401K Rollover to Non Deductable IRA
401K Rollover to Non Deductable IRA
Hello all
I recently did in in-service rollover (Transamerica allows this without the age limitation and still being employed with my company) with a large sum of money from my 401K to a Traditional IRA due to the 401K having horrible expense ratios for each investment going all the way up to 1.5 The traditional IRA is now invested in Vanguard ETF's (Following the coffeehouse portfolio) with considerable lower expense ratios so I thought the move was a good one.
My issue is that now I realized after the rollover that the IRA is now a non deductible one since I don't qualify for any deductions on my contributions. I read that this is the worst IRA to have from my "Bogleheads Guide to Retirement Planning" so I'm very concerned now.
Did I make a bad move on this, should I have done more research? I figured pulling out of the high expense ratio funds I had would be a no brainer. My plan was to do the same in-service rollover each year from my 401K to my IRA little by little until most of the funds were in the IRA.
Any insight or recommendations on this would be greatly appreciated! Thanks guys
I recently did in in-service rollover (Transamerica allows this without the age limitation and still being employed with my company) with a large sum of money from my 401K to a Traditional IRA due to the 401K having horrible expense ratios for each investment going all the way up to 1.5 The traditional IRA is now invested in Vanguard ETF's (Following the coffeehouse portfolio) with considerable lower expense ratios so I thought the move was a good one.
My issue is that now I realized after the rollover that the IRA is now a non deductible one since I don't qualify for any deductions on my contributions. I read that this is the worst IRA to have from my "Bogleheads Guide to Retirement Planning" so I'm very concerned now.
Did I make a bad move on this, should I have done more research? I figured pulling out of the high expense ratio funds I had would be a no brainer. My plan was to do the same in-service rollover each year from my 401K to my IRA little by little until most of the funds were in the IRA.
Any insight or recommendations on this would be greatly appreciated! Thanks guys
Re: 401K Rollover to Non Deductable IRA
This is not a non deductible rollover, it is a rollover of pre tax 401k money into an IRA account and now you have a large pre tax IRA balance. Or if some of the 401k funds were after tax, you would need to record that on Form 8606 for your IRA to reflect the basis that you rolled over.
If the funds rolled over are entirely pre tax, and now you make non deductible contributions to an TIRA account, you cannot convert those contributions tax free due to the pro rate rules. So you cannot do a back door Roth. I think that is what you meant to say,
If so, the larger the amount of the rollover and the greater the expense savings in the IRA vs the 401k, the less damage the loss of the back door Roth will be. You would have to compute your expense savings from having your investments in the IRA in order to assess how much this is costing you, if any.
If the funds rolled over are entirely pre tax, and now you make non deductible contributions to an TIRA account, you cannot convert those contributions tax free due to the pro rate rules. So you cannot do a back door Roth. I think that is what you meant to say,
If so, the larger the amount of the rollover and the greater the expense savings in the IRA vs the 401k, the less damage the loss of the back door Roth will be. You would have to compute your expense savings from having your investments in the IRA in order to assess how much this is costing you, if any.
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Re: 401K Rollover to Non Deductable IRA
Maybe or maybe not a bad move. If your 401k expenses are indeed "horrible" this may be the best thing to do. One correction, your tIRA isn't a "non-deductible one" since there isn't any such a thing. It's just a tIRA that may or may not have some non-deductible contribution basis in it. Probably it doesn't since the 401k rollover would all be pre-tax. Question? ... you said you make too much to deduct tIRA contributions, but do you also make too much to make direct Roth contributions? If you are over for Roth IRAs too then this will interfere with you doing a "backdoor" Roth to get around the income limit. If not, you haven't lost anything. http://www.irs.gov/Retirement-Plans/Amo ... e-For-2015
Can you list your 401k investment options with expense ratios for perhaps the third or half with the lowest ERs? I'd like to make sure there isn't something there with a non-horrible enough ER that it would be worth using in conjunction with your IRAs.
JW
Can you list your 401k investment options with expense ratios for perhaps the third or half with the lowest ERs? I'd like to make sure there isn't something there with a non-horrible enough ER that it would be worth using in conjunction with your IRAs.
