pros and cons for rollover to tIRA or other 401k from previous employer

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Topic Author
lepa71
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pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Wed Apr 10, 2019 9:48 pm

My new employer has 401k and I max it out. It is with the Principal. There are only a couple of funds (Fid 500 index, SmallCap S&P 600 Index and MidCap S&P 400 Index). There is a portion of the pension plan from the previous employer that I will have to rollover soon. I have a tIRA at Vanguard.
So. What pros and cons for rollover to tIRA or other 401k from the previous employer?

Thanks

mega317
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by mega317 » Wed Apr 10, 2019 10:02 pm

tIRA pro is control over the investments and costs. Con is closing the back door Roth if that's a concern for you.

I think depending on the state that IRAs and 401ks have different legal protections.

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Wed Apr 10, 2019 10:10 pm

Based on projection, I hope I will need a backdoor Roth conversion. I still have at least 15 years before I can retire, so I don't know if backdoor Roth conversion will still be available. I'm already contributing to trad 401k and roth 401k.

Is there anything else I need to consider?
Thanks

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Thu Apr 11, 2019 7:34 am

I was reading more about backdoor Roth conversion and it seems that can't do it if I already have tIRA in my name.
Do I need to ask my current employer's 401k admin if I can roll my tIRA into it(Principal)?
I'm also wondering if I could roll it into one of my other previous employer's 401k( Fidelity). I didn't consolidate them because Fidelity one has better funds choices and lower fees.

Another caveat, both current and previous employer's 401k have both traditional and Roth portions.

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Thu Apr 11, 2019 7:40 am

Yes ask Principal if you can roll over the IRA into the 401k plan. I don’t think you will be able to roll the IRA into previous 401k plan, but sure ask the plan administrator.

If the balance in the IRA is small enough, you may want to consider taking the tax hit and convert that to Roth.

deltaneutral83
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by deltaneutral83 » Thu Apr 11, 2019 7:54 am

I'm a little confused. When you roll a 401k to a traditional IRA, is all the traditional IRA monies not in one account? So could you essentially just contribute the $6,000 into the tIRA and then convert any amount you wish to the Roth?

ETA- Just googled, I guess 401k monies go into a separate "rollover" IRA different than a tIRA account which creates the pro rata issue because of the two separate accounts?

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Thu Apr 11, 2019 9:53 am

Originally, I opened tIRA for regular yearly contribution($5500, etc...). One of my employers(private company A) had an ESOP pension pre-tax plan. Based on rules of that plan, I did pull 10% after 11 years being with the company and rolled it over into the same tIRA at Vanguard while continuing contributing yearly tIRA allowance($5500). I hope it makes sense. After that, Company A got bought out by a public company B. Company B has its own 401k( Fidelity). So I had to roll over the rest of the ESOP money into it as ESOP has been dissolved.

I have $95K in that tIRA. This year based on my CPA I will not get a full write-off just a partial for contributing to tIRA. So I'm planning to open Roth IRA at Vanguard and put $6K into it.

Does this help?

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Fri Apr 12, 2019 5:39 pm

Anybody?

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Fri Apr 12, 2019 5:52 pm

What is your income and tax filing status? It appears to me that you are within the phase out region (but not exceed) for deductibility of the traditional IRA, but then it also automatically places you in the eligibility range for direct Roth IRA contribution. Why do you need to mess with backdoor Roth if you have the front door open?

Also, is your contribution of $6000 for 2018 of 2019? Guess I am asking if you are over age 50 or under. Forget about the tiny tax difference it would make to contribute partly to Traditional and partly to Roth. Let it ride fully in Roth.

Later, when the tax season died down, DO initiate the rollover of the traditional IRA to your Principal 401k. If backdoor Roth is in your future, this needs to go. If Principal won’t accept the funds, convert slowly, depending on how much additional tax bite you can absorb. Fortunately, it sounds like you have as few years to go before you jump against those limits.
Last edited by lakpr on Sat Apr 13, 2019 9:22 am, edited 1 time in total.

madbrain
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by madbrain » Fri Apr 12, 2019 5:56 pm

One of the biggest cons of rolling over 401ks is that you will be uninvested for some period of time. Your old 401k assets are first liquidated, then the company sends you a check, then you have to send that check to the new 401k provider, then it gets deposited, then you select the investments. This can take a number of weeks, during which you may be missing sizeable gains (or losses!). Personally, with my luck, I have always missed on gains. When the balance starts to be mid 6 figures, this uninvested time can be significant.

