Mega Backdoor Roth 401(k) – Too Good To Be True?

[esetter]

My son’s 401(k) plan allows after-tax 401(k) contributions (up to the IRS limits) to use an in-plan Roth rollover into a designated Roth account in the same plan. Assuming the rollovers are done as soon as the after-tax contributions are made, is it accurate to say that the rollover amounts are not taxable and that pro-rata rules do not apply?

[Alan S.]

Yes, but only if there are no gains before the IRR. If there are a few dollars of gains in the after tax sub account, those gains will be taxable and your 1099R will report them in Box 2a.

Be sure your IRR is limited to the balance in the after tax sub account.

 

[esetter]

Thank you, Alan.  In this case there will be minimal, if any, gains before the rollover. It’s a pleasant surprise to learn that the prorata rules do not apply.

[Author]

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