JW
Retired at Last
Re: 401K Rollover to Non Deductable IRA
Thanks for the quick reply gentlemen.
1) The in-service rollover was all pre-taxed funds from my 401K and there shouldn't be any tax penalties as per Transamerica (401K) & Vanguard (tIRA)
2) I currently qualify for and contribute to a Roth IRA. My plan was to contribute annually to both the Roth ($2750) & my tIRA ($2750) but because I realized I can no longer contribute pre-tax dollars to my tIRA that's why I assumed it was a non-deductible IRA now. Is it correct that I can still contribute to it with after-tax dollars but I will need to keep track over the next 20 or so years of all my contributions through a tax form so I don't have to pay taxes on it again when I withdraw at retirement making this a grueling process?
3) Below are my 401K investment choices and what im currently invested in. I chose the funds with the lowest expense ratios.
CURRENT INVESTMENTS
Transamerica Partners High Yield Bond Ret Acct Expense Ratio 1.05
SSgA Russell Large Cap Value Index Ret Acct Expense Ratio 0.83
SSgA Russell Large Cap Growth Index Ret Acct Expense Ratio 0.83
Columbia Mid Cap Value Inv Acct Expense Ratio 1.17
American Funds New Perspective Inv Acct Expense Ratio 1.10
SELECTIONS
Cash Equivalent/Money Market
AEGON Cash Reserve Ret Acct Expense Ratio 0.80
Intermediate-Term Bonds
PIMCO Total Return Ret Acct Expense Ratio 1.15
High Yield Bonds
Columbia Income Opportunities Inv Acct Expense Ratio 1.13
Transamerica Partners High Yield Bond Ret Acct Expense Ratio 1.05
World/Foreign Bonds
Oppenheimer International Bond Ret Acct Expense Ratio 1.25
Large-Cap Value Stocks
JPMorgan Equity Income Ret Acct Expense Ratio 1.24
SSgA Russell Large Cap Value Index Ret Acct Expense Ratio 0.83
Large-Cap Blend Stocks
American Funds Fundamental Investors Ret Acct Expense Ratio 0.96
Large-Cap Growth Stocks
American Funds Growth Fund of America Inv Acct Expense Ratio 0.98
SSgA Russell Large Cap Growth Index Ret Acct Expense Ratio 0.83
Thornburg Core Growth Ret Acct Expense Ratio 1.49
Mid-Cap Value Stocks
American Century Mid Cap Value Ret Acct Expense Ratio 1.41
Columbia Mid Cap Value Inv Acct Expense Ratio 1.17
Mid-Cap Blend Stocks
Fidelity Advisor Leveraged Company Stock Inv Acct Expense Ratio 1.32
Oppenheimer Main Street Mid Cap Ret Acct Expense Ratio 1.36
Small-Cap Blend Stocks
Wells Fargo Advantage Small Cap Value Inv Acct Expense Ratio 1.30
Small-Cap Growth Stocks
Nuveen Small Cap Select Ret Acct Expense Ratio 1.70
World/Foreign Stocks
American Funds New Perspective Inv Acct Expense Ratio 1.10
MFS International Value Ret Acct Expense Ratio 1.32
Thornburg International Value Ret Acct Expense Ratio 1.49
Balanced
American Funds Balanced Inv Acct Expense Ratio 0.94
Fidelity Strategic Dividend & Income Ret Acct Expense Ratio 1.27
Target Date Investment Choices
Vanguard Target Retirement Income Ret Acct Expense Ratio 0.91
Vanguard Target Retirement 2010 Ret Acct Expense Ratio 0.91
Vanguard Target Retirement 2015 Ret Acct Expense Ratio 0.91
Vanguard Target Retirement 2020 Ret Acct Expense Ratio 0.91
Vanguard Target Retirement 2025 Ret Acct Expense Ratio 0.92
Vanguard Target Retirement 2030 Ret Acct Expense Ratio 0.92
Vanguard Target Retirement 2035 Ret Acct Expense Ratio 0.93
Vanguard Target Retirement 2040 Ret Acct Expense Ratio 0.93
Vanguard Target Retirement 2045 Ret Acct Expense Ratio 0.93
Vanguard Target Retirement 2050 Ret Acct Expense Ratio 0.93
Vanguard Target Retirement 2055 Ret Acct Expense Ratio 0.93
1) The in-service rollover was all pre-taxed funds from my 401K and there shouldn't be any tax penalties as per Transamerica (401K) & Vanguard (tIRA)
2) I currently qualify for and contribute to a Roth IRA. My plan was to contribute annually to both the Roth ($2750) & my tIRA ($2750) but because I realized I can no longer contribute pre-tax dollars to my tIRA that's why I assumed it was a non-deductible IRA now. Is it correct that I can still contribute to it with after-tax dollars but I will need to keep track over the next 20 or so years of all my contributions through a tax form so I don't have to pay taxes on it again when I withdraw at retirement making this a grueling process?
