Backdoor ROTH with max ROTH 401k/ROTH IRA contribution

[Anonymous]

My son is starting work after college who is an aggressive saver for future. Thus the high interest in Roth instruments. Currently have no traditional IRA, SEP IRA/SIMPLE so no complex pro-rata issues to do backdoor ROTH.

My question is once he has maxed out an Roth IRA ($6K), its not possible to do a Traditional IRA that starts the backdoor Roth. However, if his MAGI phases out Roth IRA, then there is opportunity to do backdoor Roth.

Is this understand correct?

Furthermore, seems like mega backdoor Roth through the post tax 401k method is even higher Roth potential.

[DianeC958 · Accepted solution]

Yes if his MAGI is too high for him to contribute to a Roth IRA he can fund a Backdoor Roth IRA.

He would make his contribution to a Traditional IRA, (which will be non-deductible) and then he moves the money to a Roth IRA since there are no income restrictions on moving the money to a Roth IRA from a regular IRA.

Depending on the rules of his employer's 401k plan a Mega Back Door Roth IRA may be possible.

The 401K plan his employer offers must contain two  rules

• After-Tax Contributions Above and Beyond the $19,500 Pre-Tax Contribution Limits
• In Service Distributions Or Non-Hardship Withdrawals 

If the plan does not allow for both of these rules then he cannot have a Mega Back Door Roth.

If the plan does allow for both these rules then he could contribute up to $57,000 to the 401K and then convert the after tax contribution that he makes to the Mega Back Door Roth Account.  He would need to know how much of his contributions to the 401K plan were after tax contributions.

If the employer's plan allows for after tax contributions to the 401k plan but not the in service distributions or hardship withdrawals then the after tax contributions would stay in the 401K account until he leaves that employer and then he can convert them to the Roth account.

Any growth on the after tax contributions becomes part of the pre-tax contributions.

[Edited 02/24/20 8:25am PST]

[Anonymous]

Thank you. Really helpful. Have a follow up

1. Doing max ROTH 401k ($19.5k) and max backdoor ROTH 401k ($26.7k) at work (employer 401k plan allows). This is $10.8k below IRS limit of $57k (We guess margin for employer contribution?).

2. 2020 MAGI will be below $124k. Like to fund $6k ROTH IRA.

I believe #2 is possible even after doing #1 right? (They are independent as far as I can tell) And of course living frugally while doing all this haha.