can make an extra “after tax” contribution and immediately roll it over to the Roth 401k in the plan. Immediately being the same day so there’s no gains or losses to contend with on the rollover. The company’s plan has to allow this and usually has a company managing it that can support it - Fidelity actually promotes this to their clients and offers it for the plans they manage.
Since the pre-tax and after-tax contributions are both held in the same 401(k) account, can you show the math around how the earnings number on the after-tax contribution was calculated?
Tell your employer you want to do mega backdoor roth IRA (or don't...) with their 401k. (In reality you just want to ask about the attributes of their 401k. Does their 401k allow after-tax contributions and in-service distributions?) If things are not compatible, tell them you want to work as a 1099 contractor for them instead of W-2, (if you have a close relationship with them they might agree) direct the 1099 to the EIN of a new company that you create / own / work for, then open a Solo 401k and push every penny of money (~$58k max) into that for retirement. (Bonus points if you get to double the mega roth IRA if you have a spouse and if he/she participates in the business.) Then, push that all into a Roth IRA and make massive returns. I'll meet you on your yacht. Beginner hint: Once you go the 1099 route, it will affect your credit and ability to purchase large ticket items like mortgages and cars.
Can you do both Mega back door using after tax 401k non roth and simple back door ? For example $6000 for 2020 and also using employers after tax non Roth 401k ?
@@WillPeterson Thank you. But if you are trying to do traditional IRA conversion into Roth IRA, don't I have to have 0 balance in Traditional IRA? If so, where can I transfer the earnings from the Roth 401k?
@@williamkim1460 go ahead and transfer everything in your after tax 401k to a Roth IRA. Yes, you'll have to pay taxes on the portion of that amount that is earnings, but that's OK. That will keep your tIRA empty
@@WillPeterson Thank you! That clarifies it. But just to confirm, am I understanding correctly regarding the backdoor Roth requiring empty Traditional IRA? Once again, thanks for taking your time to reply. Subscribed!
Thank you for the putting together this wonderful video. You've done an excellent job at explaining a corner case of our current IRS tax code that very few people know about. Question: Where in your tax forms (what form and line item?) did you capture the $2623.87 AND then the 76.26?
I Also got a 1099r, but it should say $0 in the box labeled "taxable amount". If that's what it says, I don't believe this needs to be reported on your tax return
Man.. I love all of your video's.. you should piggy back off your credit card videos and make a video about using a HELOC to pay off debt.. specifically mortgage
These videos are amazing. I hope you get the credit and high subscribers or other benefits you deserve or want. I have a follow up question. I have some untaxed earnings in a tIRA from doing this mega, we'll call it moneyA. So if I keep converting via a backdoor roth ira each year, do I always get taxed each year I do the conversion if I leave moneyA in the traditional IRA? Or is moneyA kept in a separate bucket somehow, and not used to calculate taxes each year when a backdoor Roth IRA is done in future? Just trying to figure out how to convert this small amount of earnings from the tIRA to roth IRA the best way. It's still there from 2019 tax year, a year I also did the back door roth IRA, so I think I may get taxed via the pro rate rule?
Thanks for the feedback! As to your question: If during your normal backdoor Roth each year, you convert $6000 from tIRA to Roth (the money you contributed non-deductibly to the tIRA), while still leaving untaxed earnings in your tIRA, you will indeed be taxed each year based on the percentage of the money in all your tIRAs that was still pretax. Instead, for convenience, you should probably just convert ALL the money in your tIRA, including the earnings from the mega backdoor, to Roth, pay the tax on the earnings, and that way you've cleared out your tIRA so future years backdoor Roth conversions are clean and completely tax free. Check out my other video on the pro-rata rule, might help clarify. Personally, now that I've started doing the backdoor roth, I have switched my approach with the megabackdoor roth: during the megabackdoor I roll EVERYTHING to Roth, including the earnings which I pay tax on, just to keep my tIRA empty.
