Rolling over portion of tIRA to 401(k)

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Blimpalot
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Rolling over portion of tIRA to 401(k)

Post by Blimpalot » Mon Jul 23, 2018 7:26 pm

I'm 50 years old. I have a traditional IRA through Betterment that I opened in 2013 after leaving my former employer.

At that time, I rolled over from my former employer's 401(k) approximately $31,000 (consisting of pre-tax contributions that had been deducted from my paycheck as well as all the earnings on those pre-tax contributions).

I left the account alone for a few years and simply allowed Betterment to automatically reinvest all dividends. I've never taken any distributions from the account.

In tax years 2016, 2017, and 2018 I made the maximum contributions. These were all after-tax contributions, as I have a 401(k) through my current employer (begun in 2015) and am a high earner (according to the IRS). These after-tax contributions totaled $17,500 ($5,500 for 2016, $5,500 for 2017, and $6,500 for 2018). The IRA currently has a balance of approximately $68,000.

My current employer's 401(k) plan had a number of high-fee and low-performing offerings (SEI funds). Between 2015 and 2017 I nonetheless maximized my contributions to take advantage of the tax savings. Earlier this year, I persuaded my employer to change plans. We are now with Empowerment Retirement, and they offer a number of low-cost index funds from Fidelity and Vanguard. I currently have about $85,000 in this 401(k). The plan allows for rollover contributions, including from traditional IRAs.

It's my understanding that it might be advantageous to me at some point in the future to convert my traditional IRA to a Roth IRA (though I am by no means expressing any current intent to do so). It's also my understanding that if I were to try to do that, the "aggregation rule" would negatively affect my tax savings. So:

1. Am I understanding this correctly? If not, where have I erred?
2. If correct, is it possible for me to roll over the "pre-tax" portion of my IRA with which I originally funded the IRA into my current 401(k), thereby "isolating" and leaving behind in the IRA only the "after-tax" contributions that I have made between 2016 and 2018?
3. If so, would the amount I can roll over into my 401(k) be equal to the IRA account balance minus $17,500 or is it more complicated than that? I.e., do I need to account for more than just the after-tax contributions and try to allocate in some way the growth attributable to the initial pre-tax contribution and the growth attributable to the after-tax contributions made in the last few years?
"Nothing I see can be taken from me."--Tom Marshall

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FiveK
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Re: Rolling over portion of tIRA to 401(k)

Post by FiveK » Mon Jul 23, 2018 7:49 pm

Blimpalot wrote:
Mon Jul 23, 2018 7:26 pm
1. Am I understanding this correctly?
2. If correct, is it possible for me to roll over the "pre-tax" portion of my IRA with which I originally funded the IRA into my current 401(k), thereby "isolating" and leaving behind in the IRA only the "after-tax" contributions that I have made between 2016 and 2018?
3. If so, would the amount I can roll over into my 401(k) be equal to the IRA account balance minus $17,500?
1. Yes
2. Yes
3. Yes

Have you been filing form 8606 with your 2016 and 2017 tax returns?

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Blimpalot
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Re: Rolling over portion of tIRA to 401(k)

Post by Blimpalot » Mon Jul 23, 2018 9:52 pm

Thanks for the quick and helpful reply.

Yes, I have filed an 8606 reporting each of the non-deductible contributions made for the last three tax years.
"Nothing I see can be taken from me."--Tom Marshall

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Blimpalot
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Re: Rolling over portion of tIRA to 401(k)

Post by Blimpalot » Tue Jul 24, 2018 12:43 pm

Follow-up questions:

I'd like to get out of Betterment entirely. If I roll the ~$50K of pre-tax contributions and growth into the 401(k), I'd like to take the $17K in after-tax contributions I've made between 2015 and 2017 and put it into an IRA at Vanguard. I want to leave Betterment because I don't like how many different funds they use and my lack of control over choosing specific funds. Plus, my wife has an IRA at Vanguard and that's where we have out joint taxable account. I am interested in simplifying.

Logistically, how do I accomplish this? Is there a specific order in which I need to do things? Should I open a new Vanguard account first and have Betterment directly roll over the $17K into that, and then have Betterment roll over the remainder into my 401(k)?

Any help from anyone who has done this before would be most appreciated. I don't want to screw it up and end up with a distribution that I have to pay tax on. Thanks.
"Nothing I see can be taken from me."--Tom Marshall

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FiveK
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Re: Rolling over portion of tIRA to 401(k)

Post by FiveK » Tue Jul 24, 2018 1:00 pm

Blimpalot wrote:
Tue Jul 24, 2018 12:43 pm
Logistically, how do I accomplish this? Is there a specific order in which I need to do things?
The order is not critical. For the purposes of taxes calculated on form 8606, the 31-Dec snapshot is what matters.

Usually the best results come when the receiving company pulls, rather than having the sending company push. E.g., you could have Vanguard pull the after-tax contribution amount into a Roth IRA, and your 401k pull the rest from Betterment.

Alan S.
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Re: Rolling over portion of tIRA to 401(k)

Post by Alan S. » Tue Jul 24, 2018 1:07 pm

Before doing the intended tax free conversion, be totally sure your 401k will accept an IRA rollover from a contributory IRA account. Your IRA is no longer a rollover IRA because you made regular IRA contributions to it.

