So I had read about the Mega-Backdoor Roth last year and it sounded like I might be able to pull it off.
This is when you contribute after-tax dollars to your 401(k) and then roll it over into a Roth IRA, and it gets around the normal $5500 cap on contributions.
After doing some reading on how to pay for college for my 2 kids, a Roth seemed like the best way to do it. The only reason people advise against it is because you can normally only contribute $5500 into it and you don't want to be spending money in a tax-advantaged retirement account if you don't have to. Also, you can withdraw contributions from a Roth for Higher-Education expenses without paying any penalty. I could barely put $5500 normal dollars into my Roth for my normal retirement, anything extra was going toward a college fund, so it made sense to try and get the college fund money in there, too. (Yes, I am already contributing 8% to my 401(k) and it gets matched by 4%, and the company gives me 3% off the bat vested in 3 years, so 15% overall, I contribute $5500 to a personal Roth, and I contribute $6750 to an HSA account which I can use anything over $2k for investing). I wanted to use a Roth because unlike a 529, if my children don't use it for higher-education for whatever purpose I don't have to pay a penalty to use it. My state offers no tax break for contributions to 529 plan.
My employers plan is old as dirt (one of the things that favor it being able to do a Mega-Backdoor) so I called and asked the provider last year and I explained everything to them. Did they allow after-tax contributions to the plan, and do they allow in-service rollovers/withdraws of those after-tax dollars? They put me on hold for about 15 minutes and came back and said that yeah, I should totally be able to do what I described (rollover after-tax dollars from my 401(k) to my Roth). So I set it up to contribute after-tax dollars to the 401(k) plan, and it was going to be around $5k a year that I would be able to put in the Roth for college later on.
I called my provider yesterday about an unrelated topic and while I had the guy on the phone I asked him to roll the after-tax dollars in my 401(k) into my Roth. He starts asking a ton of questions and I answer them all, he puts me on hold for about 15 minutes and comes back and says "Sorry bro".
Turns out they do allow in-service rollovers of money contributed to my 401(k), but not ONLY after-tax dollars. It would have to be a mix of my pre and post tax contributions. Either they changed it between the 9 months or so that has gone by since I talked to them, or they just didn't have their facts straight that first time. I actually waited a day and called back and had another guy try to do it and he said the same thing, so I said fine I'll just take it as a withdraw, I already paid tax on it and will put it in my daughters actual 529 plan that I still have. Guy says, "Sorry bro", turns out is the same way for normal withdraws as it is for rollovers, they can't take it specifically from one source. They can tell me exactly how much I have contributed in after-tax dollars, and my cost basis for that after-tax money, but not withdraw or rollover specifically from that "bucket" of money in the 401(k).
I'll just come right out and say that my employees service plan provider is Fidelity.
I'm not even mad at Fidelity, it really is a goofy thing to try and pull off and I hadn't even gotten to the point where I was going to have to explain all this to my accountant =D
tl;dr If you are trying to do a Mega-Backdoor Roth then the first year try and rollover some after-tax contributions into the Roth early in the year to make sure that you can actually do it. I contributed about $3k of already taxed money into a 401(k) which is downright stupid and cost me about $600 or so I guess.
Submitted July 19, 2017 at 12:46PM by h_trism http://ift.tt/2uaIRK9