@@WillPeterson Thanks for the quick reply. Yeah, so I guess I gotta watch for that taxation if I left earnings in the tIRA, since over the years I'd pay loads of tax on that small amount. If I convert that small amount of tIRA money now, before April 15th, does that count as 2019 tax year or 2020, or is that I choice I'm given? I did watch your excellent pro rata video, which brought me to the conclusion I would be taxed each year on that tIRA money. I left it too long before I converted the mega last year, hence the earnings
@@WillPeterson no worries man, you can't be spoon feeding folks either or you'll be here all day! Thanks again, I love your videos. I told guys at work about them and I swear - half the people in the office (big tech company) are using your tricks and tips now. I wish, for you, you could monetize that helpful advice
I just did something very similar I work at a government institution but it's run by private contractors and recently the contractor changed so I rolled my 401k over to my Roth IRA I did have to pay taxes but I see it as an advantage later in life
Hey Will, so the optimal way to save as much as possible in tax advantaged account per year would be - 1. Max out Roth IRA to 6k, 2. Max out HSA account if your state law doesn't mess with it, 3. Max out 19k on Roth 401k, 4. Max out Traditional 401k to 35k (54k-19k) but don't take tax deduction on your contribution, and roll it over to Roth IRA before end of the year. Am I understanding this correctly? What can we do with Roth 401k when we leave the company? Is there any benefit to contributing 19k to Roth 401k before contributing to after tax traditional 401k to be rolled over to Roth IRA? I'd rather have more fund in Roth IRA since IRA accounts have more flexible investment options.
And just to clarify, we are NOT allowed to rollover our 401k to Roth IRA until we leave the company or we meet one of the distribution criteria for 401k, like age 59.5, death, disability, etc, right?
You've pretty much got the prioritization correct. Only thing: don't refer to your after tax 401k as "traditional", usually that's a term reserved for pre-tax contributions. Now to your question about whether you to make your first 19k in the 401k as tradional (pre-tax) or Roth. If I make Roth contributions, I'm taxed at my current marginal tax rate. If I make tradional contributions, I'm not taxed until later when I convert to Roth, which I hope to do in early retirement when I'll have a much lower income and thus lower tax rate.
@@WillPeterson "You've pretty much got the prioritization correct. Only thing: don't refer to your after tax 401k as "traditional", usually that's a term reserved for pre-tax contributions. Now to your question about whether you to make your first 19k in the 401k as tradional (pre-tax) or Roth. If I make Roth contributions, I'm taxed at my current marginal tax rate. If I make tradional contributions, I'm not taxed until later when I convert to Roth, which I hope to do in early retirement when I'll have a much lower income and thus lower tax rate." Thanks! When you say "If I make traditional contributions," are you taking about the after-tax 401k? Or are you saying that putting 19k into Roth vs. Traditional depends on my current tax rate and how it compares with later tax rate when you convert to Roth IRA? If you anticipate that your income tax rate will actually drop in the future then it would make more sense to put 19k into the Traditional 401k rather, right?
@@WillPeterson "Many companies actually allow you to do an in-service rollover of JUST your after tax money to Roth IRA even while you are still employed!" This is ONLY for the after tax 401k contribution excess of the 19k that I would've contributed to the Roth 401k, and Roth 401k or Traidtional 401k can only be rolled over when the distribution criteria are met, right?
Thanks for this amazing video, 5 stars! I'm interested in knowing about what kind of investments do you put your contributions in? With so many possibilities, I find it hard to decide which one is the best. If you can create a video about that, it would be greatly appreciated.
Thats a great idea for a video! At a high level, this is the general investing approach I use: www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy
SO I'm kind of confused. You explained the pro rata rule in another video about back door Roth IRA. You basically need to empty your traditional IRA to avoid pro rata tax on the Roth conversion. How come you deposit more money to your traditional IRA while doing the MEGA backdoor ROTH?
Great question. I actually made this video before I exceeded the income limit for regular Roth contributions, and didn't yet require the (regular) backdoor Roth. The approach described in this Mega backdoor video of splitting earnings off into a traditional IRA probably doesn't make sense if you also want to do a backdoor Roth, because you would be subject to the pro rata rule. When doing the Mega backdoor now, I just roll all the money from the after tax 401k into a Roth IR, including the earnings, on which I am taxed
@@WillPeterson Can you please clarify that? When doing the mega backdoor, you convert everything, including the earnings? Would those be subject to tax?
@@WillPeterson could you do both the regular back door and mega back door RIRA conversions? or would the mega back door contribute to the $6000 cap of the RIRA? Great video btw
@@jeajea You can do both. An in plan roth-ira conversion, which is the name of the account, not mega back door, is completely seperate from a roth-ira, or back door roth-ira. Just make sure if you're doing both to not have any traditional IRA's at teh end of hte year
Will great video. I have a question. My company offers a 16% match whether I contribute or not. So the companies portion is 37k or so. Can I contribute to this 401a before I contribute to my own portion (19.5/ 26k)? Basically, do the “ Mega” portion first then fall back the remainder of the year on my contribution. Basically, helping the company pay that 37k as fast as possible because the portion I pay can go into the Roth. The portion the company pays (of the 37k) can not. My goal is to put 75% of my pay check Jan/ feb and pay off that 37k as fast as possible. Hopefully, by the end of February. So do I have to put my portion first or in conjunction with the 401a portion? Thx
What if I wish to not transfer gains from the after tax non Roth contribution to a traditional IRA. I make non deductible traditional IRA Contributions and perform a Roth conversion (back door roth) each year. I don’t want to run afoul of pro rata rules. Can I simply take the $76 (in your example) as a distribution and pay marginal tax rates in the current year?
with a HSA. It was my understanding that you can only put money in for the year you are goin g to use it. And if you don't use it in that year, you lose it if you don't use it towards medical expenses in that year. Has the rules changes? Is it more like an IRA now where you can contribute upt to 3k per year and you can let it set till you need to use it compounding in investments?
