Moving & Mega Backdoor Roth IRAs

Before any big change in your life (hello, moving!), it's important to get your finances in order. We consider the cost of a move, and we compare our current salary with our future position. But what about saving for your future? It's probably not on your mind when you're thinking about moving. But for my recent move, a Mega Backdoor Roth IRA was something important to consider.

I recently announced our move to a MCOL. I had less than 2 months before my planned maternity leave to figure out how to make sure I was maximizing benefits, particularly my work-sponsored retirement accounts.

My Work-Sponsored Retirement Accounts

To recap, here are the retirement accounts I have through work:

  • 403(b) – I max out my contribution at $18,000 and receive a generous employer contribution + match. I am currently 40% vested in employer contributions.
  • Private 457(b) – I max out my contribution at $18,000. There is no employer contribution.
  • Cash Balance Plan (aka small pension) – Unfortunately, I am 0% vested, so I will lose it all.

In addition to these work retirement accounts, my Roth IRA for 2017 was funded in January.

Planning Ahead for a Move

Since the leave was planned well before our move to a MCOL, I had already increased contributions to my work's 403(b) and 457(b) so that my contributions would be maxed out by the end of September.

I was unable to get a straight answer from HR if I can continue to make contributions when short term disability pay kicked in for my maternity pay, so I played it safe. I also could not get a straight answer if I would continue to get employer contributions plus the match match if I front loaded the 403(b) and 457(b).

Thankfully, the employer contributions + match have continued!

Now, I will be separating from my job (I am employed until the end of December), some things will change. I am starting a new job in 2018 that only offers a 401(k). That means I'm losing my 457(b) and cash pension plan.

Because of that, I decided to take advantage of the Mega Backdoor Roth IRA (linked to excellent article by Mad Fientist).

What is a Mega Backdoor Roth IRA?

You might be wondering what exactly is a Mega Backdoor Roth IRA?

It is the ability to contribute an additional $36,000 a year into a Roth IRA. This is in addition to the regular or backdoor Roth IRA of $5,500 annually.

I knew this was an option through my work's 403(b) since they allow non-Roth after-tax contributions (aka NRATs). This is not the same as being able to contribute to a Roth 403(b) or 401(k). These contributions are in addition to my $18,000 employee contribution. You can contribute NRATs up to the total limit of $54,000 (for 2017).

Obviously, I want the free employer contribution + match, so I am limited to contributing an extra ~ $15,000 in after-tax contributions. But if you have no employer contribution then you can contribute the difference of $54,000 less $18,000, or up to $36,000.

Understanding Mega Backdoor Roths and Taxes

One caveat is that you want your plan to allow in-service distributions, meaning that you can move the NRAT portion of your 403(b) or 401(k) out of the account and into your Roth IRA. Some plans let you do this quarterly or annually. Mine only allows this upon job separation.

This is not a deal breaker, but this means that I will owe taxes on the gains only. One will still owe taxes on the gains with a quarterly or annual in-service distribution, but it will have less time to make gains, so they should be minimal.

Why This Money Move Was Right Before Our Move

I did not contribute to this in the past since I'm still paying down student loans. But now that I am leaving and losing a good amount of tax-advantaged space with the new job. It made sense to “fill up” this bucket before my move.

Final Thoughts on Mega Backdoor Roth IRAs

To summarize, here is how to tell if you are eligible for a Mega Backdoor Roth IRA. Ask yourself these questions:

  • Does your plan allow non-Roth after-tax contributions?
  • Does your plan allow in-service distributions? How often?
  • If yes to both – you are lucky! And have an additional potential $36,000 to contribute to your Roth IRA

If you're eligible to contribute or you want more information about a Mega Backdoor Roth, make sure you swing by the Mad Fientist's article. Whether a Mega Backdoor Roth is the right financial move for you or not, before you move to a new city or simply change jobs, make sure that you think about your future money situation, too.

Have you heard of the Mega Backdoor Roth IRA? Comment below!]]>

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