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Fri Apr 12, 2019 6:03 pm

madbrain wrote:
Fri Apr 12, 2019 5:56 pm
One of the biggest cons of rolling over 401ks is that you will be uninvested for some period of time. Your old 401k assets are first liquidated, then the company sends you a check, then you have to send that check to the new 401k provider, then it gets deposited, then you select the investments. This can take a number of weeks, during which you may be missing sizeable gains (or losses!). Personally, with my luck, I have always missed on gains. When the balance starts to be mid 6 figures, this uninvested time can be significant.
Very true.

One way to mitigate, but not completely eliminate, this risk is to dial up the stocks allocation in current (target account) 401k, while the money is in transit. Treat that portion of the money in transit as completely being in bond funds, rebalance with higher allocation to stocks.

Of course, this only works if you have a sizable portfolio in the newer 401k in the first place. If you have started the new job just weeks or at most months ago, the entire balance would not be enough to compensate, to bring your asset allocation up to the desired level.

madbrain
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by madbrain » Sat Apr 13, 2019 1:32 am

lakpr wrote:
Fri Apr 12, 2019 6:03 pm
Of course, this only works if you have a sizable portfolio in the newer 401k in the first place. If you have started the new job just weeks or at most months ago, the entire balance would not be enough to compensate, to bring your asset allocation up to the desired level.
Yeah, this really doesn't work if you are with a new employer, unfortunately. I would think this is a fairly common situation. There are many good reasons to do consolidate balances : if the new plan is superior in terms of investments and costs, but also the possibility of withdrawing funds penalty free if retiring at age 55 from the new employer.

In my experience, previous employers only let you rollover the entire 401k balance at once. There is no way to rollover partially in multiple steps to reduce the risk of being uninvested. In this day and age, I really think there should be a way for these rollovers to happen electronically, without involving physical checks.

deltaneutral83
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by deltaneutral83 » Sat Apr 13, 2019 7:38 am

madbrain wrote:
Fri Apr 12, 2019 5:56 pm
One of the biggest cons of rolling over 401ks is that you will be uninvested for some period of time. Your old 401k assets are first liquidated, then the company sends you a check, then you have to send that check to the new 401k provider, then it gets deposited, then you select the investments. This can take a number of weeks, during which you may be missing sizeable gains (or losses!). Personally, with my luck, I have always missed on gains. When the balance starts to be mid 6 figures, this uninvested time can be significant.
If this is a direct rollover to an IRA does this not minimize the time out of the market to like 2 weeks?

JediMisty
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by JediMisty » Sat Apr 13, 2019 7:51 am

deltaneutral83 wrote:
Sat Apr 13, 2019 7:38 am
madbrain wrote:
Fri Apr 12, 2019 5:56 pm
One of the biggest cons of rolling over 401ks is that you will be uninvested for some period of time. Your old 401k assets are first liquidated, then the company sends you a check, then you have to send that check to the new 401k provider, then it gets deposited, then you select the investments. This can take a number of weeks, during which you may be missing sizeable gains (or losses!). Personally, with my luck, I have always missed on gains. When the balance starts to be mid 6 figures, this uninvested time can be significant.
If this is a direct rollover to an IRA does this not minimize the time out of the market to like 2 weeks?
This is the process that must be followed for trustee to trustee transfer, which I think is what you are asking by "direct rollover". I was all over each of the steps described above and it was probably three weeks. The uninvested time can be brutal if the market swings while you're uninvested. When my company was bought by another, we we're given a one time opportunity (for a few weeks) to roll over all funds to the new company instantaneously. I didn't and wished I had given how cheap the funds are and that everything I need in index funds is there except international bonds. Sure, I'm flagship at Vanguard now, but the customer service has not been as great as I hoped. Later our 401k was moved to Vanguard by the new company, making the choices and expenses even more attractive. Consider all choices carefully before moving funds.

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lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sat Apr 13, 2019 2:52 pm

lakpr wrote:
Fri Apr 12, 2019 5:52 pm
What is your income and tax filing status? It appears to me that you are within the phase out region (but not exceed) for deductibility of the traditional IRA, but then it also automatically places you in the eligibility range for direct Roth IRA contribution. Why do you need to mess with backdoor Roth if you have the front door open?

Also, is your contribution of $6000 for 2018 of 2019? Guess I am asking if you are over age 50 or under. Forget about the tiny tax difference it would make to contribute partly to Traditional and partly to Roth. Let it ride fully in Roth.