Great video and very clear! One question for you: what is the reason for contributing post-tax into the 401(k) instead of Roth? Could Roth 401(k) contributions be rolled over to a Roth IRA? Thanks!
Indeed, Roth contributions are always preferred over post-tax contributions, and can be rolled into Roth IRA. The only reason for post-tax contributions is that the annual contribution limit is much higher as I show in the beginning of the video. After you max out your Roth contributions, you still have much more room for post-tax contributions
Will Peterson makes sense! Another question occurred to me: why do you roll over the earnings from the 401k to the Traditional IRA? I understand they need to be taxed, but what if you are deducting your Traditional IRA contributions? To me, that would be mixing two different types of moneys: the Traditional IRA contributions, which haven’t been taxed for income and the earnings, which were already taxed for income (as they were made through a post-tax contribution to the 401k). Thanks again!
I make more than the allowed amount for regular Roth IRA contributions. Would a Roth 401k be the next best option for me? I max out my regular 401k quickly
There is a third option you are missing. The employer can allow for in-service in-plan ROTH rollover. Meaning money can go from an "After-Tax 401(K) account" to a "ROTH rollover 401(K) account" both accounts being within the 401(K) at the employer.
You're absolutely right! I wasn't aware of this when I made the video, but I subsequently made a follow-up: ruclips.net/video/HsZCqtRhBFQ/видео.html
So, this means that you don't need an IRA, right?
But does the money supposed to end up in a Roth IRA? I thought that’s what the mega backdoor was. Is Roth 401k essentially the same? Can you manage your own individual investments with a Roth 401k?
Fantastic explanation of a seemingly complicated mechanic that you make really simple. I especially like how you explain how to practically do it instead of just the theory, that part is left out in so many articles!
Thank you! That's high praise! Let me know if there's anything else I can help explain!
You were the one who explained this on here four years ago and I’ve been doing it ever since. Thanks.
I'm really happy it's been helpful. In the description I have a link to a follow-up video I made, that might make things even easier for you. Thanks for watching!
this is the best explanation of the mega backdoor roth ira. thanks
Just got my first job at 20 that'll be paying me a boatload of money (I plan on maxing out all my retirement accounts early so I can get that delicious compounding) and the visual animations here were super useful to understand.
This is by far the best explanation I have seen! Thanks!
This was a great video that clearly walks through the benefits of the backdoor Roth and you also walk through the steps to make it happen. Many of the other videos on the same subject talk about the benefits but don't walk you through the steps to make it happen and just refer you to the video owner for paid advice. Thanks for this excellent video!
Ya man, good job. Complicated subject explained well and easy to understand. Thanks man!!
Excellent- I started doing this and was surprised by how Wells Fargo customer support couldn’t understand what I wanted to do but very good idea at the end to write out instructions to the receiver
Yeah I've found it's really "hit or miss" with the customer support staff. Some people instantly understand what you are trying to do, other's don't get it
this video is really usefull and may I add that the bar chart visualization really works in explaining the concepts, good job
I've been struggling to get my head around this. Watched multiple videos but this is by far the best and easiest to understand!! Thanks!!
I'm Really glad to hear that Ronan! Cheers!
thank you. this was the best, most simple, most clear and to the point explanation of what this is. It was perfect.
This was the most easy to understand explanation of mega backdoor Roth. Great job
I have been dollar cost averaging into my trad IRA for several years and converting the full balance to Roth. Your video helped me figure out I have been doing it wrong, dang! It looks like I will need to pay tax on the trad earnings or contribute one lump sum. Bummer!
I am just writing to say thank you. You made it simple and clear to understand!
I'm most likely never going to do this but I'm glad I learned about it. RUclips University. I never want to graduate.
Thanks for making this! The visuals really helped me understand this. My company just added that we can convert pre-tax 401k dollars to roth..so I think I can finally use this approach.
I think you should not touch your pretax 401k. Only convert your after-tax 401k into either a Roth 401k or Roth IRA account.
