401k + ira + roth = confused

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plasma800
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401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 12:02 pm

Hi, trying to get my head wrapped around something...

I'm 100% owner of a Texas S corp with employees.

I file an 1120s K-1.

I'm opening a safe harbor through Employee Fiduciary.

My wife and I both have traditional IRA's with balances of +/- 52k and 30k

I'm in a higher tax bracket.

My plan is to fund our 401k's to the max of 18k + profit sharing, but I'd also like to fund my IRA's to their maximum.

I'm wondering about the scenario in which we each contribute 18k to the 401k, then 5500 to the ira as a non deductible, but then immediately convert that 5500 contribution to a roth, leaving the current traditional IRA balances in place.

What happens if I do this? Or is this even possible? Even if possible, is it prudent?

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CAsage
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Re: 401k + ira + roth = confused

Post by CAsage » Fri Aug 11, 2017 12:11 pm

Addressing only the "back door" IRA question - you cannot contribute to an IRA and convert to a Roth without taking into account the current existing IRA balances - the IRS rules specify that conversions are prorated, so you will end up paying taxes on $5500/$52,000.... Would it be worthwhile to just convert the older IRA, bite the cost once, so you can back-door-Roth every year from now on? Or, you need to take those old IRA and transfer them into a 401k-type (and I don't know what that takes or how it's allowed).
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

niceguy7376
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Re: 401k + ira + roth = confused

Post by niceguy7376 » Fri Aug 11, 2017 12:46 pm

Doesnt your EF 401k allow rollovers of your Trad IRA balances to the 401k plan?

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 12:47 pm

No matter what, I'll have the 5500 dollars laying around, as I make way more money than I can contribute to our 401k's...

the only choices I have with the additional income is to save it in a checking account, save it in a taxable investment account, or buy a yacht (kidding, i'd never buy a yacht)

I did consider biting the bullet and converting the whole thing.. but I expect to be in a lower tax bracket at retirement with a very streamlined and inexpensive lifestyle... so most guides point to not converting now at my high tax bracket, but to wait.

Honestly, I don't know what the right answer is.. but I guess I'm moreover trying to figure out what to do with the remaining money I want to save each year after our 401k's, and HSA's are fully funded. This is no less than 30,000 more dollars per year in our family decided long term savings plan, and could be up to an additional 60,000 in shiny years.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 12:48 pm

niceguy7376 wrote:Doesnt your EF 401k allow rollovers of your Trad IRA balances to the 401k plan?
This is a great question, and one I now know to ask... I hadn't yet crossed this bridge.

Let's play out the scenario is this is possible.

One would roll the ira into the 401k...

Then one would now be able to backdoor ROTH IRA at will?

niceguy7376
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Re: 401k + ira + roth = confused

Post by niceguy7376 » Fri Aug 11, 2017 12:56 pm

plasma800 wrote:
niceguy7376 wrote:Doesnt your EF 401k allow rollovers of your Trad IRA balances to the 401k plan?
This is a great question, and one I now know to ask... I hadn't yet crossed this bridge. Let's play out the scenario is this is possible. One would roll the ira into the 401k... Then one would now be able to backdoor ROTH IRA at will?
If you dont have existing Trad IRA balance, then you can do the "BackDoor ROTH" easily.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 12:57 pm

niceguy7376 wrote:
plasma800 wrote:
niceguy7376 wrote:Doesnt your EF 401k allow rollovers of your Trad IRA balances to the 401k plan?
This is a great question, and one I now know to ask... I hadn't yet crossed this bridge. Let's play out the scenario is this is possible. One would roll the ira into the 401k... Then one would now be able to backdoor ROTH IRA at will?
If you dont have existing Trad IRA balance, then you can do the "BackDoor ROTH" easily.

I see. So that seems like an answer for the next $5500 of savings. Consolidate the ira's into the 401k, then next year 5500, convert to roth, then to taxable account for remaining savings.