Later, when the tax season died down, DO initiate the rollover of the traditional IRA to your Principal 401k. If backdoor Roth is in your future, this needs to go. If Principal won’t accept the funds, convert slowly, depending on how much additional tax bite you can absorb. Fortunately, it sounds like you have as few years to go before you jump against those limits.
Adjusted gross income is $99K filing married-jointly. I'm 47. I usually contribute to tIRA at the begging of the year. So as usual at the begging of 2018, I did $5500. At that time my employer did not have 401K. Later in the year after the employer got bought out, the new employer does offer 401K. So I tried to max out 401k contribution( contributed around $18K for 2018 this is in Fidelity with good index funds options) I think this why my $5500 for 2018 was not 100% deductible. I believe it was only $2200 deductible. I haven't done it this year because I've read somewhere that it may not be fully deductible when I have 401k from work. This was confirmed by the CPA. He suggested waiting until 2020 to find out the portion that would be deductible and split tIRA vs ROTH IRA. Since then I got a new job. Current employer has 401K from Principal( not much to pick from. Only has one good Fidelity SP500 index). I also have $79K left in the original ESOP plan that I will have to roll it to something by June 2019. I have spoken with Fidelity and they said that I should be able to roll $79K into 401k even as I'm no longer an active employee. This is why I'm thinking if I can do this then why can't I roll over my tIRA into it. To answer your question "Why do you need to mess with backdoor Roth if you have the front door open?" It is my understanding that if I have a tIRA in my name I can't do backdoor Roth conversion in the future. I have about $300K in trad 401k and hopefully, this may materialize into 1-2M at retirement edge.

Does this help?

Thanks

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sat Apr 13, 2019 2:54 pm

madbrain wrote:
Fri Apr 12, 2019 5:56 pm
One of the biggest cons of rolling over 401ks is that you will be uninvested for some period of time. Your old 401k assets are first liquidated, then the company sends you a check, then you have to send that check to the new 401k provider, then it gets deposited, then you select the investments. This can take a number of weeks, during which you may be missing sizeable gains (or losses!). Personally, with my luck, I have always missed on gains. When the balance starts to be mid 6 figures, this uninvested time can be significant.
I'm not sure if this is really true. I have done rollovers in the last couple of years and it was done within 5-7 business days.

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sat Apr 13, 2019 3:01 pm

madbrain wrote:
Sat Apr 13, 2019 1:32 am
lakpr wrote:
Fri Apr 12, 2019 6:03 pm
Of course, this only works if you have a sizable portfolio in the newer 401k in the first place. If you have started the new job just weeks or at most months ago, the entire balance would not be enough to compensate, to bring your asset allocation up to the desired level.
Yeah, this really doesn't work if you are with a new employer, unfortunately. I would think this is a fairly common situation. There are many good reasons to do consolidate balances : if the new plan is superior in terms of investments and costs, but also the possibility of withdrawing funds penalty free if retiring at age 55 from the new employer.

In my experience, previous employers only let you rollover the entire 401k balance at once. There is no way to rollover partially in multiple steps to reduce the risk of being uninvested. In this day and age, I really think there should be a way for these rollovers to happen electronically, without involving physical checks.
I'm not trying to roll over old 401k into a new one. Fidelity funds options are much better in old 401k than in Principal. Also, fees are less in Fidelity. I'm only looking to roll over tIRA from Vanguard into 401k. Being it Fidelity(would be my preference) or Principal.

The only question stands. If I leave it as is and roll over it later. Is there a legal time period that I have to have no tIRA in my name and be able to do the backdoor Roth conversion?

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Sat Apr 13, 2019 4:00 pm

lepa71 wrote:
Sat Apr 13, 2019 3:01 pm
The only question stands. If I leave it as is and roll over it later. Is there a legal time period that I have to have no tIRA in my name and be able to do the backdoor Roth conversion?
The only date that IRS cares about is 12/31/20xx, where 20xx is the calendar year for which you are filing the tax return for. As of that date, the balance in Traditional IRAs of any sort should be zero.

Of course, if 12/31/20xx falls on a weekend, since the markets are closed, the value would be as the close of last business day prior to that date.

So, to answer your specific question: as long as you roll over your IRA from Vanguard into Principal 401k before 12/31/2019, you are golden. If you pollute your IRA with non-deductible contributions to Traditional IRA, Principal will not / can not accept it (and the reason for that is ERISA act places super-strict liabilities on the 401k plans not to accept monies on which taxes have already been paid).