I do the traditional 401K with my company and a Roth IRA. I'm putting in the max for both of those and that is already taking a pretty big chunk of my current income, which is a good thing since I am young and it can grow overtime. Maybe it depends on how much you are making and what your income goals are in life, but with the two investment accounts I have, I think that is more than enough for the average person. If you are maxing that out for however long you can for both accounts and if you are putting in as much as you can after that, you'll probably be living very comfortably in retirement or whenever you decide to take that money out, if you start pretty young to let it grow. Good video too and is good information to have for those who want to save even more money in life. 👌🏼
Your explanation of this topic was absolutely the most detailed and helpful! Thank you so much!
This explanation is incredible. Hats off to you, sir.
Best information on this topic that I’ve seen. Thank you for the clear explanation.
Amazing work, the visuals truly helps. Thank you very much
Glad it was helpful!
Bro, your videos are awesome!!!!! Love the graphics, way easier to visualize
Thanks dude! I appreciate it.
I need to watch this a few more times
Let me know if there's anything I can help explain!
Hey Will! Knock out video bro. I'm guessing this doesn't apply for the tsp but it's certainly a very valuable tool to look into and if nothing else, have in our toolbox. Thanks for sharing! I'm subscribing and binging more content!
Thanks Jessie! I really appreciate the feedback!
Fab explanation. Crossing my fingers my 403(b) plan allows for it.
Excellent video Will and thanks for sharing your knowledge.
This is by far the best video I've seen on the topic -- thanks! One question. If we assume the person doing this is a high-income earner who can't otherwise contribute to a Roth, would it then work to also subsequently convert that IRA (with the earnings from the after-tax non-Roth funds) into their backdoor / mega-backdoor Roth IRA? Or is that too devious lol... surely they have to get their tax on the earnings somewhere.
Converting the (untaxed so far) earnings in the tIRA into a Roth IRA would be a taxable event. That year you would be taxed on the amount of the conversion.
If that's what you want, then you actually can simplify this whole process. Just roll the WHOLE amount from your afer-tax 401k (contributions + earnings) directly to the Roth IRA. You'll be taxed on the earnings (just as if you had done what you suggested: first sent the earnings to a tIRA, then converted them to Roth)
I'm glad you found it useful!
I imagine that you could use the Roth conversion ladder later on though to roll your tIRA funds (incl. the untaxed earnings) into a Roth IRA account when your income that year is low enough that you would effectively not pay any taxes on those conversions and then wait 5 years for the money in the Roth to season before withdrawing tax free.
This it THE BEST explanation on the mega backdoor mechanics
Very clear explanation , calling my 401k administrator tomorrow
First video I watch for you, and I am subscribing. Very helpful method described!
Good explanation Will, it helps.
Here is my suggestion : if you explain something like when you can withdraw the money with penalty and without penalty from different accounts, that would be cool.
Great to see other millennials doing this! Only difference for me is I just pay income tax on the earnings and convert them to Roth, this way I can still do the "back door ira to roth" conversion as well.
Hi Will, this is such a good information for everyone. Thank you 🙏 so much for your efforts.
Great video man. As you can see I am 1 ½ year's late to the game and still found your video the BEST mega back door explanation around. I have been looking for weeks! 1 Question and 2 Video recommendations.
Question: In the video, you keep mentioning “immediately” doing the transfer and then say “same year”. I don’t know if employers allow this every paycheck, but my company only allows in-service every 6 months.
Therefore, my question is:
1) Since I can’t do immediately (6-month situation) would it be best to this in January for the prior year? So do the process in January 2020 for all the contributions saved Jan-Dec 2019?
Or if the next year isn't possible, would late December be the only time someone is able to do this for funds saved Jan-Dec since you kept mentioning same year?
Video Recommendations:
1) Roth Conversion Ladder
2) SEPP 72(t) Distributions
You could absolutely do it January the following year! The only reason I keep saying "immediately" or "the same year" is because ideally you want to move that money into the Roth ASAP, where all the gains will be tax free. Any gains you make while it still sits in the after-tax 401k are taxable. But the difference between a week and 6 mo or a year probably doesn't matter all that much! I usually do 2 a year: one after my bonus hits in March (25% of which I send to my after tax 401k) , and the other in January the following like you describe.
Also thanks for the video ideas! I think I'll definitely take you up on that!
@@WillPeterson thanks man. Solid feedback.
Hey dude just wanted to say thanks for the idea on the Conversion Ladder video. Just finished it and uploaded it!
This is a FANTASTICALLY explained video on this subject. Thanks!
Most clear video on this subject! Thank you.
best explanation I've heard. thanks for sharing
It is not very often that my mind is blown I was clueless about what I just watched sweet Jesus! So a little sketchy on specifics but now I gotta do some more research
no worries dude this stuff is overwhelming if you jump right into it. Keep reading and lmk if you have any questions!