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BL
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Re: 401k + ira + roth = confused

Post by BL » Fri Aug 11, 2017 2:07 pm

Does your spouse have a current 401k also? Then she could do the same.

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celia
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Re: 401k + ira + roth = confused

Post by celia » Fri Aug 11, 2017 2:08 pm

You'll have to see which money your 401K accepts as a rollover. Your IRA could contain any --or-- all of these:
Rollover of 401K from previous employer (and its growth while in the IRA)
Deductible IRA contributions (and their growth while in the IRA)
Non-deductible IRA contributions (and their growth while in the IRA)

Most 401Ks will accept Rollovers from previous 401K (and its growth while in the IRA)
Some 401Ks will accept deductible IRA Contributions (and their growth while in the IRA)
NO 401K is allowed to accept non-deductible contributions. They may or may not accept the growth on those contributions.

It is your responsibility to know what is in your IRA and to clarify with the current 401K administrator what they will and will not accept.


And to do the Backdoor Roth, it is not just existing IRAs that will complicate the process, but the existence of ANY non-Roth IRAs (except Inherited, which can not be converted). This includes SEP IRAs and SIMPLE IRAs.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 2:33 pm

celia wrote:You'll have to see which money your 401K accepts as a rollover. Your IRA could contain any --or-- all of these:
Rollover of 401K from previous employer (and its growth while in the IRA)
Deductible IRA contributions (and their growth while in the IRA)
Non-deductible IRA contributions (and their growth while in the IRA)

Most 401Ks will accept Rollovers from previous 401K (and its growth while in the IRA)
Some 401Ks will accept deductible IRA Contributions (and their growth while in the IRA)
NO 401K is allowed to accept non-deductible contributions. They may or may not accept the growth on those contributions.

It is your responsibility to know what is in your IRA and to clarify with the current 401K administrator what they will and will not accept.


And to do the Backdoor Roth, it is not just existing IRAs that will complicate the process, but the existence of ANY non-Roth IRAs (except Inherited, which can not be converted). This includes SEP IRAs and SIMPLE IRAs.

Ok, let's dig a little deeper.

My IRA is 100% deducted, non-employer provided traditional IRA.

My wife's ira consists of a % of funds rolled from her SEP-IRA provided by another employer, for whom she still works part time. The rest of her IRA is traditional, 100% deducted, non employer provided traditional IRA money. Further, my wife does not contribute to her part time works SEP, she only receives his flat % he gives to all employees.

mhalley
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Re: 401k + ira + roth = confused

Post by mhalley » Fri Aug 11, 2017 2:40 pm

As long as there is zero in trad Ira as of dec 31, you can do the backdoor Roth this year.

rkhusky
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Re: 401k + ira + roth = confused

Post by rkhusky » Fri Aug 11, 2017 2:48 pm

For taxable investing after maxing 401k and IRA, using tax efficient investments, like Total Stock Market, Total International Stock Market, and Tax Exempt Bonds, are also not too bad.

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celia
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Re: 401k + ira + roth = confused

Post by celia » Fri Aug 11, 2017 3:00 pm

plasma800 wrote:My IRA is 100% deducted, non-employer provided traditional IRA.

My wife's ira consists of a % of funds rolled from her SEP-IRA provided by another employer, for whom she still works part time. The rest of her IRA is traditional, 100% deducted, non employer provided traditional IRA money. Further, my wife does not contribute to her part time works SEP, she only receives his flat % he gives to all employees.
These are two vastly different scenarios. You still have to ask your current 401K administrator(s).

I'm pretty sure you won't be able to roll anything into your 401K. But, what percentage of your IRA is the non-deductible contributions? If it is about half, consider converting it. You will only have to pay taxes on the growth. If that is too much tax for you, you can convert half this year and half next year. Each time you convert, each conversion is part contribution and part growth, so you only pay taxes on the growth each time.

