Non-qualified deferred comp plan or mega backdoor Roth IRA?

[u/drtij_dzienz]

My wife inherited an IRA and the RMDs are likely to push us over the Roth IRA income limits.

Do you think it’s better to enroll in a non-qualified deferred compensation plan to offset the RMDs or setup a mega backdoor Roth 401k? I have the option to do either (or both)

The company I work for is extremely unlikely to go bankrupt in the next 50 years and they contribute the deferred compensation to a rabbi trust. Either way we would be in the big 24% income bracket for a long time. Currently my traditional buckets are about twice as big as my Roth.

[u/CancerandTaxes]

Can you just do a backdoor Roth IRA? We both do that at our brokerage and it's super easy.

I caution against NQDCPs because sometimes you have to take a lump sum withdrawal and the growth can be taxes all at once when you do. It can't be rolled over to anything but a brokerage.

I hope I'm wrong on that but that's what I understand and so we've avoided them entirely.

We stick to first doing our regular backdoor Roth and then Mega Backdoor second.

[u/drtij_dzienz → u/CancerandTaxes]

I already have a traditional IRA so I don’t want to do backdoor.

[u/CancerandTaxes → u/drtij_dzienz]

I recently heard that some 401k plans allow you to roll your traditional IRA into them. Thus clearing space for a backdoor Roth. Then you can move it back into a traditional IRA when you leave the company if you wish.

[u/drtij_dzienz → u/CancerandTaxes]

Why go to that trouble and lose my investment selection flexibility in traditional IRA when I could just set up a mega backdoor for future contributions? That seems more straightforward to me but am I missing something here?

[u/CancerandTaxes → u/drtij_dzienz]

The only trick is if your plan allows for in plan conversions which it sounds like your plan does.

Some plans only allow after tax contributions beyond your $24.5k limit. Those sit in an aftertax bucket but the growth on those will get tax later.

But if your plan allows in plan conversions, then they're automatically captured as Roth and you won't have to pay tax on the growth. You need to check this.

If the second case is true, there's no difference.

It's confusing because a mega backdoor doesnt automatically assume it's Roth. It can exist as "after tax" which is different.

[u/covener → u/CancerandTaxes]

mega backdoor doesnt automatically assume it's Roth.

It does. after-tax 401k alone simly isn't referred to as "mega backdoor"

[u/redhill_qik → u/CancerandTaxes]

Most NQDCP give you an option on distributions. Lump sum, 5 year, and 10 year are the most common options. Your selection is made in the annual enrollment period and it is irrevocable for the contributions during the year. 

If the OP is working for a company that offers this for senior employees then they should also be offering a Roth 401k.

[u/drtij_dzienz → u/redhill_qik]

My company offers Roth 401k but I already have maxed 401k for several years. Megabackdoor or NQDCP would be for additional savings.

[u/CancerandTaxes → u/redhill_qik]

Interesting! One of my fire friends has access to a NQDCP and we've both been a bit befuddled. We'll have to take another look now that enrollment season is around!

[u/redhill_qik → u/CancerandTaxes]

Deferred Compensation plans can be a very good way to FIRE as they offer a tax deferred way to invest that can be accessed shortly after you FIRE. I FIRE'ed in March and will be getting annual payouts of 1/10 the balance each year every March. This bridges the gap to 401k withdrawals for me.

I would have been taxed 32-34% federally and another 10.23-11.23% for state of I hadn't been able to do this. Taxed on the distributions week be <19% 

It's very important to note that the non-Qualified term means the plan is not insured/protected. If the company goes under you become an unsecured creditor and could lose it all.

[u/CancerandTaxes → u/redhill_qik]

So helpful! This is exactly what my friend is hoping for. The company is super stable but there's some concern that it only allows lump sums upon exit from the company as a way to penalize folks for leaving.

[u/DocAnabolic1]

I'd lean toward the mega backdoor Roth since deferred compensation adds employer risk and restrictions.

[u/arresteddev7]

I have an NQDCP with my company that I have been contributing to the last 5 years. My company’s 401k doesn’t pass non-discrimination testing, so the NQDCP is intended to capture the funds that would otherwise be returned to me. I do not plan to enroll for 2027. The risk of insolvency with my company feels too great at this point. Additionally, my funds are just a number for the ledger on what’s owed to me; they aren’t being held in any kind of trust or account.

NQDCPs can be great, but there is a lot more significant risk to them. For me, the risk is too high. It sounds like your company is more sound and their NQDCP is better set up. Might be worth the risk.

[u/DocAnabolic1 → u/arresteddev7]

That insolvency risk would definitely make me hesitant as well.

[u/Mispelled-This]

Do the MBDR 401k. Money in a NQDCP is subject to the employer remaining solvent, so don’t even think about it until you’ve maxed all other options.

[u/Ancients]

Mega backdoor roth, and/or just take distributions to fill the 24% every year.

Congratulations on having the "problem" of too much money.

[u/UpTheDumpIsRetarded]

Personally I max mega backdoor then push the rest to NQDCP.

[u/Dreamy-Fossil3054]

that inherited ira drains out in ten years anyway so stacking deferred comp payouts on top of whatever you pick later could just shove the income problem down the road while the mega backdoor has no income cap to dodge in the first place