Awesome advice, I had no idea this was possible!
Great video! didn't know this strategy existed. job well done!
Thank you Will Peterson! You are the best! I finally got it.
Great video! Thank you for such a clear explanation, as well as providing an actual example of the letter. I’m in the same boat with my 401k at Fidelity and Roth IRA at Vanguard, so was wondering how to do this.
Aaaaand just watched your most recent video on this...even easier!
Incredible explanation! Really easy to follow. Thanks! Subscribed.
Thank you! You are the man. 😎
Best mega backdoor explanation wearing in tank ever! lol Thanks a million! Just out of curiosity, why you made $2,623 check only when you can contribute additional up to $30K? Wouldn't it be easier just rollover a big lump sum to Roth IRA before filing tax report? Or does that contribution need to stay in 401k for a while, so you transfer a portion of it once in a while?
Hey Gary! Two reasons one might do this:
1. My guess at that time, It took me to november or so to fill up my pre-tax $19000 bucket, and based on my budget I could only afford another $2,500 that year. So that's all the money that was in the after-tax account.
2. doing smaller, more frequent conversions minimizes the amount of taxable earnings accrued before you convert to Roth.
If you haven't seen it yet, i just published a new video on this topic yesterday! check the pinned comment.
Clear, concise, perfect
Gracias for the explanation, very straight forward.
Very useful. Thanks for your efforts
7:09 when you convert from traditional 401k to Roth IRA you still need to pay taxes for what you are converting.
It's not coming from traditional. It's after tax, this already taxed so only gains are taxes.
Earnings on after tax accounts converted to a Roth IRA is a taxable event.
Thanks man, this is helpful and perfectly clear. Now I just need my company to remove the contribution cap so I can contribute up to the max!
Glad it was helpful man! Some people have had success petitioning HR: www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan
Still the best video on this out there.
Haha thanks!
Great video! What happens if one has an existing traditional IRA account with some $? Will one be subjected to pro rata for the after-tax $? Thanks!
Nope! since the mega backdoor strategy doesn't ever involve money flowing through a traditional (pre-tax) IRA. (Money goes straight from after-tax 401k to Roth IRA or Roth 401k)
Thx Will!
This video is by far the best explanation of how a mega backdoor contribution works. I get that i need to ask my employer 401k plan if they allow me to make an after-tax, non roth contribution. What do i ask my roth ira company to verify if they can do this?
+Lin Cui on that end there shouldnt be anything you need to confirm, from their end it's just a standard rollover. Pretty much guarantee that all IRA companies allow it
Best explanation ever.
6:40 Roth earnings are only tax free IF it’s in an ira for 5 years or more AND you’re 59.5.
Thanks for the informative video
Can you also do a regular back door roth (6K in a traditional IRA and rolled into a Roth IRA)
Awesome video and clear answers. Thank you!
That’s a phenomenal explanation
Very well-illustrated video, but could you please point me to your source for the Total Contribution Limit of $54,000. For Tx Yr 2019, every site I go to says 19K + 6K catchup.
Rewatch from 2:35 to 3:42 to answer your question. The 19K you refer to is 18K in this video (from 2017).
See the IRS website here on overall limits. Looks like it's $57,000 for 2019 now: www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Just found out employer offers this. Thank you!!!
Fantastic! One of the lucky few!
Thanks for the video! Great info! 2 quick questions. Can you do this after you have maxed out your Roth IRA contributions? Second, is the additional 30k you can put into the 401k coming from cash? Or it has to be deducted from your paycheck? Thanks again!
1. Yes, no problem. 2. Has to come from paycheck deductions! Good questions.
I'd like to learn more about using an HSA for saving for retirement. Do you already have a video about that? If not, can you make one?
Love that idea! It's on my list now!
I love the topic. I"m trying to understand it. Can you do the same talk going slower with more examples. I'm extremely interested but could not follow or understand even though you did a fantastic job. There is just to much information going by me too quickly. I suppose lots of others are in the same category as me.
Slow down the play back speed
Thanks Will, this was a great explanation. Could you share a way to automate this transfer between fidelity and vanguard? In my case it’s fidelity and Chase. I’m wondering if I should open a second IRA account with fidelity for these rollover contributions and maintain Chase IRA for my own contributions. I am not sure if that would have any tax complications.
Unfortunately I don't think there's any way to automate it when you are dealing with two different providers. Your idea of opening a new IRA with fidelity is fine, and will probably eliminate the need for paper checks. Also check out my most recent video which offers some new advice on the mega backdoor Roth: ruclips.net/video/HsZCqtRhBFQ/видео.html
Why don't you open roth IRA with fidelity. If you do, can they transfer from 401 to roth within Fidelity?