So, if you are running out of time, you can still execute the backdoor Roth conversion, as long as you can get it done by 12/31/2019. BUT, I strongly suggest to please do it at a different custodian until the Traditional IRA is rolled over. Chances for even the most minor of screw ups,either involving Principal or Vanguard, jeopardizing the entire backdoor process are quite high. With the new tax law, you can't even undo a Roth conversion anymore, and you will be stuck for decades with the Form 8606 and pro-rata rules. It is highly advisable to delay conversion until the Traditional IRA is rolled over successfully.

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lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sat Apr 13, 2019 4:48 pm

lakpr wrote:
Sat Apr 13, 2019 4:00 pm
lepa71 wrote:
Sat Apr 13, 2019 3:01 pm
The only question stands. If I leave it as is and roll over it later. Is there a legal time period that I have to have no tIRA in my name and be able to do the backdoor Roth conversion?
The only date that IRS cares about is 12/31/20xx, where 20xx is the calendar year for which you are filing the tax return for. As of that date, the balance in Traditional IRAs of any sort should be zero.

Of course, if 12/31/20xx falls on a weekend, since the markets are closed, the value would be as the close of last business day prior to that date.

So, to answer your specific question: as long as you roll over your IRA from Vanguard into Principal 401k before 12/31/2019, you are golden. If you pollute your IRA with non-deductible contributions to Traditional IRA, Principal will not / can not accept it (and the reason for that is ERISA act places super-strict liabilities on the 401k plans not to accept monies on which taxes have already been paid).
I'm not sure what you mean. 2018 tIRA contribution already has a partially deductible contribution. I was only able to deduct only $2200 and $2300 went into tIRA without deduction. Unless there are some kind of legal issues with that I'm ok not be able to deduct full amount
So, if you are running out of time, you can still execute the backdoor Roth conversion, as long as you can get it done by 12/31/2019. BUT, I strongly suggest to please do it at a different custodian until the Traditional IRA is rolled over. Chances for even the most minor of screw ups,either involving Principal or Vanguard, jeopardizing the entire backdoor process are quite high. With the new tax law, you can't even undo a Roth conversion anymore, and you will be stuck for decades with the Form 8606 and pro-rata rules. It is highly advisable to delay conversion until the Traditional IRA is rolled over successfully.

Should I just forget about Roth backdoor conversion?
One more question.
Should I wait to figure out what portion is deductible and then put deductible in tIRA and non-one into Roth IRA or just put everything in Roth IRA and be done with it? I already do split 401K into Trad. and Roth. I could switch to contribute the whole 401K to trad and open Roth IRA at Vanguard and do 2019 to it.

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Sat Apr 13, 2019 6:16 pm

lepa71 wrote:
Sat Apr 13, 2019 4:48 pm
I'm not sure what you mean. 2018 tIRA contribution already has a partially deductible contribution. I was only able to deduct only $2200 and $2300 went into tIRA without deduction. Unless there are some kind of legal issues with that I'm ok not be able to deduct full amount
Did you contribute the $5500 to the exact same Traditional IRA account that you previously contributed to? If so, you did what I was warning you in my previous post not to do. Now the Traditional IRA cannot be rolled into Principal 401k plan. It is "polluted" by non-deductible contributions and no 401k plans can accept it.
One more question.
Should I wait to figure out what portion is deductible and then put deductible in tIRA and non-one into Roth IRA or just put everything in Roth IRA and be done with it? I already do split 401K into Trad. and Roth. I could switch to contribute the whole 401K to trad and open Roth IRA at Vanguard and do 2019 to it.
Well, this question is moot now.

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lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sat Apr 13, 2019 8:54 pm

lakpr wrote:
Sat Apr 13, 2019 6:16 pm
lepa71 wrote:
Sat Apr 13, 2019 4:48 pm
I'm not sure what you mean. 2018 tIRA contribution already has a partially deductible contribution. I was only able to deduct only $2200 and $2300 went into tIRA without deduction. Unless there are some kind of legal issues with that I'm ok not be able to deduct full amount
Did you contribute the $5500 to the exact same Traditional IRA account that you previously contributed to? If so, you did what I was warning you in my previous post not to do. Now the Traditional IRA cannot be rolled into Principal 401k plan. It is "polluted" by non-deductible contributions and no 401k plans can accept it.
One more question.
Should I wait to figure out what portion is deductible and then put deductible in tIRA and non-one into Roth IRA or just put everything in Roth IRA and be done with it? I already do split 401K into Trad. and Roth. I could switch to contribute the whole 401K to trad and open Roth IRA at Vanguard and do 2019 to it.
Well, this question is moot now.
I'm not sure I understand. This is the same tIRA account I have been contributing for the last 7 years. I thought that just because I did not get a tax deduction for the full $5500 it does not mean I'm not qualified to contribute full $5500. Am I missing something?

