Roth IRA, Rollover IRA, Roth 401k dilemma

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Duke27
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Joined: Wed Aug 08, 2018 7:13 pm

Roth IRA, Rollover IRA, Roth 401k dilemma

Post by Duke27 » Thu Aug 09, 2018 12:11 am

I have a Roth IRA, Rollover IRA and Roth 401k with my current company. Due to my tax inexperience, I find myself in a bit of a dilemma.

By my calculations, retirement timeline, etc., Roth IRA is preferred over the traditional IRA; however, last year I had to do a recharacterization, as I exceeded the income limit. Yay! That's a good problem right? "Not so fast my friend."

Those recharacterized funds ended up in a Rollover IRA from a previous employer 401k. Pre-($30,000) and post-tax($5500) money in the same IRA. Ugh!! I had no idea that could happen. Well, we gotta clean up this mess.

After researching in these BH forums and IRS publication 590a, I find that I can move RO IRA pre-tax money into my company's 401k and then move the post-tax money into a Roth IRA. "Ok. Cool. I think I can make this work," I think to myself. (Correct me, if I am wrong here.)

Then, I read 590a a little further... converting funds from an IRA to a ROTH 401k is not allowed. This makes sense as this would also mix pre- and post-tax funds. "Well, Crud! Back to square one."

So that's my dilemma: Want to do backdoor contributions to a Roth IRA, but my current IRA is a mix of pre- and post-tax money, yet, I cannot clean that up with a conversion to my company's 401k as I elected to do a Roth 401k.

Up until last year, I had very clean and simple taxes, so part of my motivation for a solution is to return to those simpler days. I really do not want to deal with pre-/post-tax record keeping when I start withdrawing 20 years down the road.

Unless I resolve this mess, I could be left out of the Roth IRA advantage.

What are my options? I could just convert the Rollover IRA to a Roth IRA but that exposes me to pro-rata marginal rate taxes on the pre-tax funds but I am hoping that there is a better solution.

PFInterest
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Joined: Sun Jan 08, 2017 12:25 pm

Re: Roth IRA, Rollover IRA, Roth 401k dilemma

Post by PFInterest » Thu Aug 09, 2018 8:07 am

if you are high enough income to need backdoor rIRA, you should reconsider doing r401k anyways. likely t401k is a better option but i digress.

you do realize you still have a t401k its not like its gone because you didnt choose it.

so move the 30K rollover tIRA to the 401k.

add 5.5K to your tIRA this year, then convert the 11K nondeductible portions to your rIRA. if you werent planning on doing the rIRA this year, then just convert the 5.5K (with earnings).

Spirit Rider
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Re: Roth IRA, Rollover IRA, Roth 401k dilemma

Post by Spirit Rider » Thu Aug 09, 2018 9:33 am

In a 401k. Your employer contributions have to go into a pre-tax account. The fact that your employee elective contributions go to a designated Roth account is irrelevant.

Just rollover your all your pre-tax (and just the pre-tax) IRA balances to your 401k pre-tax account.

Note: It was irrelevant that you contributed your non-deductible traditional IRA contributions to the rollover IRA. All pre-tax balances in all traditional, SEP and SIMPLE IRA accounts a aggregated for the pro-rata calculation.

megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Roth IRA, Rollover IRA, Roth 401k dilemma

Post by megabad » Thu Aug 09, 2018 9:57 am

Spirit Rider wrote:
Thu Aug 09, 2018 9:33 am
In a 401k. Your employer contributions have to go into a pre-tax account. The fact that your employee elective contributions go to a designated Roth account is irrelevant.

Just rollover your all your pre-tax (and just the pre-tax) IRA balances to your 401k pre-tax account.

Note: It was irrelevant that you contributed your non-deductible traditional IRA contributions to the rollover IRA. All pre-tax balances in all traditional, SEP and SIMPLE IRA accounts a aggregated for the pro-rata calculation.
Just for clarity here, would the "pre-tax" amount to be rolled over into the 401k pre-tax account include gains on the recent non-deductible IRA contribution?

