Your email address will not be published. You then make a $5,500 non-deductible contribution to a traditional IRA with the intention of converting it to Roth tax-free. Over the course of two years, you can max out your after-tax/Roth contributions to your 401k (say $30k per year extra). This strategy is really for people who are maximizing their savings in other avenues first: 401k, IRA, HSAs, 529s. I really appreciate it! Box 2b “Taxable amount not determined” should NOT be checked. Starting Monday, January 11 through Friday, January 29, eligible City of Tacoma employees have an opportunity to buy affordable additional long-term disability insurance coverage through the City. I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. The Mega Backdoor Roth IRA Contribution is a strategy to leverage after-tax 401k contributions as a way to boost Backdoor Roth IRA conversion dollars. Now that we have walked through the steps, let’s look at an example of how to report a backdoor Roth IRA contribution. Part 1 of Tom’s Form 8606 is filled out below. Please note for an in-plan rollover to Roth 401k you would answer ‘Yes’ to the question after the 1099-R entries and follow from there. In other words, do I trip the pro-rata rule if I have a SEP IRA when doing a Mega Backdoor Roth conversion? Not a public safety officer, unless you actually are one. Tag Archives: Reporting Mega Backdoor Solo 401k Conversion. We recommend keeping Form 5498 for your records, but you don’t need to report Form 5498 in your tax filing. I didn’t have any earnings/losses from this – so I thought “since I had already paid taxes on the contributions (they are after tax contributions after all), there was nothing here for me to report on form 1040” – so I left boxes 16a and b on form 1040 blank. I’ve saved over $25,000 in retirement fees but that’s not enough. In that case ask your 401k provider whether they can redo your 1099-R to make it a rollover to traditional because they didn’t mention anything about Roth to the receiving end. By the time the money was rolled over to a Roth IRA, your contributions earned $200. Mastering the Mega Backdoor Roth IRA: What Is It and How to Execute If you knew a tool that could potentially maximize your retirement tax savings, would you be interested in it? This is the guide that I use to enter a backdoor Roth into TurboTax. So, answer the rollover and recharacterization questions correctly. See the previous post Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA? In contrast, a Roth IRA … This is informational reporting only; it is issued in May of the year after the contribution is being made for to both the IRA owner and to IRS. Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA? Read how a mega-backdoor Roth conversion can work for high earners. This is troubling, largely because it’s so preventable. I think I might go to a CPA instead. I think they are taxing this 15k. Call the number on the notice and ask them what they need. By contrast, the mega backdoor allows 401(k) [or 403(b)] after-tax monies to be distributed while the employees is still working and immediately converted to a Roth IRA on a virtually tax-free basis. After this point, the interview follows the same path as rolling over to the Roth account within the plan. Why do you need a financial plan? Again, the Mega Backdoor Roth is just for those who have additional money to save. So, Bob gives the mega-backdoor Roth IRA a try, given there are no income limitations with funding after-tax contributions in a 401(k). However, they insist on direct depositing the original contribution into my checking account. You are done. Get the copy of that rollover check and show them they put it in the wrong account. When you see TurboTax moving on to a totally separate topic, in our case Social Security Benefits, you know that’s the end of reporting your mega backdoor Roth. May I ask how do I find out whether the 401k provider processed the check correctly as a rollover to a roth IRA or not? ... to a traditional IRA and the after-tax portion to a Roth IRA, resulting in a tax-free rollover and conversion. 401(k) plans are a type of defined contribution plan where you, as the employee, make your own contributions to your retirement. Please scroll up and follow there. The mega backdoor Roth Solo 401(k) plan strategy is the holy grail of Roth tax planning. Step one of the Backdoor Roth IRA is making a non-deductible contribution to your Traditional IRA. switch from TurboTax Online to TurboTax download. $100k was after-tax contributions to my 401k. The rules, and even the availability, for these plans may vary considerably from one company to another. Some 401k administrators retain the loss within the 401k. When they do a rollover to Roth they are supposed to say Roth. January 21, 2021 | By Mark Nolan. Learn how to find an independent advisor, pay for advice, and only the advice. For more information on Backdoor Roth, see Backdoor Roth: A Complete How-To. Do I keep this $12k as listed since that was what actually went into my Roth 401k, or list what my actual after-tax contributions were during 2017 ($15k)? In that case, the pro rata rule is only applied within the after-tax account: earnings will be distributed together with after-tax contributions. A Mega what? It works the same in a 403(b). The gains are a non-trivial