3) Below are my 401K investment choices and what im currently invested in. I chose the funds with the lowest expense ratios.
CURRENT INVESTMENTS
Transamerica Partners High Yield Bond Ret Acct Expense Ratio 1.05
SSgA Russell Large Cap Value Index Ret Acct Expense Ratio 0.83
SSgA Russell Large Cap Growth Index Ret Acct Expense Ratio 0.83
Columbia Mid Cap Value Inv Acct Expense Ratio 1.17
American Funds New Perspective Inv Acct Expense Ratio 1.10
SELECTIONS
Cash Equivalent/Money Market
AEGON Cash Reserve Ret Acct Expense Ratio 0.80
Intermediate-Term Bonds
PIMCO Total Return Ret Acct Expense Ratio 1.15
High Yield Bonds
Columbia Income Opportunities Inv Acct Expense Ratio 1.13
Transamerica Partners High Yield Bond Ret Acct Expense Ratio 1.05
World/Foreign Bonds
Oppenheimer International Bond Ret Acct Expense Ratio 1.25
Large-Cap Value Stocks
JPMorgan Equity Income Ret Acct Expense Ratio 1.24
SSgA Russell Large Cap Value Index Ret Acct Expense Ratio 0.83
Large-Cap Blend Stocks
American Funds Fundamental Investors Ret Acct Expense Ratio 0.96
Large-Cap Growth Stocks
American Funds Growth Fund of America Inv Acct Expense Ratio 0.98
SSgA Russell Large Cap Growth Index Ret Acct Expense Ratio 0.83
Thornburg Core Growth Ret Acct Expense Ratio 1.49
Mid-Cap Value Stocks
American Century Mid Cap Value Ret Acct Expense Ratio 1.41
Columbia Mid Cap Value Inv Acct Expense Ratio 1.17
Mid-Cap Blend Stocks
Fidelity Advisor Leveraged Company Stock Inv Acct Expense Ratio 1.32
Oppenheimer Main Street Mid Cap Ret Acct Expense Ratio 1.36
Small-Cap Blend Stocks
Wells Fargo Advantage Small Cap Value Inv Acct Expense Ratio 1.30
Small-Cap Growth Stocks
Nuveen Small Cap Select Ret Acct Expense Ratio 1.70
World/Foreign Stocks
American Funds New Perspective Inv Acct Expense Ratio 1.10
MFS International Value Ret Acct Expense Ratio 1.32
Thornburg International Value Ret Acct Expense Ratio 1.49
Balanced
American Funds Balanced Inv Acct Expense Ratio 0.94
Fidelity Strategic Dividend & Income Ret Acct Expense Ratio 1.27
Target Date Investment Choices
Vanguard Target Retirement Income Ret Acct Expense Ratio 0.91
Vanguard Target Retirement 2010 Ret Acct Expense Ratio 0.91
Vanguard Target Retirement 2015 Ret Acct Expense Ratio 0.91
Vanguard Target Retirement 2020 Ret Acct Expense Ratio 0.91
Vanguard Target Retirement 2025 Ret Acct Expense Ratio 0.92
Vanguard Target Retirement 2030 Ret Acct Expense Ratio 0.92
Vanguard Target Retirement 2035 Ret Acct Expense Ratio 0.93
Vanguard Target Retirement 2040 Ret Acct Expense Ratio 0.93
Vanguard Target Retirement 2045 Ret Acct Expense Ratio 0.93
Vanguard Target Retirement 2050 Ret Acct Expense Ratio 0.93
Vanguard Target Retirement 2055 Ret Acct Expense Ratio 0.93
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Re: 401K Rollover to Non Deductable IRA
You could do this half tIRA/half Roth split and keep track of the tIRA basis on yearly (8606) forms, but that makes no sense at all. Just put the full $5500 into the Roth.dskillz1 wrote:2) I currently qualify for and contribute to a Roth IRA. My plan was to contribute annually to both the Roth ($2750) & my tIRA ($2750) but because I realized I can no longer contribute pre-tax dollars to my tIRA that's why I assumed it was a non-deductible IRA now. Is it correct that I can still contribute to it with after-tax dollars but I will need to keep track over the next 20 or so years of all my contributions through a tax form so I don't have to pay taxes on it again when I withdraw at retirement making this a grueling process?
