Mega Back Door Roth cautionary tale (Fidelity)

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investor997
Posts: 153
Joined: Tue Feb 07, 2017 3:23 pm

Mega Back Door Roth cautionary tale (Fidelity)

Post by investor997 » Mon Oct 30, 2017 11:51 am

My 401k plan is through Fidelity, and luckily for me, they allow in-service withdrawals of after-tax money as often as I'd like. The first time I did a Mega back door rollover, my Roth IRA was with another custodian. For the after-tax contributions, I instructed Fidelity to cut a check payable to other custodian FBO me. The remaining pre-tax profits went into a Rollover IRA at Fidelity. Everything went according to plan.

I was poking around the Fidelity NetBenefits (401k) website and by blind luck, I stumbled into the section regarding tax reporting. For the upcoming 2017 1099-R form, Fidelity was going to report the after-tax portion of that initial rollover as taxable ordinary income. Not good! After calling them, they confirmed the issue and committed to correcting it.

Since the initial rollover, I moved my Roth IRA to Fidelity just to make the process quicker and easier, ie, no checks have to be mailed. Ever since then, there's been no issue with transaction reporting. It was just that one initial rollover where the after-tax portion went to an external custodian that had a problem.

So, like they say, Trust but Verify.

ved
Posts: 642
Joined: Sat Jan 18, 2014 6:56 pm

Re: Mega Back Door Roth cautionary tale (Fidelity)

Post by ved » Mon Oct 30, 2017 3:24 pm

My 401k is through Fidelity/Net Benefits also.
I keep my after-tax conversions to Roth IRA at Fidelity itself.

It is a much faster process - the money is put my 401k on Day 1, and it is usually in the Roth IRA on Day 2. So, I am about a day or so out of the market with that money, rather than days/weeks fo having them to send me a check, and me sending it to my Roth IRA custodian.

Plus the conversion can be done over a 5 minute phone call - no forms to fill up, and checks mailed, etc.

SlowMovingInvestor
Posts: 212
Joined: Sun Sep 11, 2016 11:27 am

Re: Mega Back Door Roth cautionary tale (Fidelity)

Post by SlowMovingInvestor » Mon Oct 30, 2017 4:07 pm

ved wrote:
Mon Oct 30, 2017 3:24 pm
My 401k is through Fidelity/Net Benefits also.
I keep my after-tax conversions to Roth IRA at Fidelity itself.

It is a much faster process - the money is put my 401k on Day 1, and it is usually in the Roth IRA on Day 2. So, I am about a day or so out of the market with that money, rather than days/weeks fo having them to send me a check, and me sending it to my Roth IRA custodian.

Plus the conversion can be done over a 5 minute phone call - no forms to fill up, and checks mailed, etc.
if you transfer from a 401k to an IRA at Fido, the money should really be out of the market for even a day unless you use a specific type of 401k fund that is not available in your IRA. And even in that case, Fido will sometimes transfer to an equivalent fund -- for instance from the institutional variety of a fund in a 401k to the investor variety in your IRA.

Also, you can always keep a Roth IRA at Fido, as a conduit, i.e. transfer to it first, then initiate a transfer from that Roth IRA to an outside firm. If the outside firm uses ACATS, the transfer should be quick, and many assets should transfer over. Or you may need to convert the MFs into MFs/ETFs that the other firm accepts, but that can be done without remaining out of the market.

So you can have your IRAs at other firms, and still avoid being out of the market.

investor997
Posts: 153
Joined: Tue Feb 07, 2017 3:23 pm

Re: Mega Back Door Roth cautionary tale (Fidelity)

Post by investor997 » Mon Oct 30, 2017 5:03 pm

SlowMovingInvestor wrote:
Mon Oct 30, 2017 4:07 pm
if you transfer from a 401k to an IRA at Fido, the money should really be out of the market for even a day unless you use a specific type of 401k fund that is not available in your IRA. And even in that case, Fido will sometimes transfer to an equivalent fund -- for instance from the institutional variety of a fund in a 401k to the investor variety in your IRA.
I've found that you need to tell them specifically what you want. One time they tried to roll over the funds as-is which resulted in one of them being converted from an institutional class to investor. Another time, they liquidated everything first.

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TomatoTomahto
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Re: Mega Back Door Roth cautionary tale (Fidelity)

Post by TomatoTomahto » Mon Oct 30, 2017 5:22 pm

investor997 wrote:
Mon Oct 30, 2017 5:03 pm
SlowMovingInvestor wrote:
Mon Oct 30, 2017 4:07 pm
if you transfer from a 401k to an IRA at Fido, the money should really be out of the market for even a day unless you use a specific type of 401k fund that is not available in your IRA. And even in that case, Fido will sometimes transfer to an equivalent fund -- for instance from the institutional variety of a fund in a 401k to the investor variety in your IRA.
I've found that you need to tell them specifically what you want. One time they tried to roll over the funds as-is which resulted in one of them being converted from an institutional class to investor. Another time, they liquidated everything first.
I told them specifically how much to put in each check. They didn’t follow directions, and didn’t check back to clear up their confusion. It was only $xxxx or so in error, but I chuckle when people tell me that Fido’s customer service is so much better than Vanguard’s.

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