This is a document to help me understand how 401(k) and IRA work. Last updated on 2019/02.

401(k)

Types of Contributions

	Pre-tax 401(k)	Roth 401(k)	After-tax 401(k)
Contribution Taxed today?	No	Yes	Yes
Contribution Taxed upon withdrawal?	Yes	No	No
Earning taxed upon withdrawal?	Yes	No (for qualified withdrawals)*	Yes
Can you convert to Roth later?	Yes	No	Yes
Contribution Limits (2019)	$19000(<50), $25000(>50)**	$19000(<50), $25000(>50)**	$27500

*A distribution or withdrawal of Roth 401(k) is usually taxable unless the inital contribution was made more than 5 years ago and you’re at least 59.5. Early withdrawels maybe subject to 10% federal penalty tax.

**Pre-tax and Roth commbined cannot exceed the amount listed.

IRA

Types of Contributions

	Traditional IRA	Roth IRA
Income Limits	No	Phase-out starts at $122000, ineligible at $137000 if single. Phase-out starts at $193000, ineligible at $203000 if married.
Contribution Limits(2019)	$6000(<50), $7000(>50)*	$6000(<50),$7000(>50)*
Tax Deduction	No deduction if your income is above certain amount.**	No
Withdrawal	Withdrawals are penalty free beginning at age 59.5.	Contributions can be withdrawn at any time, tax-free and penalty free. Five years after your first contribution and age 59.5, earnings withdrawals are tax-free, too.

*This covers your total contribution to either a Traditional or a Roth IRA.

**This means the Trditional IRA can contain after-tax contributions. When you take a distribution from a nondeductible contribution, the portion of the distribution coming from nondeductible contributions is tax-free. For example, if two-thirds of your traditional IRA’s value comes from nondeductible contributions, two-thirds of your distribution will be tax-free. For more details about tax deduction, please take look here.

Roth IRAs: Contribution Dealine: 04/18/Y for Year Y-1

Pro-rata Rule

What is this

The pro-rata rule is the formula used to determine how much of a distribution is taxable when the account owner holds both after-tax and pre-tax dollars in their Traditional IRA(s).

Calculate how much money in your Traditional IRA(s) accounts is pre-tax and how much is after tax. Treat all of your IRAs like one big IRA for this purpose. Say you have a total of $100,000 in all of your accounts, and $10,000 of it is money you put in after taxes. You will owe taxes on 90% of the money you convert to a Roth.

How to avoid it

You can roll the pre-tax amounts from your Traditional IRA(s) to 401(k). And then roll the after tax amounts from your Traditional IRA(s) to Roth IRA.

Backdoors and Rollover

Backdoor Roth IRA

In a short: Convert from Traditional IRA to Roth IRA.

Ensure you don’t have any amount of pre-tax IRA(s).

This is to avoid Pro-rata rule.
Make a non-deductable IRA contribution.

This is as known as after-tax traditional IRA.
Convert the money from traditional IRA to Roth IRA.

MEGA Backdoor Roth IRA

MEGA back door has two flavors: Convert from after-tax 401(k) to Roth 401(k) or Roth IRA.

Contribute to your money after-tax 401(k).
Convert that money to the Roth 401(k) or Roth IRA.

Ideally, you will convert the money to Roth 401(k) or Roth IRA as soon as you cotribute the money to the after-tax 401(k). In this way, you don’t need to pay the earning tax because this is no earning yet (in your after-tax 401(k) account).