My CPA said that if I want to contribute tIRA for 2019 after maxing 401k, I should wait until taxes 2019 are calculated to find out how much I should put into tIRA vs Roth IRA. Is that right?

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Sat Apr 13, 2019 9:05 pm

I'm not sure I understand. This is the same tIRA account I have been contributing for the last 7 years. I thought that just because I did not get a tax deduction for the full $5500 it does not mean I'm not qualified to contribute full $5500. Am I missing something?

My CPA said that if I want to contribute tIRA for 2019 after maxing 401k, I should wait until taxes 2019 are calculated to find out how much I should put into tIRA vs Roth IRA. Is that right?
Let us back up a minute.

Question 1: What is your filing status?
Question 2: What is your 2018 Adjusted Gross Income?
Question 3: Do you want to take as much deduction of Traditional IRA that you can get? Or contribute full $5500 to Roth IRA for 2018?
Question 4: Do you want to rollover the current Traditional IRA to your Principal 401k plan or no? Why or why not?

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lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sat Apr 13, 2019 9:58 pm

lakpr wrote:
Sat Apr 13, 2019 9:05 pm
I'm not sure I understand. This is the same tIRA account I have been contributing for the last 7 years. I thought that just because I did not get a tax deduction for the full $5500 it does not mean I'm not qualified to contribute full $5500. Am I missing something?

My CPA said that if I want to contribute tIRA for 2019 after maxing 401k, I should wait until taxes 2019 are calculated to find out how much I should put into tIRA vs Roth IRA. Is that right?
Let us back up a minute.

Question 1: What is your filing status? Married-jointly
Question 2: What is your 2018 Adjusted Gross Income? Line 7 1040 AGI $99659. Taxable income $75659
Question 3: Do you want to take as much deduction of Traditional IRA that you can get? Or contribute full $5500 to Roth IRA for 2018? For 2018, I contribute a full amount of $5500 to tIRA at the beginning of 2018 because my employer was not offering 401k. It is in the middle of 2018 after company A has been purchased by company B that had 401K. I have decided to max out 401k under company B for 2018 contribution. Just to be clear. I have contributed to both Trad 401k and Roth 401k. This is with Fidelity. I have in Roth 401k around $6500 and with some rollover $293K in Trad 401K. Since I found a new job at company C. To answer your questions. I want to get as much deduction for contributed tIRA($5500) but I'm ok not to because of the changes happened during 2018
Question 4: Do you want to roll over the current Traditional IRA to your Principal 401k plan or no? Why or why not? Here my line of thoughts. I would like to have an option for Roth backdoor conversion. I'm concerned about RMD. Besides work income, I also get income from rental properties. Which I will hopefully continue to get in retirement. I may end up with $1-$2M in tradition contributions and some in Roth. My preference would be to roll over tIRA from Vanguard $95K into Fidelity 401K from the company B. Fidelity has better funds choices In January 2019 I started a new job at company C. This company uses the Principal for their 401k. There are not many choices funds-wise in Principal. If for some reason I can't so be it. It's not the end of the world.

madbrain
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by madbrain » Sun Apr 14, 2019 1:27 am

deltaneutral83 wrote:
Sat Apr 13, 2019 7:38 am
If this is a direct rollover to an IRA does this not minimize the time out of the market to like 2 weeks?
2 weeks out of the market can mean massive underperforming. Just look at the returns of the S&P500 of the last 2-3 weeks, for example.
And I was referring to 401k to 401k transfer, with no IRA involved. If a rollover IRA is used as an intermediate step, it only adds to the processing time. The basic problem is that the existing custodian has to cut you a check, send it, and then you have to send it to the new custodian.

madbrain
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by madbrain » Sun Apr 14, 2019 1:30 am

lepa71 wrote:
Sat Apr 13, 2019 2:54 pm
I'm not sure if this is really true. I have done rollovers in the last couple of years and it was done within 5-7 business days.
I did one last august. It took more. The existing custodian was Fidelity. I asked and paid for overnight shipping. They still took 4 business days before they cut the check and send it. By that time, it was the following weekend. I don't think I got it done in less than 10 business days ultimately, ie. 2 weeks from the time I first liquidated the assets in the existing Fidelity 401k (moved to stable value fund) to the date my funds were reinvested in the new 401k at Vanguard according to my desired asset allocation.

madbrain
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by madbrain » Sun Apr 14, 2019 1:32 am

lakpr wrote:
Sat Apr 13, 2019 4:00 pm
The only date that IRS cares about is 12/31/20xx, where 20xx is the calendar year for which you are filing the tax return for. As of that date, the balance in Traditional IRAs of any sort should be zero.
That is true for IRA conversions. But for IRA contributions, you have until 4/15/20xx+1, even those contributions are reportable (and possibly deductible) on the tax return for the previous year .

