"Mega" 401(k)

I've not heard this term.  What's the difference, if any, between this "mega" 401(k) and a 401(k) that allows for both Roth deferrals and employee voluntary contributions?

2 hours ago, thepensionmaven said:

I've not heard this term.  What's the difference, if any, between this "mega" 401(k) and a 401(k) that allows for both Roth deferrals and employee voluntary contributions?

Nothing. It's just another term to describe it, though I usually hear it described as "a mega back door roth"

The "mega" is in reference to being able to essentially make a ROTH contribution equal to the 415c limit through VAT and immediate conversion to ROTH instead of the non-mega? IRA limit you could get by contributing the IRA limit and converting that to ROTH (assumes you don't have pro-ration problem with other taxable IRAs)

Lou, do you prefer In-Plan conversion or "Out-of-Plan" to an IRA? What are the resonings for your preference?

To be honest I had not given it much thought. I suppose the rollout to IRA approach has some planning benefits with respect to the 5 year clock and basis recovery first should the funds be required before 59.5 where as in the plan a future in-service that's not qualified would be be prorated between basis and earnings.

5 year clock can be bypassed by opening a Roth IRA in advance with a nomianl $100, no?

What is a good source to read up on the mechanics?

I have a client that is making voluntary contributions as well as deferrals plus SHNE, all within 415 limits.  Broker sold the client on the idea of converting voluntary to Roth and has done nothing.  Voluntary just sitting in participant's account.  Sounds like broker doesn't know what he's doing!

While I haven’t considered whether it’s a good source, here’s an article from the Journal of Accountancy:

https://www.journalofaccountancy.com/news/2023/may/how-mega-backdoor-roth-works.html

I concur with AlbanyConsultant’s observation about too many people reading or hearing about the idea without recognizing how a plan provision fits with coverage, nondiscrimination, and top-heavy rules.

Beyond a one-participant situation, allowing employee contributions might fit if all employees are highly-compensated employees. That sometimes happens with a professional-services firm if the firm uses no support staff and even a beginner gets pay above $155,000.

I concur also that within-the-plan reallocations to Roth often meet enough of the interest in Roth-ing to make employee contributions unnecessary.

I find myself wasting too much time explaining to the owner of a firm with a 50 life plan why Mega Back Door Roth won't even work for that plan due to ACP Testing (among other issues), because the client's broker read some article that this is the ultimate way to save for retirement.  Oh, and that owner often tends to be close to retirement already.

Just as a follow-up to my above comment.  Just this morning I had another client who is being advised to do Mega Roth, and guess what?  They have 10 other employees under the Plan.  It is a 401(k) Safe Harbor Plan, so the broker thinks that ACP Testing doesn't apply.  As I understand, Voluntary Post Tax Contributions are NOT considered Safe Harbor Contributions, so the ACP testing would apply.  Is this correct?

Yup.

yes, ACP applies.   Not likely to work unless all Ees are HCEs.  

As suspected.  I HATE when these new fad strategies start going around.  Yes, I understand that for some people this is a good choice, but the niche is small.  So far, just today, I had to explain to 2 clients that it won't work for them specific to their plans given the coverage of employees, the low participation rate of employees, and the impact of both ACP and Top Heavy being put back on the table.  This is being done all the while that the investment advisor is saying how his manager says there is no such problems.  Right.

I’m curious, when a broker-dealer or investment-adviser rep presents an idea like Mega Roth, how many of them add to the description something like: “You should check it out with your retirement-plan guy.”?

All? Many? Some? None?

8 minutes ago, Peter Gulia said:

I’m curious, when a broker-dealer or investment-adviser rep presents an idea like Mega Roth, how many of them add to the description something like: “You should check it out with your retirement-plan guy.”?

All? Many? Some? None?

Some.  Others were "I was just at the Dr. Acula conference and in one session...", or "Forbes/WSJ just had this article..."

On 1/2/2024 at 5:10 PM, Peter Gulia said:

I’m curious, when a broker-dealer or investment-adviser rep presents an idea like Mega Roth, how many of them add to the description something like: “You should check it out with your retirement-plan guy.”?

All? Many? Some? None?

I think it all depends upon what the broker is trying to represent themselves to be to a client.  You have the "I am the one-stop solution to all your needs", or the "let's work with your other advisors" person.  The former provides horrible service and should be avoided, while the latter makes sure that the client is properly advised.  Unfortunately, this Mega Roth Fad is bring all of the one-stop disasters out as they try to sell whatever pops up on the shelf, regardless of whether it applies to a specific client.  Just today, I fielded 3 call on Mega Roth for clients that could never use that type of provision.  Does the broker care that what they are saying is wrong is a really telling question.  One that I had today I had tried to call the broker last week, and got no return call.  Of course, the client then calls us to find out how this great idea will apply and you have to tell them it won't work, so of course the broker calls you to complain that you contradicted there oh so wonderful advice.  Of course, even after you point out that you tried to minimize the damage with your attempted call from a week ago, you are still at fault.  How dare you tell the client the actual facts!