401k rollover and backdoor roth

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blackwhisker
Posts: 62
Joined: Thu Jul 05, 2018 9:32 pm

401k rollover and backdoor roth

Post by blackwhisker » Tue Jul 10, 2018 3:24 pm

hello,

i am currently considering to rollover a 401k from a previous employer to a regular ira. i am reading about the pros and cons about rollover vs leaving it in the 401k.

some posts mentioned one of the disadvantages of rollover 401k to an ira is that it will negatively impact back door roth conversion. i don't think i understand this part. if i rollover my 401k to an ira, should i still be able to convert that regular ira to a roth ira in the future without any issues?

i think i must have mis-understood something here. but can't figure out.
thank you!

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Duckie
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Re: 401k rollover and backdoor roth

Post by Duckie » Tue Jul 10, 2018 6:07 pm

blackwhisker, welcome to the forum.
blackwhisker wrote:some posts mentioned one of the disadvantages of rollover 401k to an ira is that it will negatively impact back door roth conversion. i don't think i understand this part. if i rollover my 401k to an ira, should i still be able to convert that regular ira to a roth ira in the future without any issues?
The issue isn't with converting the rollover IRA. It's if you earn too much to contribute directly to a Roth IRA. The Backdoor Roth IRA is a two-step method of contributing to a TIRA (which is allowed no matter how much you earn) and then converting quickly to a Roth IRA (which is allowed no matter how much you earn). Any non-Roth IRA assets (the rollover IRA) will get in the way of that method because of the pro-rata rule.

If you don't expect to be in that situation (earning too much), a rollover IRA is fine.

ExitStageLeft
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Re: 401k rollover and backdoor roth

Post by ExitStageLeft » Tue Jul 10, 2018 6:12 pm

Welcome to the forum! Assuming your old 401k account was the typical tax-deferred account, if you roll it over into an IRA it will remain tax-deferred. The IRS doesn't care that it came from a 401k and doesn't distinguish a rollver IRA from a traditional IRA. If you roll it over it becomes a traditional IRA.

One argument against doing that is if you anticipate needing to employ a backdoor Roth maneuver. You would do that when your income is too high to make a Roth IRA contribution. You can still make a contribution to a traditional IRA, although it is not tax deductible. This after-tax contribution to a separate IRA account is still viewed by the IRS as part of your overall IRA. Some of it is pre-tax contributions, some of it is after-tax contributions, and some of it is earnings.

Michael Kitces has an article that describes the implications for a Roth conversion: https://www.kitces.com/blog/the-impact- ... -payments/

What is motivating you to consider a rollover?

blackwhisker
Posts: 62
Joined: Thu Jul 05, 2018 9:32 pm

Re: 401k rollover and backdoor roth

Post by blackwhisker » Tue Jul 10, 2018 8:59 pm

Thank you for the warm welcome Duckie and ExitStageLeft!

thanks for explaining the pro-rata rule. i didn't not know that! i don't think i have contributed any non deductible traditional ira in the past. so for me, it would be simple - all conversion would be taxed at 100% of my normal tax rate. i guess my potential 401k rollover would not get in the way of a conversion.

the non deductible ira to roth ira conversion sounds like a really good deal. i would have contributed to non-deductible ira a few years ago if knew it can be converted to roth ira partially tax free based on the pro-rata percentage.

ExitStageLeft,
to answer your question: i am considering a 401k rollover because my 401k plan(with fidelity) doesn't allow purchase of stocks or CDs(except brokered CDs). They charge $4.95 for purchasing an ETF like VTI. i still need to figure out if they have other similar EFTs commission free. they also charge a $40 annual fee for the 401k
let me know if you have advice. thanks!

AlwaysWannaLearn
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Re: 401k rollover and backdoor roth

Post by AlwaysWannaLearn » Tue Jul 10, 2018 9:22 pm

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Last edited by AlwaysWannaLearn on Thu Jul 19, 2018 6:01 pm, edited 2 times in total.

AlwaysWannaLearn
Posts: 230
Joined: Mon May 28, 2018 8:37 pm

Re: 401k rollover and backdoor roth

Post by AlwaysWannaLearn » Tue Jul 10, 2018 9:23 pm

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Last edited by AlwaysWannaLearn on Thu Jul 19, 2018 6:08 pm, edited 1 time in total.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: 401k rollover and backdoor roth

Post by Spirit Rider » Tue Jul 10, 2018 10:00 pm

blackwhisker wrote:
Tue Jul 10, 2018 8:59 pm
i am considering a 401k rollover because my 401k plan(with fidelity) doesn't allow purchase of stocks or CDs(except brokered CDs). They charge $4.95 for purchasing an ETF like VTI. i still need to figure out if they have other similar EFTs commission free. they also charge a $40 annual fee for the 401k let me know if you have advice. thanks!
From your description this is a 401k plan of your current employer. You are not going to be able to do what you want.

IRS regulations prohibit the in-service rollover of employee elective contributions, unvested employer contributions and their earnings prior to age 59 1/2.

IRS regulations allow, but do not require the in-service rollover of vested employer contributions and earnings prior to age 59 1/2. Many 401k plans do not allow this prior to 59 1/2.

AlwaysWannaLearn
Posts: 230
Joined: Mon May 28, 2018 8:37 pm

Re: 401k rollover and backdoor roth

Post by AlwaysWannaLearn » Tue Jul 10, 2018 10:44 pm

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Last edited by AlwaysWannaLearn on Thu Jul 19, 2018 6:00 pm, edited 1 time in total.

blackwhisker
Posts: 62
Joined: Thu Jul 05, 2018 9:32 pm

Re: 401k rollover and backdoor roth

Post by blackwhisker » Wed Jul 11, 2018 1:47 am

thanks everyone! yes it is a 401k from a previous employer.

alwaysWannaLearn,
thanks for asking and explaining. my 401k is pre-tax. this is good to know in case i make any after-tax contribution in the future.

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