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Sun Apr 14, 2019 3:08 am

lepa71 wrote:
Sat Apr 13, 2019 9:58 pm
lakpr wrote:
Sat Apr 13, 2019 9:05 pm
Let us back up a minute.

Question 1: What is your filing status? Married-jointly
Question 2: What is your 2018 Adjusted Gross Income? Line 7 1040 AGI $99659. Taxable income $75659
Question 3: Do you want to take as much deduction of Traditional IRA that you can get? Or contribute full $5500 to Roth IRA for 2018? For 2018, I contribute a full amount of $5500 to tIRA at the beginning of 2018 because my employer was not offering 401k. It is in the middle of 2018 after company A has been purchased by company B that had 401K. I have decided to max out 401k under company B for 2018 contribution. Just to be clear. I have contributed to both Trad 401k and Roth 401k. This is with Fidelity. I have in Roth 401k around $6500 and with some rollover $293K in Trad 401K. Since I found a new job at company C. To answer your questions. I want to get as much deduction for contributed tIRA($5500) but I'm ok not to because of the changes happened during 2018
Question 4: Do you want to roll over the current Traditional IRA to your Principal 401k plan or no? Why or why not? Here my line of thoughts. I would like to have an option for Roth backdoor conversion. I'm concerned about RMD. Besides work income, I also get income from rental properties. Which I will hopefully continue to get in retirement. I may end up with $1-$2M in tradition contributions and some in Roth. My preference would be to roll over tIRA from Vanguard $95K into Fidelity 401K from the company B. Fidelity has better funds choices In January 2019 I started a new job at company C. This company uses the Principal for their 401k. There are not many choices funds-wise in Principal. If for some reason I can't so be it. It's not the end of the world.
OK. Given you are filing MFJ, and your AGI is less than $101k (2018 limit for deducting IRA contributions for the MFJ status), it appears your contribution is fully deductible.

Actually I made an error in my question. IRS actually asks for Modified Adjusted Gross Income (MAGI). Is this figure substantially greater than AGI for you? For most folks they are really close. But I am not sure if your rental income pushes you over the edge; and makes your IRA contribution only partially deductible.

Regardless of the question on AGI vs MAGI: you appear to be in the 12% tax bracket, and also prospects of higher income in the near future. With 1 million+ in projected lifetime retirement contributions, you are also on track to be in the 22% tax bracket in retirement. Given this, I strongly suggest you forego deductibility for now and choose Roth IRA instead.

If this is acceptable to you, please call Vanguard, and ask them to recharacterize (use that word and emphasize it) your traditional IRA contribution for 2018 to Roth IRA. DO NOT "CONVERT" to Roth IRA. If either you or Vanguard makes a mistake, the new law makes it impossible to undo the mistake, you will be stuck. THIS MUST HAPPEN BY MONDAY!!! Vanguard must report IRA balances asof April 15 midnight to the IRS. You want to have reported Roth balance than tIRA balance for 2018.

If you have already filed taxes, you will have to file an amended tax return by October 15th. Otherwise please file for an automatic extension to file. File after the recharacterization is completed and set in stone.

Lastly: I said this before in a previous post, but will repeat. Fidelity 401k, from your Company B, is unlikely to accept incoming rollover of your IRA from Vanguard. You are no longer employed there. The only choice is to rollover into Principal 401k, your current employer.

Because of ERISA restrictions, 401k plans cannot accept funds with a mix of deductible and non-deductible contributions. This gets back to the question of 2018 contribution made for 2018, Is it a traditional IRA contribution AND fully deductible? If it is even 1 dollar non-deductible, you will never be able to roll it into Principal 401k. ERISA prohibits it. For this additional reason, it is cleaner if your entire 2018 contribution is recharacterized as Roth IRA.