That is a much better investment and it's painless.
JW
Retired at Last
Re: 401K Rollover to Non Deductable IRA
So just let me tIRA sit and collect interest till I retire would be my only move here? Would it be wise to do yearly rollovers from my 401K into my tIRA or do I just build up my 401k?
Thanks
Thanks
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Re: 401K Rollover to Non Deductable IRA
Yes, I would certainly do the yearly rollovers if the 401k choices are even a little horrible. This way, your VG tIRA will grow to a size equivalent to a good 401k! Plus you have an ongoing Roth. That's usually a very good mix.dskillz1 wrote:So just let me tIRA sit and collect interest till I retire would be my only move here? Would it be wise to do yearly rollovers from my 401K into my tIRA or do I just build up my 401k?
You are fortunate, in-service rollovers are a pretty rare option in a 401k.
JW
Retired at Last
Re: 401K Rollover to Non Deductable IRA
The reason it makes no sense to contribute after-tax funds to a Traditional IRA when you can put them into a Roth, is that earnings can be withdrawn tax free from the Roth, whereas they are taxed at your marginal income tax rate when withdrawn from a Traditional IRA. After-tax contributions can be withdrawn tax free from both.JW Nearly Retired wrote:You could do this half tIRA/half Roth split and keep track of the tIRA basis on yearly (8606) forms, but that makes no sense at all. Just put the full $5500 into the Roth.dskillz1 wrote:2) I currently qualify for and contribute to a Roth IRA. My plan was to contribute annually to both the Roth ($2750) & my tIRA ($2750) but because I realized I can no longer contribute pre-tax dollars to my tIRA that's why I assumed it was a non-deductible IRA now. Is it correct that I can still contribute to it with after-tax dollars but I will need to keep track over the next 20 or so years of all my contributions through a tax form so I don't have to pay taxes on it again when I withdraw at retirement making this a grueling process?
That is a much better investment and it's painless.
JW
Re: 401K Rollover to Non Deductable IRA
OK so basically still contribute to my 401K and do rollovers to my tIRA every year up to the max they allow.
Looking at the 401K funds I listed, those Expense Ratios are pretty high correct?
Thanks for your advice!
Looking at the 401K funds I listed, those Expense Ratios are pretty high correct?
Thanks for your advice!
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- Posts: 7189
- Joined: Sun Dec 16, 2007 11:25 am
Re: 401K Rollover to Non Deductable IRA
We have seen worse but I agree with pretty high. Your ER's at Vanguard will be around 10X lower.dskillz1 wrote:OK so basically still contribute to my 401K and do rollovers to my tIRA every year up to the max they allow.
Looking at the 401K funds I listed, those Expense Ratios are pretty high correct?
IMO, the periodic rollovers to Vanguard are an easy call.
JW
Retired at Last
Re: 401K Rollover to Non Deductable IRA
You might consider changing your fund selection to a Vanguard Target Fund that meets your desired stock to bond ratio. Then hold the same Target Fund in your tIRA and Roth IRA. This would be very simple investing and nothing would need to be rebalanced or adjusted when you do your rollovers.
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