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There exist two types of Roth IRA Rollover (a.k.a., Roth IRA backdoor):

  1. Convert from a non-deductible traditional IRA to a Roth IRA
  2. Convert from an after-tax 401(k) to a Roth IRA

What are the pros/cons of 1 vs. 2?


Related question: What are the disadvantages of a backdoor versus conventional Roth IRA contribution?

FYI, if you contribute to Roth 401(k) or Roth IRA: Tax on money withdrawn from Roth 401(k) and Roth IRA when living outside the United States and over 59.5-year-old

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It sounds like you're comparing (1) the backdoor Roth IRA and (2) the mega backdoor Roth. Although the names are similar they are considerably different, and not mutually exclusive.

The goal of the backdoor Roth IRA is to contribute to a Roth IRA even if you are over the income limits. This is accomplished by contributing to a non-deductible Traditional IRA and then converting to Roth. Both of these steps have no income limit (unlike a direct Roth IRA contribution, which does), and only the earnings (which should be minimal) will be taxed. More info here (mirror).

The goal of the mega backdoor Roth is to get a lot of money into Roth accounts through salary deferral. This is accomplished by making non-Roth after-tax contributions to your 401(k) after exhausting the $18,000 limit (in 2017) for pre-tax + Roth employee contributions. The after-tax contributions (potentially up to $36,000 for 2017) can be rolled over to the Roth 401(k) or to a Roth IRA, while the earnings can be rolled over to the pre-tax 401(k) or a Traditional IRA, or taxed like regular income and converted to Roth along with the contributions. More info here (mirror).

  • Thanks for the detailed explanation! So to sum it up, assuming one can do either backdoor Roth IRA or mega backdoor Roth (or both), backdoor Roth IRA has neither upside nor downside vs. mega backdoor Roth, correct? – Franck Dernoncourt Oct 16 '17 at 3:00
  • @FranckDernoncourt They can both be good options. The major con of the backdoor Roth IRA is the pro rata rule if one has existing pre-tax IRA money, as discussed here. – Craig W Oct 16 '17 at 3:08
  • why 36K for 2017? – mhoran_psprep Oct 16 '17 at 10:16
  • @mhoran_psprep The overall 401(k) contribution limit for 2017 is $56,000. So subtracting the $18,000 of employee contributions to pre-tax or Roth, and assuming no employer contributions, you'd have a maximum of $36,000 you could contribute to after-tax. – Craig W Oct 16 '17 at 12:33
  • If they allow after tax. Of the 5 companies I have worked for only 2 have allowed after tax contributions, and none since the introduction of the Roth 401k. – mhoran_psprep Oct 16 '17 at 12:44
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One difference is in the ability to split the pre-tax and after-tax portions of the Traditional account. (Note that earnings in a Traditional IRA or Traditional 401(k) are always pre-tax, even if it was earned from after-tax money, so if you left the money for some amount of time after an after-tax contribution, chances are it's a mix of pre-tax and after-tax money.)

When you take money out of a Traditional IRA, including for conversion to a Roth IRA, you are generally subject to the "pro-rata rule", which means that your withdrawal will consist of pre-tax and after-tax amounts in the same proportion as in your whole Traditional IRA. This means that a conversion of a Traditional IRA with any mix of pre-tax and after-tax amounts, will always be taxed on a portion of the withdrawal (the pre-tax portion), and it will leave some after-tax amounts in the Traditional IRA unless you take everything out. The only way to separate the pre-tax and after-tax amounts is to roll over to a Traditional 401(k) (if you have a 401(k) plan that allows this); rules say that only pre-tax amounts can be rolled over into a 401(k), so only pre-tax amounts are rolled over, and if you roll over all the pre-tax amounts, only after-tax amounts will remain.

On the other hand, when you rollover your entire Traditional 401(k) to IRAs, you can choose to have the pre-tax portion rolled over to a Traditional IRA and the after-tax portion rolled over to a Roth IRA, separating them, due to IRS Notice 2014-54.

  • In the last paragraph, don't you mean "rollover your entire after-tax 401(k)"? If you rollover a Traditional 401(k) it would all go into a Traditional IRA. – Craig W Oct 16 '17 at 21:10
  • @CraigW: By Traditional 401(k) I mean a 401(k) that is not a Roth 401(k). It can have both pre-tax and after-tax money. Earnings all go into the pre-tax. – user102008 Oct 16 '17 at 22:29
  • Fair enough, but is it common for people to rollover their entire non-Roth 401(k), i.e. including pre-tax contributions and earnings? I thought typically people just rolled over their after-tax 401(k) contributions (to Roth 401(k) or Roth IRA) and earnings (to pre-tax 401(k) or Traditional IRA). – Craig W Oct 16 '17 at 22:49

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