amount of money, since I just quit my job and had gains from many years of after-tax contributions. You can fund the remaining balance of $37,000 through any of the following ways: That means you might be able to contribute an additional $20,000 or more after-tax each year after maxing your elective deferral and receiving your match. Hi Harry, this is exactly what I’m looking for! … However, I just received a notice from the IRS yesterday, showing this $5k amount as taxable and ordering to pay back taxes of $2k. But if you’re not careful, you can be hit with a big tax bill when you do it. While you were on vacation I had left you a question on another link on your spreadsheet calculations for Business income Mega door Roth amount.I am still waiting for an answer on that. You don’t need a Form 8606 when you go from the plan directly to the Roth IRA. It’s not true. A CPA can help you with the paperwork to report the reality only *after* the IRA provider corrects it. How To Make A Mega Backdoor Roth 401(k) Contribution Looking to boost your retirement savings? The Mega Backdoor Roth IRA is another potential tool to maximize tax savings IF you have more bandwidth for savings. Special Considerations for a Backdoor Roth IRA An After-tax 401(k), also known as a Mega Backdoor Roth IRA, is a type of deferred 401(k) subaccount, with different rules from traditional and Roth 401(k) accounts. Your email address will not be published. That means you might be able to contribute an additional $20,000 or more after-tax each year after maxing your elective deferral and receiving your match. My 401k provider somehow did not include my roth IRA account number when sending the check to the IRA provider so the IRA provider intuitively deposited the check into my traditional IRA. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax from Amazon or Costco and switch from TurboTax Online to TurboTax download. Using the mega backdoor Roth method was cumbersome previously. In 2017 I contributed about $15k after-tax, but since my plan only allows quarterly in-plan Roth conversions I ended up only being able to rollover $12k to my Roth 401k, which is what is listed on my 1099-R in box 5. If you use turbo tax and do a Mega Backdoor Roth, be prepared for some additional headaches. Conclusion. I’m using 401(k) as a shorthand. Traditional and Roth IRA: Recharacterize vs Convert. The Mega Backdoor Roth 401(k) provides the ability to make additional tax-advantaged contributions to the Nike 401(k) plan above and beyond the typical employee limits of $19,500, plus catch-up contributions of $6,500 for ages 50+ (2020). Check out Mega Backdoor Roth Explained to see how you might be able to do a backdoor Roth in your employer 401(k) plan. Soon after, an IRS employee in the Tax-Exempt and Government Entities Division stated that the Backdoor Roth IRA is allowed by the IRS. However, with the Mega Backdoor Roth, you can save up to $62,000 in a Roth in 2019! Or it’s just like that all after tax contributions are non-taxable income and earnings are taxable? Choose Yes when you rolled over the money within the plan. Backdoor Roth IRA Tax Return Reporting. I’m not repeating them here. Rolling over within the plan is much easier, and many plans automate the process. Formula = 401(k) + Profit Sharing + After Tax Contribution + Roth Conversion. If you subsequently did the transfer as a conversion, you have a potential issue with paying tax twice. The “Mega Backdoor Roth” is a strategy to put as many Roth dollars as possible in your Rocket Dollar Self-Directed Solo 401(k). Called them up, they said all they want is the 1099-R’s showing the $0 in box 2a. You trip it when you make an interim stop at a traditional IRA. Line 5a includes the $10,200 gross distribution amount. Not only to increase your chances of success, but to also minimize potential failures. See Traditional and Roth IRA: Recharacterize vs Convert. I like that idea much better than Turbo’s suggestion that I alter Box 5. The IRA provider’s 1099-R says you should pay tax because you converted from traditional to Roth. Here’s why. About Form 8606, Nondeductible IRAs. A Mega Backdoor Roth IRA Contribution. A mega backdoor Roth means making non-Roth after-tax contributions to a 401k-type plan and then taking the money out (with earnings) to a Roth IRA or moving it to the Roth account within the plan. Box 1 15,300 You rolled over $10,200 to your Roth IRA. And Roth 401k Contributions. As you know, the idea is to get the entries of the 1099Rs into the program without any tax or penalties. Back in 2016, when I first made the after-tax contributions to my 401k (about $5k), I wasn’t entirely sure on how to do the traditional/roth conversions – so I got scared and simply requested a withdrawal and encashed the check received. Scroll up or down in the right pane to lines 5a and 5b. I am doing this exactly as shown. The Factors to Make a Mega Backdoor Roth Conversion Work. However, tax forms and reporting can be a daunting challenge. If your answer is yes, then read on to learn more about the mega backdoor Roth IRA concept. If you qualify for the 199A deduction, you might want to consider Roth and Mega Backdoor Roth 401(k) contributions. $25k was earnings from those after-tax contributions. To see if you're eligible to utilize this strategy, check out our flowchart! Or do