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1. 

   dan23
   

   Apprentice
   Joined: Aug '10
   Posts: 52

   After reading a few posts on 401ks, I thought I’d share how to potentially contribute a lot more money into tax sheltered accounts. I went through this last year for a lesser amount successfully. You have to earn at least 55K to do this for the full amount. As this post is fairly long, I will divide this up into 50K and 5K components in 2 posts below.

   This strategy will allow for up to 55K minus(401k contributions + employer match) in a Roth IRA in 1 year. It is only possible at employers whose 401k plan is structured the right away (discussed in below post). You may have to talk to your benefits people to find out if your 401k plan is structured right.

   Why put every extra amount you can spare into a Roth IRA rather than a taxable account?
   If you have had a Roth IRA for at least 5 years (doesn’t have to be with the same broker), you can withdraw your contributions, rollovers and conversions without any penalty or taxes and without having to use 72t. There is a priority order of contributions vs rollovers and conversions, but if you have had a Roth IRA for 5 years this doesn’t really affect you. Unless you need quick access to contributions AND gains, putting money in a ROTH IRA should almost always be better than putting it in a taxable account (so your gains are untaxed and you can access your contributions at any time without penalty)

   Note: I am not a tax adviser and take no responsibility if you screw this up and owe taxes.

   Posted 1 year ago #
2. 

   dan23
   

   Apprentice
   Joined: Aug '10
   Posts: 52

   50K: Savings Plan to Roth 401K:

   Requirements:

   401K at your employer with:

   1.a nondeductible component - also called a “savings plan” or “post-86 savings plan.” This is completely different from a Roth 401K

   2.non-hardship in-service pre 59.5 withdrawal possible from the savings plan before 59.5.

   3.non-hardship in-service pre 59.5 withdrawal not possible from your regular pre-tax 401k

   4.Not required, but makes this better: a lump sum contribution option to your savings plan

   Steps:

   1.Calculate how much you want to contribute to your pretax 401k and what your employer match is. For employer matches leave a buffer in case of salary increase. For example on salary not likely to be higher than 100K that year, 17K +7% match on 100K = 24K

   2.Subtract that number from 50K. 50K-24K = 26K: that is the number you have to work with

   3.If you have lump sum contribution available: contribute up to that number (26K) into your “post-86 savings plan.” You should place the money in the least volatile option (money market if available) your savings plan has.

   If you don’t have lump sum contribution available – contribute up to that number (26K) in as short a time period as possible (reason for this will be explained in [5]

   Note: You cannot contribute 26K until you have earned 26k+your 401k contributions and matches so far. Your plan will probably be able to tell you how much you are authorized to contribute as a lump sum at any point during the year

   4.Immediately after 3., request from your 401k a non-hardship in-service pre 59.5 rollover from your savings plan to your Roth IRA

   5.Your 401k will tell you what amount is taxable and what isn’t. The only amount that is taxable will be any gains on your 26K. If you do a lump sum contribution and then immediately withdraw you should have no gains. If you did not do a lump sum contribution you will likely have a small amount of gains.

   Safest option if you do have gains is to still rollover the entire amount in your savings plan to a Roth IRA and not have them withhold tax on the gains, but pay the tax out of pocket when you do your taxes – if you let them withhold you might run into issues where you pay penalties. Note: There are techniques to put the gains into an IRA and the contribution into a Roth IRA, but they are out of scope and it is unknown whether the IRS is okay with those techniques.

   6.Have them send you a check to your broker for benefit of you. For example: “Vanguard FTC FBO Dan23”

   7.Mail that check to your Roth IRA broker

   At the end of a year your 401K should send you (it sent me) a 1099R with the entire rollover amount as nontaxable (if you had no gains).

   Posted 1 year ago #
3. 

   dan23
   

   Apprentice
   Joined: Aug '10
   Posts: 52

   For the extra 5K:

   If your MAGI (modified adjusted gross income) is under the Roth IRA limit (110K for single), just contribute 5K to a Roth IRA

   If your MAGI is over the Roth IRA limit, conduct a Backdoor Roth IRA, which many of you are probably familiar with (discussed below):

   1.If you have any money in a regular IRA, and you do not want to pay taxes on converting that money into a Roth IRA – move that money into your companies 401k

   2.Contribute 5k nondeductible into a standard IRA

   3.Immediately convert that money into a Roth IRA
   Only gains will be taxable (if there are any never withhold for taxes). If you do this process in 2 consecutive days and placed the initial contribution in a money market you should have no gains.

   Posted 1 year ago #

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