After Tax Contributions and Mega Back Door Roth Contribution

[mjf06241972]

Can someone provide me some pro's and con's on each type of contribution?

1.  After Tax Contribution to 401k plan

2.  Mega Back Door Roth Contribution

Normally the plans we work on are just pretax 401k and roth 401k.

Thank you.

[Bill Presson]

These options work well in a owner only 401(k).

But in a 401(k) with other employees, the after tax contribution typically won't pass the ACP test.

[mjf06241972]

Thanks Bill.  That's what I see too.

[JackS]

Now that we have Roth and in-plan Roth conversions, both options have become almost useless and irrelevant.  As Bill states, Owner only is the only pace this tends to work but ask the owner this question, would you rather make deferrals of compensation and pay wage taxes or just make a PS contribution and not pay wage taxes?  If the owner's comp is  low - e.g. $30k and they want to be able to put most of it in a plan, then the deferral part will be needed.  If the comp is high enough the deferral part can be ignored.  Make the PS and do an in-plan roth transfer if you just have to pay taxes now. 

BTW, every month or 3 some yahoo writes an article touting the benefits of post-tax contributions in plans, gives it some marketable fancy name (e.g. Mega Back Door in Morningstar recently!) as if they have just discovered penicillin.  They always ignore the practical issues - ACP testing.  Then a new crop of advisors read it and think they have just found a magic elixer of eternal life.  Those of us in the pension community have the honor of breaking the bad news to them.  It's a conversation that has gotten very old.

Interestingly, I did talk to an advisor the other day who claims that Google uses the post tax feature.  I can see where they would have many people in the higher (but not HCE high) salary range who many want to defer more than the 19k/25k limit.  I can also see where they have the resources to throw $ at the plan in the form of additional matches for NHCE's to support the program and pass the testing.  It's always nice to have a client where money is no object.  

[justanotheradmin]

"Mega Back Door Roth" is a marketing term. An after-tax contribution is done, then converted to Roth. 

A better phrase would be "after-tax contribution with a Roth conversion". Sometimes we see plans with after-tax contributions but no one remembered to do the Roth conversion part (which is pretty important) so the participant finds out later that there is tax due on the earnings on the after-tax money. 

And  I agree with JackS, the news / marketing cycle churns this up periodically and it's nothing new. 

[MoJo]

We've actually seen a lot of interest in this approach - and yes, the BIG drawback is the ACP testing failure.  BUT, if the numbers work, then it can be a viable solution for participants who have outside assets into the plan, and then converted to Roth so that future growth is tax FREE.  But, it is a numbers game.  We have one LARGE law firm doing this - where 1) all of the Associated make in excess of the HCE dollar limit; 2) NONE of the employer contributions go to Associates (i.e. - typical lawfirm 2 plans set-up with a Partner & Staff plan where employer contributions are made and a separate deferral plan for Associates only); and 3) the employer makes the "top paid group" election to limit the number of HCEs - resulting in all of the associates being NHCEs (despite making obscene amounts of money).  The "Mega-Roth" feature is limited to use ONLY by NHCEs - which gives the Associates, and staff the opportunity to convert outside assets into tax FREE growth.  Works for them.  But it requires a situation like that to avoid the ACP issues.....