I need to offer more explanations? The downloaded software is way better than online software. Not if you go directly from 403b to Roth IRA. You rolled over $10,200 to your Roth 401(k) account. I think this will solve the problem. Based on your Turbotax walkthrough, what differences should I do to make sure both 1099-R are covered? Why is this advantageous? Therefore I received two 1099-R with same amount of money (one from the 401k institution, and the other from the IRA brokerage firm). We love navigating complex issues like these and giving guidance to elevate your finances. A back door Roth consists of opening a Traditional IRA and making a fully non-deductible contribution to the Traditional IRA. Now let’s confirm you’re only paying tax on the $200 earnings, not on your $10,000 after-tax non-Roth contributions. Not all plans allow non-Roth after-tax contributions but some estimated that 40% of people can do it. Please help. Background: my employer contributions for our 403b plan go to a separate account that allows employee after tax contributions. … Comment document.getElementById("comment").setAttribute( "id", "afab210af6ac48706158275386ea3139" );document.getElementById("af3dfc15b7").setAttribute( "id", "comment" ); We resigned from all affiliate programs. the “unless” bits helped greatly and the 1040 example was perfect. However, some plans require pro-rated distribution across both pre-tax and after-tax accounts. If you choose to contribute to a Roth IRA or to complete a backdoor Roth IRA conversion, you are choosing to be taxed now instead of later. Import the 1099-R if you’d like. I’ve read the previous posts on this site regarding mega Backdoor Roth rollovers but I am confused by the pro Rata rule. Now the entries into TurboTax. Make sure you make that crystal clear in your request. 6 Minute Read . It’s a great way to put additional money into a Roth account without having to pay much additional tax. In certain cases, clients may be eligible to make a Mega Backdoor Roth IRA contribution. (2018, November 1). Here are the factors to make a mega backdoor Roth conversion work: 1. Thanks a lot, you are a wonderful and knowledgeable teacher. After-tax 401(k) contributions allow you to … Generally, when you want to move funds from your 401(k) to another plan, there must be a qualifying event. Correct. Hi Harry – thank you so much for the visual explanations! Solo 401k. Mega Backdoor Roth and Access To Your Money Before 59-1/2. If you use turbo tax and do a Mega Backdoor Roth, be prepared for some additional headaches. Fidelity only sent one “combined” 1099-R. And maxing out your Roth 401k or Roth IRA first. Use Form 8606 for calculating the taxable amount from the conversion if you had any earnings in the Traditional IRA. 1) This 1099R is for the Roth in Plain conversion and I think this is correct January 17, 2021 | By Mark Nolan. Thank you for this great visual explanation! Here is a … But I learned Fidelity has now worked it out so that after-tax contributions will be automatically scraped every month and put into a Roth IRA. My distribution is about 7k and double tax means paying ~2k more for me!! Form 8606 helps track your basis and avoid paying additional tax on your non-deductible contribution as you convert the balance to a Roth IRA. Some older posts may still contain non-functioning affiliate links. The mega backdoor Roth strategy is the only strategy that will allow a self-employed individual or small business owner with no employees to contribute up to $57,000 (or $63,500 if age 50+) in 2020 in a Roth and potentially get immediate access to the cash. The mega backdoor Roth is simply the company retirement plan version of the backdoor Roth IRA. Form 8606 helps track your basis and avoid paying additional tax on your non-deductible contribution as you convert the balance to a Roth IRA. How does this work if you want to split the after tax contribution from the earnings so the after tax amount goes to Roth IRA and the earning goes to Traditional IRA? But for the portion I send to my Roth (original non-Roth after tax contributions) I receive another 1099-R with a distribution code of 1 (early distribution with no know exception). What’s more, it can all be Roth! The Mega Backdoor Roth (MBR) shields gains from taxes, but at a cost of liquidity. There are four main steps to the Mega Backdoor Roth IRA, though the fourth step depends on the specifics of your 401(k) plan. The main difference between the two backdoor accounts is that one mainly benefits people with high incomes, whereas the other is accessible to virtually anyone who needs a boost to their retirement plan, with no income limitations. The 1099B shows no tax withheld with box 1 matching box 5 and box 7 has code G. After I answer yes to contributing on a After Tax basis to my 401k and confirm the amount on the next page my tax owed goes very high. Share this post: Most of our clients want to learn ways to increase income, reduce taxes and not run out of money while minimizing market risk and unnecessary fees. However, the rules … The second step after making your non-deductible Traditional IRA contribution is converting your Traditional IRA balance to a Roth IRA. Some administrators simply treat the loss as zero gain. I called the IRA provider and they only claims that they will send out form 5498 in May