Your wife will likely be able to roll all of hers into her 401K. After that happens, then she can start backdoor Roth conversions soon after. She just needs to be sure her IRA is empty at the end of each year.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 3:11 pm

celia wrote:
plasma800 wrote:My IRA is 100% deducted, non-employer provided traditional IRA.

My wife's ira consists of a % of funds rolled from her SEP-IRA provided by another employer, for whom she still works part time. The rest of her IRA is traditional, 100% deducted, non employer provided traditional IRA money. Further, my wife does not contribute to her part time works SEP, she only receives his flat % he gives to all employees.
These are two vastly different scenarios. You still have to ask your current 401K administrator(s).

I'm pretty sure you won't be able to roll anything into your 401K. But, what percentage of your IRA is the non-deductible contributions? If it is about half, consider converting it. You will only have to pay taxes on the growth. If that is too much tax for you, you can convert half this year and half next year. Each time you convert, each conversion is part contribution and part growth, so you only pay taxes on the growth each time.

Your wife will likely be able to roll all of hers into her 401K. After that happens, then she can start backdoor Roth conversions soon after. She just needs to be sure her IRA is empty at the end of each year.
My IRA is all deducted. I put in 5500 per year from ground zero, and wrote off the 5500 for several years now.

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celia
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Re: 401k + ira + roth = confused

Post by celia » Fri Aug 11, 2017 3:42 pm

plasma800 wrote:My IRA is all deducted. I put in 5500 per year from ground zero, and wrote off the 5500 for several years now.
Sorry. I mis-read it. I think you mean you deducted it on your taxes each year. Ask your 401K administrator if they will accept a rollover of it.

The reason this is your responsibility is because custodians don't have any idea what you did on your taxes. Only the IRS and you do.
Last edited by celia on Fri Aug 11, 2017 3:46 pm, edited 1 time in total.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 3:45 pm

celia wrote:
plasma800 wrote:My IRA is all deducted. I put in 5500 per year from ground zero, and wrote off the 5500 for several years now.
Sorry. I mis-read it. Ask your 401K administrator if they will accept a rollover of it.
:thumbsup

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FiveK
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Re: 401k + ira + roth = confused

Post by FiveK » Fri Aug 11, 2017 3:57 pm

plasma800 wrote:...that seems like an answer for the next $5500 of savings. Consolidate the ira's into the 401k, then next year 5500, convert to roth, then to taxable account for remaining savings.
mhalley wrote:As long as there is zero in trad Ira as of dec 31, you can do the backdoor Roth this year.
Just reinforcing mhalley's comment.

Rayd8tr
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Re: 401k + ira + roth = confused

Post by Rayd8tr » Fri Aug 11, 2017 5:43 pm

Why not just make a non Roth after tax contribution to your 401k up to the limit of 54k and make an in-service distribution of the after tax portion of your contributions to your Roth IRA in accordance with IRS notice 2014-54.

If you contribute 18k pretax and contribute 36k after tax, you will be able to put 36k into a Roth IRA every year.

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Duckie
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Re: 401k + ira + roth = confused

Post by Duckie » Fri Aug 11, 2017 7:03 pm

plasma800 wrote:Further, my wife does not contribute to her part time works SEP, she only receives his flat % he gives to all employees.
Unless her SEP IRA (and any other non-Roth IRA) is empty at the end of the year, every year, the backdoor method will be a problem for her because of the pro-rata rule.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 8:53 pm

Rayd8tr wrote:Why not just make a non Roth after tax contribution to your 401k up to the limit of 54k and make an in-service distribution of the after tax portion of your contributions to your Roth IRA in accordance with IRS notice 2014-54.

If you contribute 18k pretax and contribute 36k after tax, you will be able to put 36k into a Roth IRA every year.
This is interesting, and something I didn't even know could be done. Could you fill me in more on this?