Before December 31, 2019, get the rest of your traditional IRA (what is left after recharacterization), rolled into Principal 401k. I know you said it does not have good choices, but either hold your nose and roll it over, or commit to converting your traditional IRA to Roth IRA ocer the next few years (the deadline is the year before your MFJ income becomes $189k or more).

Going forward, every year, only contribute to Roth IRA from now on. Until your annual MFJ income becomes $189k or more. That is when you will be forced to use backdoor Roth technique. No point in going backdoor way when the front door is fully open for you. With the backdoor technique, the funds are locked up for 5 years from the date of conversion, as opposed to immediate availability for withdrawal if you use direct Roth contributions. This is a rolling 5 year clock. Each Roth conversion has its own specific 5 year clock.

Aak732
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by Aak732 » Sun Apr 14, 2019 5:14 am

Here's an old article I found (it's from 2016, but the process should be applicable now as well).

https://thefinancebuff.com/the-backdoor ... ow-to.html

It states how one can Rollover the pre-tax portion of your Traditional IRA to an employer plan (I.e a qualified plan such as your current 401k). The rollover information is on page.21 of the IRS publication 590a (https://www.irs.gov/pub/irs-pdf/p590a.pdf).

In fact, I am planning to do the same myself. In my Traditional IRA, I have a mixed bag of Deductible, Non-Deductible, and pre-tax rollover money from a previous 401k. I am going to rollover all the pretax 401k and Deductible money in the Traditional IRA to my current 401k. Then *convert* the remaining (non-deductible monies) to my Roth IRA (which I had setup and contributed to in the past). Also I have filed Form 8606 every year that I made non-deductible contributions to my Traditional IRA.

Folks, let me know if anyone sees a flaw with this plan. Thanks.

Topic Author
lepa71
Posts: 241
Joined: Sat Mar 05, 2016 5:12 pm

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sun Apr 14, 2019 10:25 am

lakpr wrote:
Sun Apr 14, 2019 3:08 am
lepa71 wrote:
Sat Apr 13, 2019 9:58 pm
lakpr wrote:
Sat Apr 13, 2019 9:05 pm
Let us back up a minute.

Question 1: What is your filing status? Married-jointly
Question 2: What is your 2018 Adjusted Gross Income? Line 7 1040 AGI $99659. Taxable income $75659
Question 3: Do you want to take as much deduction of Traditional IRA that you can get? Or contribute full $5500 to Roth IRA for 2018? For 2018, I contribute a full amount of $5500 to tIRA at the beginning of 2018 because my employer was not offering 401k. It is in the middle of 2018 after company A has been purchased by company B that had 401K. I have decided to max out 401k under company B for 2018 contribution. Just to be clear. I have contributed to both Trad 401k and Roth 401k. This is with Fidelity. I have in Roth 401k around $6500 and with some rollover $293K in Trad 401K. Since I found a new job at company C. To answer your questions. I want to get as much deduction for contributed tIRA($5500) but I'm ok not to because of the changes happened during 2018
Question 4: Do you want to roll over the current Traditional IRA to your Principal 401k plan or no? Why or why not? Here my line of thoughts. I would like to have an option for Roth backdoor conversion. I'm concerned about RMD. Besides work income, I also get income from rental properties. Which I will hopefully continue to get in retirement. I may end up with $1-$2M in tradition contributions and some in Roth. My preference would be to roll over tIRA from Vanguard $95K into Fidelity 401K from the company B. Fidelity has better funds choices In January 2019 I started a new job at company C. This company uses the Principal for their 401k. There are not many choices funds-wise in Principal. If for some reason I can't so be it. It's not the end of the world.
OK. Given you are filing MFJ, and your AGI is less than $101k (2018 limit for deducting IRA contributions for the MFJ status), it appears your contribution is fully deductible.

Actually I made an error in my question. IRS actually asks for Modified Adjusted Gross Income (MAGI). Is this figure substantially greater than AGI for you? For most folks they are really close. But I am not sure if your rental income pushes you over the edge; and makes your IRA contribution only partially deductible.
I made about $44,061.00 in income for rental properties but expenses were $49K. I couldn't itemize this year because of the tax changes. So 24K were deducted.
Here is the tIRA layout Nondeductible Trad IRA tax form
line 1 nondeductible to tIRA for 2018 = $2080
line 2 total basic in tIRA = $2160
line 3 add line 1 and 2 = 4240
Also, I need to point it out that my wife's $5500 was fully deductible. My wife has her own tIRA. Does this play any role in all of this? If it does then maybe I will let it be.