Were you to convert first, and for whatever reason your 401k declined to accept the IRA rollover, you would be stuck with a mostly taxable conversion since you can no longer recharacterize conversions.

tenkuky
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Re: Rolling over portion of tIRA to 401(k)

Post by tenkuky » Tue Jul 24, 2018 1:23 pm

I'm right in the middle of this exercise so will weigh in
1. It's very plan and vendor specific. I had to fill out push and pull forms on both ends. In the end, the push firm had to send a paper check which is still in the mail :oops: Once it arrives, it will be credited. Not all firms allow wire/ACAT/ACH electronic process.
2. Previous poster correct, I triple-checked the retirement plan would accept incoming tIRA funds
3. I will make the conversion after monies received and credited.

Due to my sloppy/cautious math, I actually will have a little bit of taxable event with the conversion as I will convert the non-deductible part plus a pre-tax portion. Oh well, have to pay the taxman anyway. It is right on the edge of my tax bracket so will get interesting end of year, unless I do more deductions like charitable to offset.

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Blimpalot
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Re: Rolling over portion of tIRA to 401(k)

Post by Blimpalot » Tue Jul 24, 2018 5:30 pm

Thanks for the head's-up about the 401(k) plan potentially not accepting a rollover from a tIRA to which I have made contributions. I've read my plan's description and it's not entirely clear (there is nothing expressly prohibiting it, but there is language indicating that the plan administrator can "adopt separate procedures limiting the type of rollover contributions it will accept. For example, the plan administrator may impose restrictions on the acceptance of after-tax contributions or Salary Deferrals (including Roth Deferrals) or may restrict rollovers from particular types of plans....Any procedures affecting the ability to make Rollover Contributions to the Plan will not be applied in a discriminatory manner."

To my knowledge, no "separate procedures" have been adopted but I will need to check.

At the very least, it sounds like I should be able to get the $17,500 in after-tax contributions out of my Betterment account and over into an IRA with Vanguard. But I won't try to rollover the remaining ~$50K from the Betterment IRA until I confirm that my 401(k) will accept the rollover.
"Nothing I see can be taken from me."--Tom Marshall

tenkuky
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Re: Rolling over portion of tIRA to 401(k)

Post by tenkuky » Tue Jul 24, 2018 7:04 pm

Blimpalot wrote:
Tue Jul 24, 2018 5:30 pm
Thanks for the head's-up about the 401(k) plan potentially not accepting a rollover from a tIRA to which I have made contributions. I've read my plan's description and it's not entirely clear (there is nothing expressly prohibiting it, but there is language indicating that the plan administrator can "adopt separate procedures limiting the type of rollover contributions it will accept. For example, the plan administrator may impose restrictions on the acceptance of after-tax contributions or Salary Deferrals (including Roth Deferrals) or may restrict rollovers from particular types of plans....Any procedures affecting the ability to make Rollover Contributions to the Plan will not be applied in a discriminatory manner."

To my knowledge, no "separate procedures" have been adopted but I will need to check.

At the very least, it sounds like I should be able to get the $17,500 in after-tax contributions out of my Betterment account and over into an IRA with Vanguard. But I won't try to rollover the remaining ~$50K from the Betterment IRA until I confirm that my 401(k) will accept the rollover.
I recommend you first do the rollover of pretax to 401k THEN do the Roth conversion of the post tax money.
That’s what I was advised so you don’t end up prorated.
Others on this board can explain in more detail but Fidelity confirmed that is the route.

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Blimpalot
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Re: Rolling over portion of tIRA to 401(k)

Post by Blimpalot » Fri Aug 10, 2018 1:01 pm

Update (and a couple more questions):

I have initiated the process of converting what I can from my traditional IRA at Betterment to a Roth at Vanguard.

As an initial step, I had to contact my employer's 401(k) provider (Empower Retirement--they have been very helpful and responsive) to obtain a letter from them saying they would accept an incoming rollover. I had to provide that letter, along with a written letter from me asking and authorizing Betterment to release the pre-tax portion of my traditional IRA and leaving behind the $17,496 in after-tax contributions). I had to include Empower's letter, my own letter, and a copy of one of my Betterment statements in a letter that I had to mail via old-fashioned snail mail to Betterment. I'm not sure why Betterment makes it so easy to open an account but somewhat a PitA to move money out (Ok, I guess I do know why). So I am now awaiting the rollover of my pre-tax amount to my 401(k), thus "isolating" the $17,496 in after-tax contributions that will remain in my Betterment account.

Questions about the next steps in the process:

1. Once my Betterment account has only the after-tax amount remaining, should I convert the Betterment account to a Roth and THEN contact Vanguard about opening a Roth account into which I can transfer over my Betterment now-Roth account?

2. Or should I instead open a traditional IRA at Vanguard, transfer the $17,496 from my still-traditional Betterment IRA, and THEN, once at Vanguard, convert the Vanguard account to a Roth?

3. In either case, when effecting the move of funds from Betterment to Vanguard, should I do it "in kind" and then liquidate the assets that Betterment has me invested in, and then buy the new Vanguard fund(s), or should I liquidate at Betterment, move cash into Vanguard, and then buy the Vanguard fund(s)?
"Nothing I see can be taken from me."--Tom Marshall

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FiveK
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Re: Rolling over portion of tIRA to 401(k)

Post by FiveK » Fri Aug 10, 2018 1:23 pm

Blimpalot wrote:
Fri Aug 10, 2018 1:01 pm
Questions about the next steps in the process:....
Any of those will work. It usually works better to have the receiving firm "pull" from the sending firm, rather than have the sending firm "push" funds (either via you or directly) to the receiving firm. If it all works, there is no difference in the end - it's just that the "pull" process usually has fewer problems.

You might compare the selling costs at Betterment vs. Vanguard. Depending on the specific fund, it can be expensive to sell a non-Vanguard fund at Vanguard.

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