In 2019 I’ll be making ~135k base comp with ~80k RSUs vesting.
Should I do a back door conversion for a Roth?
Not making any 401k contributions since my company has no match.
Late 20s, single, no kids.
- Google YAPTRFDo you live in California? When you retire you'll likely never pay as high of taxes as you do now.
So paying taxes later in life is cheaper than paying taxes today....401k comes out ahead.
Do you live in Texas / Washington with no state taxes....then you gotta decide that If you move you **might** pay higher taxes later in life... however you'll be pulling out less from your 401k in retirement than you make today... leading to less paid out in taxes
- Almost all 401ks have a Roth option. I’d check that out. Your expense ratio on a 401k will almost certainly be lower than an IRA.
Also backdoor IRA has tax complications that are easy to get tripped up by. Like for instance the IRS won’t give solid guidance but it’s generally accepted your in service contributions need to remain in the IRA for 1 year before you do a backdoor conversion. In that time you’ll have to pay taxes on all gains. That’s all fine but the very idea that there’s controversial best practices make it not a preferred first vehicle for retirement funds.
Plus you’re limited to $5500 per year whereas the 401k is 19k.
- @IHEA anyone at boggleheads, /personalfinance reddit, or any other FIRE or investment forum will tell you this. It definitely is generally accepted. Even Vanguard gave this recommendation to amazon employees when this came up in a benefits Q&A.
You can risk it. Up to you. But it is the generally accepted recommendation to avoid IRS issues.
- I spend plenty of time on Bogleheads (not "boggleheads") and I can assure you it is not generally accepted. I invite you to post to the Bogleheads forum right now and ask, "Is it generally accepted that in the backdoor Roth IRA contribution strategy, one must wait for one year between making the traditional IRA contribution and converting it to Roth?" and see how many people agree with you that it is generally accepted.
The Vanguard employee talking to you at a benefits Q&A was surely talking about the mega backdoor strategy, not the backdoor Roth IRA strategy, because the latter is unrelated to employee benefits. Your use of the phrase "in service contributions" also hints to me that you are confusing this with the mega backdoor, because in service distributions are an important part of the mega backdoor.
Speaking of the mega backdoor, you're even safer there. Fidelity, who administers my 401k, has gone so far as to automatically instantly convert to Roth all non-Roth after tax 401k contributions *same-day*. A waiting period for in service distributions may be imposed by the terms of your plan but the IRS does not care.
Also, even if you wish to or are forced to wait to do your distributions of non-Roth after tax, the IRS has explicitly allowed you to rollover non-Roth after tax contributions and the earnings on those contributions *separately* to a Roth IRA and a traditional IRA respectively. See IRS Notice 2014-54. This means that it's not a taxable event either way (though waiting longer does give you more stuff in traditional which could have been in Roth). It's possible that your Vanguard representative was not aware of this, or that this Q&A session happened a long time ago.
- Amazon does not meet the criteria to allow mega backdoor 401ks. The vanguard rep was giving tips for alternatives because amazon highly compensated employees are not allowed to take full use of the then-$18,500 401k limit (it’s a PITA).
Fine bogleheads. 🙄 I wouldn’t post that because I’d get lectured about posting something easily searchable. So use the search bar buddy. You’ll see tons of threads on it.
Also the only way you’d pay no taxes is if you have NO traditional IRA funds/gains already, and you put after tax distributions into the account and it never had any gains. Then you can convert effectively tax free. If you currently have traditional IRA funds in any account, the IRS pro rata rules apply.
- Let me quote directly from the Bogleheads wiki ( https://www.bogleheads.org/wiki/Backdoor_Roth ):
>When you do a Backdoor Roth, you first make a nondeductible contribution (i.e., already taxed) to a Traditional IRA. After that transaction has been completed (usually in one business day), you do a Roth conversion.
>(usually in one business day)
Are you still going to say that it's generally accepted that you have to wait a year? The wiki page doesn't even mention that one business day might be controversial.
If the Vanguard employee was talking about the normal backdoor Roth IRA strategy, they were simply wrong if they said that waiting a year was "generally accepted".
The IRS pro rata issue can be avoided by rolling your traditional IRAs into your 401k before performing the backdoor Roth. If you don't have a 401k that accepts incoming rollovers from traditional IRAs, you can create a solo 401k which does accept such rollovers. For example, Fidelity's free Self-Employed 401(k) allows this, IIRC.
It sucks that you guys don't get mega backdoor at Amazon. Any idea why not? I'm sure that upper management would love this option too, i.e. it's not just something the underlings want. I wonder if your plan administrator (Vanguard) just charges employers much higher fees for adding non-Roth after tax contributions and in service distributions / in-plan conversions to their 401k plan, so corporate doesn't want to pay... is there any kind of agitation internally trying to get mega backdoor set up?
- Companies have to meet non-discrimination rules that Amazon doesn’t meet. For a lot of reasons I have to keep confidential, but sufficed to say no mega back door and every year you get a nasty refund from
Vanguard and a tax penalty from the IRS because of it. HCEs can only contribute somewhere around 16-17k to the 401k but you never know until tax time.
- Oh, yeah I'm aware of those rules, but damn, that's pretty skeevy. Our 401k's administrators worry about those rules too but I guess we at least try to meet them, instead of breaking them and then sorting out the mess with refunds and penalties later. We're only allowed to contribute up to 20% of our salary to non-Roth after tax, for example. That's one way in which they maintain compliance. I've never received a 401k contribution refund or had to pay a penalty.
I guess if I think about it it makes some sense that Amazon would have a hard time meeting the non-discrimination rules, what with the disparity in salary between engineers and, say, people working on warehouse floors (assuming they're part of the same 401k pool)...