to show that the distribution amount in their 1099R is from a rollover, which should “offset” the taxable amount. Great summary, but I have one quick question: when asked “Did you make any after-tax contribution to your 401k plan? 27, 2019 | Updated Jun. If Box 5 matches Box 1 exactly, put 0 in Box 2a instead of leaving it blank. Box 7 should show a code G. Finally, the box “The IRA/SEP/SIMPLE box is checked on my copy of the 1099-R” should NOT be checked. Most plans allow you to request in-service distribution only from the after-tax account. Guest. How IRS Notice 2014-54 permits Roth conversion of after-tax 401(k) contributions, & has created a new mega backdoor Roth contribution opportunity. The screens aren’t the same as a rollover to a Roth IRA shown here. This 1099R from IRA provider looks exactly like the one you would get by doing backdoor Roth as shown in your post “How To Report Backdoor Roth In TurboTax”. When you come to the Retirement Income section, answer Yes because you received a 1099-R from your 401(k) plan. Tom didn’t have any other Traditional IRA assets aside from his non-deductible contribution in 2018, and he didn’t have any earnings in his Roth IRA conversion. If you did a Backdoor Roth, which involves making a non-deductible contribution to a Traditional IRA and then converting from the Traditional IRA to a Roth IRA, you need to report both the contribution and the conversion in the tax software. You will owe tax on any earnings in the Traditional IRA before converting, but from that point on, those dollars are now Roth IRA assets and aren’t subject to future tax. After paying tax on this $200, the future earnings on the $10,200 going forward will be tax-free. However, the 1099-R clearly shows the $5k in boxes 1 and 5 and box 2a shows $0. For the disciplined investor, the mega backdoor Roth can also help you tuck away one-time upsides like an inheritance. I received 2 1099Rs from Fidelity, which is my 401k provider and which I have Roth IRA with (do not have a TIRA). The Mega Backdoor Roth Strategy. You just enter two 1099-Rs separately. © 2020 Merriman Wealth Management, LLC. Solved: Hi, In 2017 I did a backdoor Roth IRA (contributed $5500 to traditional in 2017 and converted to Roth in 2017) and followed these instructions which. That was it! I have some questions regards to 1099R forms. The loss will not be reported on the 1099-R. In addition, you don’t use form 8606 which is for IRAs. It’s your responsibility to report the non-deductible contribution to your Traditional IRA at tax time on IRS form 8606, Nondeductible IRAs. Box 2a 0 Thank you. If it had the word ‘Roth’, that’s your proof the IRA provider made the mistake and it gives you reason to ask them to correct that mistake. I’m typing it myself here. You just enter the two 1099-Rs independently. 9) At tax time, you will need to fill out Form 8606 for the IRS. Things to Remember About Back Door Roth IRA Conversions. There you have it—a step by step on how to fund a Fidelity Backdoor Roth IRA. I see. Thanks again for the great tutorial. When you’re done examining the form, click on Step-by-Step on the top right to get back to the interview. If you want to do a Mega Backdoor Roth IRA in your i401(k), you're going to need a customized plan. I had extensive discussions with Fidelity and they claim this is correct. I will definitely try it tomorrow. Hi Harry, Roth IRA vs. Backdoor Roth vs. Mega Backdoor Roth: Roth IRA: Backdoor Roth: Mega Backdoor Roth: Funding Source: After-tax dollars: IRA rollover: 401(k) rollover: Annual Limit: Contribution limited to $6,000, plus an additional $1,000 for employees age 50 or over in 2019 Also, should the code be G, not H according to your explanations above? Max out other tax-advantaged accounts first. Whether you take a distribution from your solo 401k, process conversions (e.g., mega backdoor) or a direct rollover to an IRA, box 7 of Form 1099-R is used to report whether such … Here’s how to avoid taxes on a Backdoor Roth Rollover. Charlie’s Backdoor Roth IRA Form 1099-R should look something like this. Please also see the following link: § Mega Back Door Roth Please let us know when you make voluntary after-tax contributions and convert to the Roth 401k sub-account so that we capture the information needed for 1099-R reporting. Do I have to “hide” that balance when performing a Mega Backdoor Roth IRA from my 403b account? Thank you for the excellent articles on this site! Line 5b only includes the $200 taxable amount. The $13,500 after-tax contribution can then be rolled over as a Mega Backdoor Roth IRA. The mega backdoor Roth Solo 401k allows you to contribute more after-tax dollars than you would in a normal Roth IRA. Try entering the 1099-R as two, one for the amount gone into Roth and another for the amount gone into traditional. I did this for 2016 returns and did not see a Form 8606 being prepared by TurboTax. If your 1099-R is correct, the amount of your after-tax non-Roth contributions shows up in box 5 and TurboTax pulls it up here. Problem is when you roll your after-tax contributions to a Roth IRA and after-tax gains into a Solo 401k. Here’s the scenario we’ll use as an example: You contributed $10,000 as non-Roth after-tax contributions to your 401(k). Withdrawing to a Roth IRA also works. 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