old 401k to IRA precludes backdoor Roth contribution??

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Topic Author
kafshar1
Posts: 68
Joined: Wed Dec 25, 2013 12:08 pm

old 401k to IRA precludes backdoor Roth contribution??

Post by kafshar1 »

Hi BH,

Thank you for all you do. I have a question... I am leaving my current job this week. Have a Fidelity 401k with some good Vanguard index funds. However, it would be slightly easier with only a trivial increase in expense ratios to have my funds in a Vanguard Rollover IRA. This would make rebalancing easier between my Vanguard Roth, my wife's Vanguard Roth, and my account (whether it be old 401k or IRA). In addition, my new employer 401k will have VIIIX as an index funds.

On a previous post, I read from a single poster that that a "401k to Rollover IRA transfer precludes a backdoor Roth from being performed". Is this true? If so, it may not be worth it to me because my goal is to increase my tax-free to tax-deferred ratio and would like to add to our Roth accounts.

Current 401k (Fidelity) - $51k
My Roth (Vanguard) - $50k
Her Roth (Vanguard) - $19k

36yo physician ending my training today.
Goal Asset Allocation until age 40
100% Stocks (50% Total US Stock, 20% Total International Stock, 10% US Reits Index, 10% Emerging Markets, 10% Small Cap Value Index)
Yearly Rebalancing
No Taxable Account


Current Fidelity 401k holdings:
VINIX - ER - 0.04%, Turnover - 5% (500 fund)
VTSNX - ER - 0.12%, Turnover - 5% (Total International)
VIEIX - ER - 0.08%, Turnover - 11% (Extended Market)

My Vanguard Rollover IRA equivalents
VFIAX - ER - 0.05%, Turnover - 3.4% (500 fund)
VTIAX - ER - 0.14%, Turnover - 4.9% (Total International)
VEXAX - ER - 0.10%, Turnover - 10.9% (Extended Market)
VTSAX - ER - 0.05%, Turnover - 4.3% (Total US Stock Market)
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happymob
Posts: 661
Joined: Wed Nov 18, 2009 3:09 pm

Re: old 401k to IRA precludes backdoor Roth contribution??

Post by happymob »

All traditional IRA (including rollovers from traditional 401k plans) are considered when doing a backdoor Roth to determine what portion of the trad IRA to Roth IRA conversion is taxable. If you leave the 401k alone, it won't be considered. If you roll it into a current 401k plan, it won't be considered. If you roll it into an IRA, it will.
barnaclebob
Posts: 5587
Joined: Thu Aug 09, 2012 10:54 am

Re: old 401k to IRA precludes backdoor Roth contribution??

Post by barnaclebob »

It doesnt preclude it, it just makes it less beneficial.

The way I understand it is if you have 95k in the IRA and you want to do a 5k backdoor roth conversion. If you put the 5k into the ira post tax when you go to convert it to a roth you will have to pay taxes on 95% of your conversion plus the gains on the post tax (which you would have to do anyway). You cant just convert post tax money if you have pretax money in the IRA too.
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Kevin M
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Re: old 401k to IRA precludes backdoor Roth contribution??

Post by Kevin M »

To prevent taxation on existing tax-advantaged assets, you do NOT want to roll over 401k into IRA. As already explained, when doing a Roth conversion (which is step 2 of a backdoor Roth), you pay prorated taxes on total pre-tax IRA value. With no pre-tax IRAs, there are no taxes to pay (other than on any earnings before you do the conversion).

Your 401k fund choices are excellent, so I see no reason to even consider an IRA rollover. I don't understand how you think rebalancing would be easier; you can't just exchange from one IRA into another.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
kafshar1
Posts: 68
Joined: Wed Dec 25, 2013 12:08 pm

Re: old 401k to IRA precludes backdoor Roth contribution??

Post by kafshar1 »

I appreciate everyone's post. Looks like there converting is not worth it.

However, just for future reference, I want to make this question clear in my head:

If I didn't want to do a Backdoor IRA (which I do...this is hypothetical situation so I can learn from this).... and then convert my old 401k (Fidelity) which is a pre-tax tax-deferred account into a Rollover IRA .... that would or would not be a taxable event? I am guessing no....but just want to make sure.


When I mentioned before that it would make rebalancing easier....I meant that because the Fidelity 401k doesn't have a Total US Stock Market, the US Reits, the Emerging Markets...it makes using that account a little more restricted. However, I am lucky to have the funds that I have in there... so not complaining. If there were no issues with converting, it would make things a little bit easier since I had more funds from my asset allocation to choose from when in a Vanguard account. Not a big deal.

Thanks again everyone
placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: old 401k to IRA precludes backdoor Roth contribution??

Post by placeholder »

Rolling over tax deferred 401k to a tax deferred IRA is a non taxable event.
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