qbteachmt
Level 15

"mega backdoor Roth) being W-2 employees. So they max out the elective portion + after-tax contributions on top of that."

You really have to know the specific plan type, because there are wage limitations for participating in some types of plans/accounts. Then, you have to know if there is employer participation or not, elective or nonelective. For example, the reason people participate in an employer plan is that the contribution max is higher than IRA (excluding SIMPLE). But the issue for Roth is when there is an upper earned income limit, above which you don't qualify to participate. That's where two things come into play: Nondeductible and Backdoor

Making a nondeductible contribution as post-tax to a plan or account that allows for it, such as 401(k) and Trad IRA, then, converting that to the Roth you would have wanted to participate in. Since it is already post-tax, there is no further tax owed (setting aside issues of pro rata conversion, of course; this is theoretical, hypothetical). And for these employer plans, the plan has to allow certain activities. There might be 8 provisions in the regulations, but an employer isn't required to offer all of them (post-tax amounts, hardship withdrawals, loans, etc).

Backdoor is just, "converted so quickly there is no taxable earnings or growth." Again, setting aside issues of pro rata and assuming an entire contribution is basis and also is converted right away. It's not a contribution type, in other words, so it is not subject to wage limits for participation.

"and made after-tax contributions on top of that"

Are you comfortable that this part already hasn't exceeded the limits, has met thresholds, etc? Your taxpayer should have had a plan administrator at the first job who watches and knows the limits. But changing jobs might mean the taxpayer needs to seek out the new plan's administrator and review what all they have done so far. And your taxpayer might benefit from rolling their prior 401(k) funds either to IRA or to the new employer's 401(k) (if the new employer provides that option).

This is why benefits planning and administration is its own specialty 🙂

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