Underrated video!
Thanks for making this great video. What's the 2020 federal limit for Backdoor Roth IRA contribution?.. having difficulty finding it.
$6000 for under age 50. There's no distinct limit for backdoor contributions, the limit on regular IRA contributions is what applies (since the first step of the backdoor is contribution to a regular IRA, which you happen to not take a deduction for).
I finally understood this thing!
Yay! Glad I could help
Excellent video explanation!!!!
Some companies allow this to be done automatically if they have a Roth 401k option. So if you’re already maxing out your regular 401k contributions you can make an extra “after tax” contribution and immediately roll it over to the Roth 401k in the plan. Immediately being the same day so there’s no gains or losses to contend with on the rollover. The company’s plan has to allow this and usually has a company managing it that can support it - Fidelity actually promotes this to their clients and offers it for the plans they manage.
Right on! In fact I just discovered this and made a more recent video about it 😂
I make more than the allowed amount for regular Roth IRA contributions. Would this be the next best option for me? I max out my 401k quickly
Since the pre-tax and after-tax contributions are both held in the same 401(k) account, can you show the math around how the earnings number on the after-tax contribution was calculated?
Sounds great, I just don't understand. I'll watch again. Thanks!
Tell your employer you want to do mega backdoor roth IRA (or don't...) with their 401k. (In reality you just want to ask about the attributes of their 401k. Does their 401k allow after-tax contributions and in-service distributions?) If things are not compatible, tell them you want to work as a 1099 contractor for them instead of W-2, (if you have a close relationship with them they might agree) direct the 1099 to the EIN of a new company that you create / own / work for, then open a Solo 401k and push every penny of money (~$58k max) into that for retirement. (Bonus points if you get to double the mega roth IRA if you have a spouse and if he/she participates in the business.) Then, push that all into a Roth IRA and make massive returns. I'll meet you on your yacht.
Beginner hint: Once you go the 1099 route, it will affect your credit and ability to purchase large ticket items like mortgages and cars.
Can you do both
Mega back door using after tax 401k non roth and simple back door ? For example $6000 for 2020 and also using employers after tax non Roth 401k ?
Yes, absolutely!
Thanks Does pro rata rule apply to mega back door if you have sep ira?
Thank you for the video. Are you allowed to do this if you are also doing backdoor Roth IRA using traditional IRA conversion into Roth IRA?
Yes, no problems with that.
@@WillPeterson Thank you. But if you are trying to do traditional IRA conversion into Roth IRA, don't I have to have 0 balance in Traditional IRA? If so, where can I transfer the earnings from the Roth 401k?
@@williamkim1460 go ahead and transfer everything in your after tax 401k to a Roth IRA. Yes, you'll have to pay taxes on the portion of that amount that is earnings, but that's OK. That will keep your tIRA empty
@@WillPeterson Thank you! That clarifies it. But just to confirm, am I understanding correctly regarding the backdoor Roth requiring empty Traditional IRA? Once again, thanks for taking your time to reply. Subscribed!
@@williamkim1460 no problem! Check out my most recent video on the pro rata rule, it discusses this very thing!
Thank you for the putting together this wonderful video. You've done an excellent job at explaining a corner case of our current IRS tax code that very few people know about. Question: Where in your tax forms (what form and line item?) did you capture the $2623.87 AND then the 76.26?
I don't believe either needed to be put on my tax return. Neither resulted in taxable income, and neither falls under the scope of form 8606
Thanks
Well, I got a 1099-R for the transaction, so I thought that has to be reported.
I Also got a 1099r, but it should say $0 in the box labeled "taxable amount". If that's what it says, I don't believe this needs to be reported on your tax return
Same here. That’s all that matters I suppose. Thank you for taking the time to reply.
With my company 401k, it defaulted to traditional but I was able to convert it to a Roth, so now it’s a Roth 401k.
Great video, thanks! Now any advice for getting my company to start allowing this lol.
Ha! I wish I could help with that! Maybe this is useful: www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan
Ditto
Man.. I love all of your video's.. you should piggy back off your credit card videos and make a video about using a HELOC to pay off debt.. specifically mortgage
GREAT video on how to do this, thank you so much
These videos are amazing. I hope you get the credit and high subscribers or other benefits you deserve or want.
I have a follow up question. I have some untaxed earnings in a tIRA from doing this mega, we'll call it moneyA. So if I keep converting via a backdoor roth ira each year, do I always get taxed each year I do the conversion if I leave moneyA in the traditional IRA? Or is moneyA kept in a separate bucket somehow, and not used to calculate taxes each year when a backdoor Roth IRA is done in future? Just trying to figure out how to convert this small amount of earnings from the tIRA to roth IRA the best way. It's still there from 2019 tax year, a year I also did the back door roth IRA, so I think I may get taxed via the pro rate rule?
