Is Backdoor Roth worth it, if one has expensive 401k?

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Is Backdoor Roth worth it, if one has expensive 401k?

Postby arvin » Fri May 10, 2013 3:18 pm

I recently learned about backdoor roth. But I was wondering if it's any good for my situation, because I need to rollover my IRA worth around 200K to my current 401k plan which I believe has high advisor fees (0.55%). They do have good Vanguard lifestrategy funds though.

So I would be paying around 1K per year for 401k fees to get 5.5K into Roth.
Even though I am in high tax bracket 25% federal + 9.3% state, I am thinking taxable is better for me than backdoor roth.

Am I thinking the right way? Did I miss any long term implications?
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Re: Is Backdoor Roth worth it, if one has expensive 401k?

Postby Random Musings » Fri May 10, 2013 4:49 pm

[edit, I thought the OP had a rollover IRA, not a traditional one]

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Last edited by Random Musings on Fri May 10, 2013 10:36 pm, edited 1 time in total.
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Re: Is Backdoor Roth worth it, if one has expensive 401k?

Postby archbish99 » Fri May 10, 2013 5:03 pm

@Random Musings -- do a little reading on Backdoor Roths. The taxation is based on what percentage of your Traditional IRA assets were deductible. By having a large amount in a Traditional IRA, the OP would pay taxes on almost the entire conversion amount taxed again in addition to having already paid taxes on the Traditional IRA contribution. They would also have to track basis in their Traditional IRAs from now on, which will be a tax hassle.

These issues on top of a rotten 401k? I'd say not worth it, personally. If you have any SE income, look into opening an Individual 401k and rolling the IRA into that. (Vanguard doesn't currently allow rollovers to their Individual 401k accounts, but Fidelity reputedly does.) Otherwise, use the 401k up to the max, but don't bother with the rollover.
I'm not a financial advisor, I just play one on the Internet.
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Re: Is Backdoor Roth worth it, if one has expensive 401k?

Postby arvin » Fri May 10, 2013 6:21 pm

@archbish99 -- Thanks for the your opinion and suggestion. I will keep my eyes open for self employment opportunities. :greedy

@Random Musings -- For backdoor roth to work, you would need to keep your ordinary IRA balance almost empty otherwise you will be hit with taxes.
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Re: Is Backdoor Roth worth it, if one has expensive 401k?

Postby grabiner » Fri May 10, 2013 9:58 pm

Another alternative is to convert your Traditional IRA to a Roth IRA over several years (up to the top of the 25% tax bracket if you don't hit any benefit phase-outs); this may make sense if you plan to retire in California as well, as you may retire in the same tax bracket. If you are going to convert over several years, you can make non-deductible contributions every year, knowing that they will become Roth contributions soon.
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