Roll IRA into high fee 401k to do backdoor roth

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FriedFire
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Roll IRA into high fee 401k to do backdoor roth

Post by FriedFire » Wed Nov 22, 2017 1:05 pm

My wife's IRA (rolled over) makes up 50% of our total portfolio. We have it with fidelity invested in low-cost index funds (total market and total bond) with an ER of 0.04-0.05%. Her IRA account prevents us from doing a Backdoor Roth IRA due to pro rata rules (we're in a high tax bracket).

Her new 401k has limited options where the best option is an S&P index fund with a 0.70% ER.

I was wondering if it makes sense to roll her IRA into her new 401k thereby increasing the ER on half of our portfolio and in return be able to contribute $11,000 annually into a taxable IRA and do a backdoor Roth conversion.

For additional context, I currently max out my 401k. I also max out after-tax 401k contributions which I then roll over into Roth 401k on monthly basis (mega backdoor).

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mhc
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Re: Roll IRA into high fee 401k to do backdoor roth

Post by mhc » Wed Nov 22, 2017 1:16 pm

I don't know if the math adds up or not, but her IRA does not prevent you from doing a backdoor Roth. Instead of $11,000, it should be $5,500.

Let's see if we can do the math. Say the tax drag of investing in taxable is 2% dividends that you pay qualified dividend rate of 15%. 15% of 2% is 0.3%. You would have to pay cap gains when you sell, but maybe you never sell (donate to charity, pass to heirs). You may also be able to TLH and gain a tax benifit. I would probably just skip the backdoor roth for the wife.

I assume the tax bill on converting the IRA to a Roth would be too high.

Taxable investing in low cost efficient funds is not really that bad.

FriedFire
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Re: Roll IRA into high fee 401k to do backdoor roth

Post by FriedFire » Wed Nov 22, 2017 1:35 pm

Forgot to mention that I have a SIMPLE IRA which I plan on rolling into my 401k after the 2-year hold period is over.

Here are my other assumptions:
1. we sell the assets eventually (not leave to heirs or charity)
2. we don’t do TLH (seems a bit complicated at the moment given our portfolio is doteibuted across 8 accounts)
3. We end up in a 20-25% tax bracket in retirement

retiredjg
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Re: Roll IRA into high fee 401k to do backdoor roth

Post by retiredjg » Thu Nov 23, 2017 10:48 am

To me, it would depend on how big the IRA is and how long she is likely to stay at that employer.

For example, if the IRA is $100k, it will cost an extra $650 a year to be in the 401k. Doing that for many years would be more than I'd want to pay. But if the IRA is $10k and she'll likely be there only 2 years, I might make a different choice.

If you and she are both maxing out 401ks and you are using the mega back door as well, I'm not sure I'd move her money to a more costly 401k in order to get another $5,500 into Roth (as opposed to taxable) each year.

And it won't be that long before you can use the back door even if she does not. The combination of your back door and your mega back door isn't bad at all and might be way more than most people get.

Nate79
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Re: Roll IRA into high fee 401k to do backdoor roth

Post by Nate79 » Thu Nov 23, 2017 6:05 pm

My guess without running the numbers that it won't make sense. We are taking about $5500/year. Calculate the added fees for the 401k. This is the added fees you are paying for the privilege of tax free growth vs paying capital gains tax rate on taxable account gains.

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Earl Lemongrab
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Re: Roll IRA into high fee 401k to do backdoor roth

Post by Earl Lemongrab » Fri Nov 24, 2017 4:59 pm

Here's another wrinkle. Does the 401(k) allow rolling rollover contributions back out? Megacorp allows that. If so, is there a fee?
She could potentially roll her IRA into the plan near the end of the year and back out in January. As long as the IRA is clear by the end of each year the backdoor Roth will be tax-free and the money will be in the higher-cost funds for a relatively short period. Now, whether that effort would be worth it is another question.
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