Thanks for the feedback! As to your question: If during your normal backdoor Roth each year, you convert $6000 from tIRA to Roth (the money you contributed non-deductibly to the tIRA), while still leaving untaxed earnings in your tIRA, you will indeed be taxed each year based on the percentage of the money in all your tIRAs that was still pretax. Instead, for convenience, you should probably just convert ALL the money in your tIRA, including the earnings from the mega backdoor, to Roth, pay the tax on the earnings, and that way you've cleared out your tIRA so future years backdoor Roth conversions are clean and completely tax free. Check out my other video on the pro-rata rule, might help clarify.
Personally, now that I've started doing the backdoor roth, I have switched my approach with the megabackdoor roth: during the megabackdoor I roll EVERYTHING to Roth, including the earnings which I pay tax on, just to keep my tIRA empty.
@@WillPeterson Thanks for the quick reply. Yeah, so I guess I gotta watch for that taxation if I left earnings in the tIRA, since over the years I'd pay loads of tax on that small amount.
If I convert that small amount of tIRA money now, before April 15th, does that count as 2019 tax year or 2020, or is that I choice I'm given?
I did watch your excellent pro rata video, which brought me to the conclusion I would be taxed each year on that tIRA money. I left it too long before I converted the mega last year, hence the earnings
Nevermind - think I found the answer "A Roth conversion can only be applied to the tax year in which it occurs."
@@daraoh81 yup, sorry i didnt get back to you earlier. good luck!
@@WillPeterson no worries man, you can't be spoon feeding folks either or you'll be here all day! Thanks again, I love your videos. I told guys at work about them and I swear - half the people in the office (big tech company) are using your tricks and tips now. I wish, for you, you could monetize that helpful advice
I just did something very similar I work at a government institution but it's run by private contractors and recently the contractor changed so I rolled my 401k over to my Roth IRA I did have to pay taxes but I see it as an advantage later in life
This was great. Do you think you might do an updated 2020/2021 video? Subscribing!
Done! ruclips.net/video/HsZCqtRhBFQ/видео.html
@@WillPeterson THANK YOU!
Hey Will, so the optimal way to save as much as possible in tax advantaged account per year would be - 1. Max out Roth IRA to 6k, 2. Max out HSA account if your state law doesn't mess with it, 3. Max out 19k on Roth 401k, 4. Max out Traditional 401k to 35k (54k-19k) but don't take tax deduction on your contribution, and roll it over to Roth IRA before end of the year. Am I understanding this correctly? What can we do with Roth 401k when we leave the company? Is there any benefit to contributing 19k to Roth 401k before contributing to after tax traditional 401k to be rolled over to Roth IRA? I'd rather have more fund in Roth IRA since IRA accounts have more flexible investment options.
And just to clarify, we are NOT allowed to rollover our 401k to Roth IRA until we leave the company or we meet one of the distribution criteria for 401k, like age 59.5, death, disability, etc, right?
You've pretty much got the prioritization correct. Only thing: don't refer to your after tax 401k as "traditional", usually that's a term reserved for pre-tax contributions. Now to your question about whether you to make your first 19k in the 401k as tradional (pre-tax) or Roth. If I make Roth contributions, I'm taxed at my current marginal tax rate. If I make tradional contributions, I'm not taxed until later when I convert to Roth, which I hope to do in early retirement when I'll have a much lower income and thus lower tax rate.
Many companies actually allow you to do an in-service rollover of JUST your after tax money to Roth IRA even while you are still employed!
@@WillPeterson "You've pretty much got the prioritization correct. Only thing: don't refer to your after tax 401k as "traditional", usually that's a term reserved for pre-tax contributions. Now to your question about whether you to make your first 19k in the 401k as tradional (pre-tax) or Roth. If I make Roth contributions, I'm taxed at my current marginal tax rate. If I make tradional contributions, I'm not taxed until later when I convert to Roth, which I hope to do in early retirement when I'll have a much lower income and thus lower tax rate."
Thanks! When you say "If I make traditional contributions," are you taking about the after-tax 401k? Or are you saying that putting 19k into Roth vs. Traditional depends on my current tax rate and how it compares with later tax rate when you convert to Roth IRA? If you anticipate that your income tax rate will actually drop in the future then it would make more sense to put 19k into the Traditional 401k rather, right?
@@WillPeterson "Many companies actually allow you to do an in-service rollover of JUST your after tax money to Roth IRA even while you are still employed!"