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Fri Aug 11, 2017 8:55 pm

Duckie wrote:
plasma800 wrote:Further, my wife does not contribute to her part time works SEP, she only receives his flat % he gives to all employees.
Unless her SEP IRA (and any other non-Roth IRA) is empty at the end of the year, every year, the backdoor method will be a problem for her because of the pro-rata rule.
To note, her sep is currently empty, as the dollars were rolled into her traditional at the start of the year.

JBTX
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Re: 401k + ira + roth = confused

Post by JBTX » Sat Aug 12, 2017 1:46 am

plasma800 wrote:Hi, trying to get my head wrapped around something...

I'm 100% owner of a Texas S corp with employees.

I file an 1120s K-1.

I'm opening a safe harbor through Employee Fiduciary.

My wife and I both have traditional IRA's with balances of +/- 52k and 30k

I'm in a higher tax bracket.

My plan is to fund our 401k's to the max of 18k + profit sharing, but I'd also like to fund my IRA's to their maximum.

I'm wondering about the scenario in which we each contribute 18k to the 401k, then 5500 to the ira as a non deductible, but then immediately convert that 5500 contribution to a roth, leaving the current traditional IRA balances in place.

What happens if I do this? Or is this even possible? Even if possible, is it prudent?
Not really totally on topic but if you are owner with employees and contributing to your own 401ks you could be subject to "discrimination" rules such that lower paid employees need to contribute comparably to higher ones or else you may be required to reduce your personal contributions. That happened to my wife's small company employer.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Sat Aug 12, 2017 6:51 am

JBTX wrote:
plasma800 wrote:Hi, trying to get my head wrapped around something...

I'm 100% owner of a Texas S corp with employees.

I file an 1120s K-1.

I'm opening a safe harbor through Employee Fiduciary.

My wife and I both have traditional IRA's with balances of +/- 52k and 30k

I'm in a higher tax bracket.

My plan is to fund our 401k's to the max of 18k + profit sharing, but I'd also like to fund my IRA's to their maximum.

I'm wondering about the scenario in which we each contribute 18k to the 401k, then 5500 to the ira as a non deductible, but then immediately convert that 5500 contribution to a roth, leaving the current traditional IRA balances in place.

What happens if I do this? Or is this even possible? Even if possible, is it prudent?
Not really totally on topic but if you are owner with employees and contributing to your own 401ks you could be subject to "discrimination" rules such that lower paid employees need to contribute comparably to higher ones or else you may be required to reduce your personal contributions. That happened to my wife's small company employer.
Safe Harbor

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Duckie
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Re: 401k + ira + roth = confused

Post by Duckie » Sat Aug 12, 2017 2:50 pm

plasma800 wrote:To note, her sep is currently empty, as the dollars were rolled into her traditional at the start of the year.
The SEP IRA has to be empty on December 31st of each year for the backdoor method to work right.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Sat Aug 12, 2017 4:43 pm

Duckie wrote:
Sat Aug 12, 2017 2:50 pm
plasma800 wrote:To note, her sep is currently empty, as the dollars were rolled into her traditional at the start of the year.
The SEP IRA has to be empty on December 31st of each year for the backdoor method to work right.
That can be done. I'm not sure when her employer makes his deposits, but I can find out. The question is where do I roll it each year? I'm thinking he makes his deposit after jan 1 of each year.

Rayd8tr
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Re: 401k + ira + roth = confused

Post by Rayd8tr » Sat Aug 12, 2017 10:47 pm

plasma800 wrote:
Fri Aug 11, 2017 8:53 pm
Rayd8tr wrote:Why not just make a non Roth after tax contribution to your 401k up to the limit of 54k and make an in-service distribution of the after tax portion of your contributions to your Roth IRA in accordance with IRS notice 2014-54.

If you contribute 18k pretax and contribute 36k after tax, you will be able to put 36k into a Roth IRA every year.
This is interesting, and something I didn't even know could be done. Could you fill me in more on this?
As long as your 401k allows for non Roth after tax contributions up to the IRS limit of 54k, you can do an in service distribution of the after tax contribution directly into a Roth IRA. This is completely legal and IAW IRS notice 2014-54.

