Rollover and Roth Conversion

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
Kintora
Posts: 107
Joined: Sun Jan 12, 2020 5:21 pm
Location: Fargo, ND

Rollover and Roth Conversion

Post by Kintora »

Hoping for some feedback on the best order of execution for a tIRA rollover to my workplace 401k and a Roth conversion of the small after-tax basis in the same tIRA.

Background:

I have a tIRA at Vanguard with about $54k in VBTLX. These funds were originally in a pre-tax 401k and then rolled over to Edward Jones as a tIRA several years ago. In 2020, I exited EJ and the tIRA transferred to Vanguard. I also have a Roth IRA at Vanguard.

For 2020, I overcontributed to my Roth IRA due to a higher than usual AGI, and to resolve this, I did a partial recharacterization from my Roth IRA to my tIRA at Vanguard ($1,280 of Roth IRA contribution plus the calculated earnings were recharacterized to my tIRA).

Now that I have $1,280 of tax basis in my tIRA, I would like to rollover the pre-tax amount from my tIRA to my workplace 401k which is a good 401k as far as fees and investment options. I would also like to convert the $1,280 after-tax amount in my tIRA back to my Roth IRA. I want to do all of this to consolidate and simplify things (fewer total accounts and less future tracking of basis in a tIRA).

Question:

As far as executing this, which would be the best way to do it?

1.) First, ask Vanguard to execute a rollover to my 401k but only with the pre-tax portion of my tIRA, leaving the $1,280 behind. I believe they would send me a check for the value of the tIRA minus the $1,280 which I would then submit to my employer 401k with a rollover form. As soon as the balance in my tIRA drops to $1,280, THEN execute a Roth IRA conversion.

OR

2.) First, execute a conversion to Roth IRA for $1,280. THEN, reach out to Vanguard to rollover the entire remaining value of the tIRA to my 401k.

Is there a best order to do this, or does it not matter?
User avatar
David Jay
Posts: 11060
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Rollover and Roth Conversion

Post by David Jay »

In my opinion, you should use process #1 because you are assured of completing the 401K before you perform the conversion (and assure no tax consequence).

With #2 there are possible unknowns that may create a tax liability. For instance, with #2, if you were fired the day you perform the conversion then you would not be allowed to complete the 401K rollover (required by December 31) and the conversion would be almost entirely (~98%) taxable.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
FiveK
Posts: 11575
Joined: Sun Mar 16, 2014 2:43 pm

Re: Rollover and Roth Conversion

Post by FiveK »

#1 is "safer" as David Jay notes. There have been tales of people who thought their 401k would accept an incoming rollover but then it didn't, and they were stuck with the pro-rata consequences.

#2 may be "cleaner" in that you can convert exactly the $1200 and then roll over "everything else" to the 401k.
User avatar
David Jay
Posts: 11060
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Rollover and Roth Conversion

Post by David Jay »

The other side is that this is a lot of work to save taxes on $1200. In, say, the 24% tax bracket, that is only $288.

Doing a 401K reverse rollover only makes sense (from an effort standpoint) if you intend to do "backdoor Roth" contributions in future years.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
Topic Author
Kintora
Posts: 107
Joined: Sun Jan 12, 2020 5:21 pm
Location: Fargo, ND

Re: Rollover and Roth Conversion

Post by Kintora »

Thanks, David Jay and FiveK, for your feedback. I appreciate it.

I am going to think over what you both have said and sleep on it.

David, it's not so much financial motivation for me. More along the lines of getting rid of future basis tracking and tax reporting (Form 8606) for when I would start taking distributions from that tIRA in retirement for income and/or conversions. I suppose it could be argued that dealing with the Form 8606 in those cases is not really a big deal. Maybe it's just a little OCD on my part too not liking that basis in my tIRA :)
User avatar
Duckie
Posts: 8236
Joined: Thu Mar 08, 2007 2:55 pm

Re: Rollover and Roth Conversion

Post by Duckie »

Kintora wrote: Thu May 06, 2021 12:15 pm First, ask Vanguard to execute a rollover to my 401k but only with the pre-tax portion of my tIRA, leaving the $1,280 behind.
Choose this option. But before starting, separate the assets into two different funds. Put the small $1280 basis amount in a money market fund so there will be minimal gains and no losses. Then have Vanguard roll the larger fund amount to the 401k. That should avoid potential screwups.
Is there a best order to do this, or does it not matter?
Roll first and convert second, just in case.
User avatar
Topic Author
Kintora
Posts: 107
Joined: Sun Jan 12, 2020 5:21 pm
Location: Fargo, ND

Re: Rollover and Roth Conversion

Post by Kintora »

Duckie wrote: Thu May 06, 2021 5:46 pm
Kintora wrote: Thu May 06, 2021 12:15 pm First, ask Vanguard to execute a rollover to my 401k but only with the pre-tax portion of my tIRA, leaving the $1,280 behind.
Choose this option. But before starting, separate the assets into two different funds. Put the small $1280 basis amount in a money market fund so there will be minimal gains and no losses. Then have Vanguard roll the larger fund amount to the 401k. That should avoid potential screwups.
Is there a best order to do this, or does it not matter?
Roll first and convert second, just in case.
Thanks, Duckie. Using that method, would I want to put the $1,280 in a money market fund other than the settlement fund? If so, the problem I see is that the minimum is $3,000 for all of the Vanguard MM funds. Or I would just park the $1,280 in the settlement fund and then instruct Vanguard to rollover everything currently in VBTLX and not to touch the $1,280 in the settlement fund?
User avatar
Duckie
Posts: 8236
Joined: Thu Mar 08, 2007 2:55 pm

Re: Rollover and Roth Conversion

Post by Duckie »

Kintora wrote: Fri May 07, 2021 11:57 am Using that method, would I want to put the $1,280 in a money market fund other than the settlement fund? If so, the problem I see is that the minimum is $3,000 for all of the Vanguard MM funds. Or I would just park the $1,280 in the settlement fund and then instruct Vanguard to rollover everything currently in VBTLX and not to touch the $1,280 in the settlement fund?
Put the $1280 in the settlement fund and have Vanguard roll just the VBTLX assets. Make sure to tell the rep that the settlement fund holds after-tax basis and cannot be rolled over. That will be recorded so note the date, time, and rep name in case there is a screw-up.
User avatar
Topic Author
Kintora
Posts: 107
Joined: Sun Jan 12, 2020 5:21 pm
Location: Fargo, ND

Re: Rollover and Roth Conversion

Post by Kintora »

Duckie wrote: Fri May 07, 2021 2:07 pm
Kintora wrote: Fri May 07, 2021 11:57 am Using that method, would I want to put the $1,280 in a money market fund other than the settlement fund? If so, the problem I see is that the minimum is $3,000 for all of the Vanguard MM funds. Or I would just park the $1,280 in the settlement fund and then instruct Vanguard to rollover everything currently in VBTLX and not to touch the $1,280 in the settlement fund?
Put the $1280 in the settlement fund and have Vanguard roll just the VBTLX assets. Make sure to tell the rep that the settlement fund holds after-tax basis and cannot be rolled over. That will be recorded so note the date, time, and rep name in case there is a screw-up.
Got it, and great idea to note the call details. Thanks again. :beer
Post Reply