Questions about rolling over IRAs and its effect on backdoor Roths

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
NotAnInsomniac
Posts: 7
Joined: Wed May 17, 2017 1:25 pm

Questions about rolling over IRAs and its effect on backdoor Roths

Postby NotAnInsomniac » Fri May 19, 2017 12:00 am

So I'm trying to consolidate some accounts to Vanguard. My wife and I both started Roth IRAs at American Funds through a financial advisor before we knew better. We are currently doing back door Roths at Vanguard as I exceed the income limit. Am I correct in concluding from what I've researched so far that it is possible to roll over the Roth IRA from American Funds to Vanguard without creating a taxable event? Would there be any nasty surprises I should look out for before doing this? Would this affect my ability to contribute to my backdoor Roth this year as well?

Separately, I have an old 401a with a previous employer. Could I roll $5500 of that over to my Traditional IRA at Vanguard and use it to do my backdoor Roth? Thanks in advance!
Last edited by NotAnInsomniac on Fri May 19, 2017 1:25 am, edited 1 time in total.

mhalley
Posts: 4304
Joined: Tue Nov 20, 2007 6:02 am

Re: Questions about rolling over IRAs and its effect on backdoor Roths

Postby mhalley » Fri May 19, 2017 12:11 am

Rolling over a roth from one account to another is not a taxable event. Rolling a 401k into a traditional ira and then rolling it over to a roth is fine. You need to check with Vanguard to see if they will take the current funds you are invested in. You might have to pay a fee at vanguard to sell the american funds. Your current roth provider will probably charge a fee to close the account. $50 is pretty common.
You will have to pay taxes on the money from the 401k if you roll it over to a roth. It doesn't have to be $5500, you can roll however much you want into a roth. Rollovers don't have limits, contributions do. You may or may not be able to only roll part of the 401k over, it depends on the plan. A better solution might be to roll the old 401k into your current one if it allows it, then you can continue to add money to your retirement space without paying the extra tax on that 401k money.
There is no reason to roll the old 401k anywhere if it has reasonable funds/fees. There are in fact some advantages of a 401k over an IRA.
http://www.obliviousinvestor.com/can-i- ... -rollover/
Look at your SPD to determine if you can do a partial rollover:
http://www.401khelpcenter.com/401k_educ ... R5-12vyu90

retiredjg
Posts: 28856
Joined: Thu Jan 10, 2008 12:56 pm

Re: Questions about rolling over IRAs and its effect on backdoor Roths

Postby retiredjg » Fri May 19, 2017 6:29 am

NotAnInsomniac wrote:Am I correct in concluding from what I've researched so far that it is possible to roll over the Roth IRA from American Funds to Vanguard without creating a taxable event?

Moving a Roth IRA from one custodian to another should not trigger any taxes. It can be done directly, from trustee to trustee. It can also be done rollover style - you actually take possession of the money and then put it in the new Roth IRA - but I would not use that method myself. There are too many ways for things to get messed up.

Separately, I have an old 401a with a previous employer. Could I roll $5500 of that over to my Traditional IRA at Vanguard and use it to do my backdoor Roth? Thanks in advance!

This would not be a "back door". This would be a simple Roth conversion of pre-tax money. It does get money into Roth IRA, however, this would be a taxable event. And....

It doesn't usually make good sense to defer tax on money by putting it into a 401k and then turn around and convert it to Roth a few years later while still working. You might, in fact, actually end up paying more tax than you would have when you deferred the tax in the first place.

If you are over the Roth IRA limit, you should use money from your salary or savings to do the back door. This puts money that would have gone into a taxable account into a Roth account instead.

If you are over the Roth IRA limit and unable to save enough this year to do the back door, don't worry about. Just skip any year that happens. Taking money from a 401k and using it for the back door does not accomplish anything beneficial.

NotAnInsomniac
Posts: 7
Joined: Wed May 17, 2017 1:25 pm

Re: Questions about rolling over IRAs and its effect on backdoor Roths

Postby NotAnInsomniac » Fri May 19, 2017 4:03 pm

retiredjg wrote: There are too many ways for things to get messed up.


What kind of things for example? I would really prefer to get that money out of American Funds.

retiredjg
Posts: 28856
Joined: Thu Jan 10, 2008 12:56 pm

Re: Questions about rolling over IRAs and its effect on backdoor Roths

Postby retiredjg » Fri May 19, 2017 4:17 pm

NotAnInsomniac wrote:
retiredjg wrote: There are too many ways for things to get messed up.


What kind of things for example? I would really prefer to get that money out of American Funds.

I didn't say not to move the money. I said I would not do a 60 day rollover. I'd have Vanguard "pull" the Roth IRA over in a trustee to trustee transfer.

NotAnInsomniac
Posts: 7
Joined: Wed May 17, 2017 1:25 pm

Re: Questions about rolling over IRAs and its effect on backdoor Roths

Postby NotAnInsomniac » Fri May 19, 2017 8:26 pm

retiredjg wrote:
NotAnInsomniac wrote:
retiredjg wrote: There are too many ways for things to get messed up.


What kind of things for example? I would really prefer to get that money out of American Funds.

I didn't say not to move the money. I said I would not do a 60 day rollover. I'd have Vanguard "pull" the Roth IRA over in a trustee to trustee transfer.


Ah I see. Yea I can see the check getting lost somewhere in the whole process.


Return to “Investing - Help with Personal Investments”

Who is online

Users browsing this forum: Bogle.My.Mind, CABob, dooron, freebeer, Gill, Inthemix22, jmk, Longdog, prudent, ruralavalon, spdoublebass, SurveySaysIRock, USGrant, Voltron and 103 guests