Spirit Rider
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Re: Roth IRA, Rollover IRA, Roth 401k dilemma

Post by Spirit Rider » Thu Aug 09, 2018 10:20 am

megabad wrote:
Thu Aug 09, 2018 9:57 am
Just for clarity here, would the "pre-tax" amount to be rolled over into the 401k pre-tax account include gains on the recent non-deductible IRA contribution?
Yes.

The total balance - the total basis (non-deductible contributions) = the total pre-tax amount (pre-tax contributions and earnings on both pre-tax and non-deductible contributions).

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Duckie
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Re: Roth IRA, Rollover IRA, Roth 401k dilemma

Post by Duckie » Thu Aug 09, 2018 6:01 pm

Duke27 wrote:last year I had to do a recharacterization, as I exceeded the income limit. Yay! That's a good problem right? "Not so fast my friend."

Those recharacterized funds ended up in a Rollover IRA from a previous employer 401k. Pre-($30,000) and post-tax($5500) money in the same IRA.
When you recharacterized, did you file Form 8606 with your taxes? That form is necessary to establish your basis before you convert (after you roll over the pre-tax amounts).

Duke27
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Joined: Wed Aug 08, 2018 7:13 pm

Re: Roth IRA, Rollover IRA, Roth 401k dilemma

Post by Duke27 » Fri Aug 17, 2018 10:58 pm

To everyone that replied,

Sorry for not posting sooner. Work has been overwhelming for me lately but thanks for all of your information.

Because of your comments, I looked much closer at my taxes and realized that last year's filing had a significant error. I should have known more about it at the time and paid closer attention to the forms my software spit out but in the confusion, the forms did not include my IRA contribution for last year (my recharacterized funds ended up in a rollover tIRA). It seems as though, the software did not ask any follow-up questions regarding my recharacterized funds. It only reminded me that I needed to recharacterize. It did not ask where I put the funds, into my IRA, so it did not get included.

Thank you, PFInterest. Thanks to your comment, I did find out more about my 401k and that it does have pre-tax and Roth components to that account.

Megabad and Spirit Rider, thanks for the clarification on the earnings on the post-tax money. That advice did not go unnoticed and is critical to keeping the tax man from assessing penalties.

Duckie, I did not file a Form 8606 but I looked into it and it seems you are correct. Thanks.

At this point, I am planning on amending my taxes but since I did not file an 8606 it seems as though I have 2 options.

1. The original plan, I could file an 8606 and clean up my tIRA by amend my 2017 filing with form 8606, then moving pre-tax funds to my 401k and then doing the backdoor conversion of last year's and this year's contribution to my rIRA. (This option is more complicated in the short term but would clear out my tIRA and allow for backdoor conversions to Roth IRA in the future. This would also put all existing tIRA funds into my company's 401k. This does not have a down-side, per se, as this 401k allows me to move funds into a brokerage account so they are not limited to just the 25 plan funds.)

2. Amend my 2017 filing by declaring my tIRA contribution as pre-tax and leaving it in the tIRA account. (This is simpler in the short term but makes it more difficult to do backdoor Roth contributions in the future.)

I guess it comes down to whether or not it makes sense to continue to fund Roth-type accounts, as PFInterest first alluded to in the first line of that reply.

I have seen a few articles on estimating returns using Roth vs. traditional accounts and given my situation, it is almost break-even at this point.

I will do more research on this subject before deciding which option to take but any advice on this situation is greatly appreciated, especially if I have any of this information wrong and those chances are 50/50 at this point.

Thanks again for all of your help!!

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BL
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Re: Roth IRA, Rollover IRA, Roth 401k dilemma

Post by BL » Fri Aug 17, 2018 11:24 pm

I would follow through with this plan to clean out the tIRA.

Then I would change to t401k from now on, or at least enough of it to make sure you don't need to do a backdoor Roth. Maybe wait until you have W-2 in hand to be sure of your income, then contribute to Roth IRA.

At some point, your income may require backdoor Roth again, and you will be ready for it.

(If you can't do direct Roth IRA, you can't deduct tIRA contributions, either.)

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