Just check with your plan administrator.

You can confirm with your tax advisor and proceed from there. :sharebeer

JBTX
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Re: 401k + ira + roth = confused

Post by JBTX » Sun Aug 13, 2017 2:58 pm

plasma800 wrote:
Sat Aug 12, 2017 6:51 am
JBTX wrote:
plasma800 wrote:Hi, trying to get my head wrapped around something...

I'm 100% owner of a Texas S corp with employees.

I file an 1120s K-1.

I'm opening a safe harbor through Employee Fiduciary.

My wife and I both have traditional IRA's with balances of +/- 52k and 30k

I'm in a higher tax bracket.

My plan is to fund our 401k's to the max of 18k + profit sharing, but I'd also like to fund my IRA's to their maximum.

I'm wondering about the scenario in which we each contribute 18k to the 401k, then 5500 to the ira as a non deductible, but then immediately convert that 5500 contribution to a roth, leaving the current traditional IRA balances in place.

What happens if I do this? Or is this even possible? Even if possible, is it prudent?
Not really totally on topic but if you are owner with employees and contributing to your own 401ks you could be subject to "discrimination" rules such that lower paid employees need to contribute comparably to higher ones or else you may be required to reduce your personal contributions. That happened to my wife's small company employer.
Safe Harbor
Good to know. I wasn't aware of this. I'll pass this information on to my wife's employer. Don't know if they are aware of it or not.

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Duckie
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Re: 401k + ira + roth = confused

Post by Duckie » Sun Aug 13, 2017 3:29 pm

plasma800 wrote:
Sat Aug 12, 2017 4:43 pm
The question is where do I roll it each year? I'm thinking he makes his deposit after jan 1 of each year.
If her 401k allows incoming rollovers she can roll the pre-tax SEP IRA contribution to her 401k each year, just like she should roll her TIRA over to the 401k. The TIRA rollover is a one-time thing. The SEP IRA rollovers will happen every year.

An alternative would be to roll the SEP IRA amount to a Roth IRA each year and pay the taxes. It depends on your tax bracket but it would get more money into a Roth account.

plasma800
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Re: 401k + ira + roth = confused

Post by plasma800 » Tue Aug 15, 2017 10:09 am

Duckie wrote:
Sun Aug 13, 2017 3:29 pm
plasma800 wrote:
Sat Aug 12, 2017 4:43 pm
The question is where do I roll it each year? I'm thinking he makes his deposit after jan 1 of each year.
If her 401k allows incoming rollovers she can roll the pre-tax SEP IRA contribution to her 401k each year, just like she should roll her TIRA over to the 401k. The TIRA rollover is a one-time thing. The SEP IRA rollovers will happen every year.

An alternative would be to roll the SEP IRA amount to a Roth IRA each year and pay the taxes. It depends on your tax bracket but it would get more money into a Roth account.

OK, so here's the official response from Employee Fiduciary

We can set up plan provisions that permit after-tax employee contributions and distributions from the after-tax employee contribution account without restriction. In theory, an employee would have the option to make an after-tax employee contribution to the plan (up to $54,000 in 2017) and directly roll the basis of that contribution over to a Roth IRA each year.

However, the plan’s ability to pass annual non-discrimination testing will be the primary limitation to the successful application of this theory (and is the one very important item that is often overlooked in the multiple internet articles and blog postings on this topic.) In any plan year that this plan covers employees defined by the IRS as non-highly compensated employees who do not participate in after-tax employee contributions at a comparable rate as the highly compensated employees (likely), the highly compensated employees would stand receive a refund of a substantial portion (possibly all) of the after-tax contributions made to the plan by HCEs for the plan year in order to satisfy non-discrimination testing for that year.

We posted a blog on this topic at some point last year. It delves into the subject and explains why it is not a fit for most retirement plans.

https://www.employeefiduciary.com/blog/ ... tributions

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