This is ONLY for the after tax 401k contribution excess of the 19k that I would've contributed to the Roth 401k, and Roth 401k or Traidtional 401k can only be rolled over when the distribution criteria are met, right?
You still have to pay state and federal income tax on this money ??
Thanks for this amazing video, 5 stars! I'm interested in knowing about what kind of investments do you put your contributions in? With so many possibilities, I find it hard to decide which one is the best. If you can create a video about that, it would be greatly appreciated.
Thats a great idea for a video! At a high level, this is the general investing approach I use: www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy
@@WillPeterson do you prefer investing in Total Market Index ETFs or to you prefer the S&P 500 index ETFs?
SO I'm kind of confused. You explained the pro rata rule in another video about back door Roth IRA. You basically need to empty your traditional IRA to avoid pro rata tax on the Roth conversion. How come you deposit more money to your traditional IRA while doing the MEGA backdoor ROTH?
Great question. I actually made this video before I exceeded the income limit for regular Roth contributions, and didn't yet require the (regular) backdoor Roth. The approach described in this Mega backdoor video of splitting earnings off into a traditional IRA probably doesn't make sense if you also want to do a backdoor Roth, because you would be subject to the pro rata rule.
When doing the Mega backdoor now, I just roll all the money from the after tax 401k into a Roth IR, including the earnings, on which I am taxed
@@WillPeterson Can you please clarify that? When doing the mega backdoor, you convert everything, including the earnings? Would those be subject to tax?
@@bragot correct.
@@WillPeterson could you do both the regular back door and mega back door RIRA conversions? or would the mega back door contribute to the $6000 cap of the RIRA? Great video btw
@@jeajea You can do both. An in plan roth-ira conversion, which is the name of the account, not mega back door, is completely seperate from a roth-ira, or back door roth-ira. Just make sure if you're doing both to not have any traditional IRA's at teh end of hte year
great video....thank you!!
Will great video. I have a question. My company offers a 16% match whether I contribute or not. So the companies portion is 37k or so. Can I contribute to this 401a before I contribute to my own portion (19.5/ 26k)? Basically, do the “ Mega” portion first then fall back the remainder of the year on my contribution. Basically, helping the company pay that 37k as fast as possible because the portion I pay can go into the Roth. The portion the company pays (of the 37k) can not. My goal is to put 75% of my pay check Jan/ feb and pay off that 37k as fast as possible. Hopefully, by the end of February. So do I have to put my portion first or in conjunction with the 401a portion?
Thx
Most companies do not allow after tax contribution or in service rollover
Great video Will! How often do you do the mega backdoor rollover per year? Quarterly? thank you very much.
I do it twice a year! Once after my annual bonus in March (which I put 25% of in my after tax 401k) and once again after the end of the year
@@WillPeterson Thank you Will! that's very helpful!
Would this be better / high priority than investing money in a taxable brokerage account?
Excellent explanation.
What if I wish to not transfer gains from the after tax non Roth contribution to a traditional IRA. I make non deductible traditional IRA Contributions and perform a Roth conversion (back door roth) each year. I don’t want to run afoul of pro rata rules. Can I simply take the $76 (in your example) as a distribution and pay marginal tax rates in the current year?
In that case it'd be best to just roll the gains right into the Roth (with all the contributions), and pay marginal income tax on just the gains.
Fantastic info. Thanks.
with a HSA. It was my understanding that you can only put money in for the year you are goin g to use it. And if you don't use it in that year, you lose it if you don't use it towards medical expenses in that year. Has the rules changes? Is it more like an IRA now where you can contribute upt to 3k per year and you can let it set till you need to use it compounding in investments?
Do I need to max out my 401k contributions to be able to contribute to a after tax, non roth bucket?
Great video and very clear! One question for you: what is the reason for contributing post-tax into the 401(k) instead of Roth? Could Roth 401(k) contributions be rolled over to a Roth IRA? Thanks!
Indeed, Roth contributions are always preferred over post-tax contributions, and can be rolled into Roth IRA. The only reason for post-tax contributions is that the annual contribution limit is much higher as I show in the beginning of the video. After you max out your Roth contributions, you still have much more room for post-tax contributions
Will Peterson makes sense! Another question occurred to me: why do you roll over the earnings from the 401k to the Traditional IRA? I understand they need to be taxed, but what if you are deducting your Traditional IRA contributions? To me, that would be mixing two different types of moneys: the Traditional IRA contributions, which haven’t been taxed for income and the earnings, which were already taxed for income (as they were made through a post-tax contribution to the 401k). Thanks again!
I make more than the allowed amount for regular Roth IRA contributions. Would a Roth 401k be the next best option for me? I max out my regular 401k quickly