Regardless of the question on AGI vs MAGI: you appear to be in the 12% tax bracket, and also prospects of higher income in the near future. With 1 million+ in projected lifetime retirement contributions, you are also on track to be in the 22% tax bracket in retirement. Given this, I strongly suggest you forego deductibility for now and choose Roth IRA instead. I don't think I'm in 12%, I think 22%. Are you saying I should do it for both 401K and IRA

If this is acceptable to you, please call Vanguard, and ask them to recharacterize (use that word and emphasize it) your traditional IRA contribution for 2018 to Roth IRA. DO NOT "CONVERT" to Roth IRA. If either you or Vanguard makes a mistake, the new law makes it impossible to undo the mistake, you will be stuck. THIS MUST HAPPEN BY MONDAY!!! Vanguard must report IRA balances as of April 15 midnight to the IRS. You want to have reported Roth balance than tIRA balance for 2018. I will call Vanguard Monday morning as they are closed today. Can I ask them to recharacterize just nondeductible portion? If yes then from numbers above. Which amount? I already filed and paid my taxes for 2018

If you have already filed taxes, you will have to file an amended tax return by October 15th. Otherwise please file for an automatic extension to file. File after the recharacterization is completed and set in stone.

Lastly: I said this before in a previous post, but will repeat. Fidelity 401k, from your Company B, is unlikely to accept incoming rollover of your IRA from Vanguard. You are no longer employed there. The only choice is to rollover into Principal 401k, your current employer.
Principal has really poor funds choices but this may change. Right now I use only Fidelity SP500 index fund. I don't know if you saw that I still have ESOP money($89K) in company A trust account that I will have to roll out in the next month or so. Company A allowed us to roll over 75% last year and 25% this year. Last year when I was employed by company B, I rolled over 75% into Fidelity. I spoke with them when I was already not an active employee about rolling over of the additional 25% this year and they said that it shouldn't a problem. I spoke with a dedicated team that services Company B. Do you see any problems with this?

Because of ERISA restrictions, 401k plans cannot accept funds with a mix of deductible and non-deductible contributions. This gets back to the question of 2018 contribution made for 2018, Is it a traditional IRA contribution AND fully deductible? If it is even 1 dollar non-deductible, you will never be able to roll it into Principal 401k. ERISA prohibits it. For this additional reason, it is cleaner if your entire 2018 contribution is recharacterized as Roth IRA.

Before December 31, 2019, get the rest of your traditional IRA (what is left after recharacterization), rolled into Principal 401k. I know you said it does not have good choices, but either hold your nose and roll it over, or commit to converting your traditional IRA to Roth IRA ocer the next few years (the deadline is the year before your MFJ income becomes $189k or more). Is there anything on tax forms that can tell me how close I'm to $189K?

Going forward, every year, only contribute to Roth IRA from now on. Until your annual MFJ income becomes $189k or more. That is when you will be forced to use backdoor Roth technique. No point in going backdoor way when the front door is fully open for you. With the backdoor technique, the funds are locked up for 5 years from the date of conversion, as opposed to immediate availability for withdrawal if you use direct Roth contributions. This is a rolling 5 year clock. Each Roth conversion has its own specific 5 year clock.
Just wondering. When I look at my Fidelity 401k at Roth deferral portion. It does say this
Roth Contributions
Net Contributions $6,152.71
Balance $6,456.53
First Roth Contribution Year 2018
First year of withdrawal without penalty *2023
Just want to say BIG THANK YOU for helping. Hope this will help others as well.

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sun Apr 14, 2019 7:29 pm

@lakpr

Could you please review my last post?
I would like to know when I will talk to Vanguard in the morning.

Thanks

sc9182
Posts: 239
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by sc9182 » Sun Apr 14, 2019 8:05 pm

If you have funds rolled over to your new employer- you can borrow/loan against the 401k (not always). Kinda helps towards your emergency funds to tide over a few un expected expenses (don’t encourage this as a strategy, but at times life/family needs may be more important than retirement planning alone).

Also, if someone is past age 55 and there are circumstances to withdraw monies, 401k/employer plan could allow penalty free withdrawals - without having to waiting until 59.5 (again don’t encourage this, especially as you are nearing retirement and you may not have much accumulation runway left)

Most importantly ensure new employers plan has decent low-cost fund options.

Topic Author
lepa71
Posts: 241
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Sun Apr 14, 2019 9:55 pm

I found notes from my CPA. My split is $2080 for Roth and $3420 for Tard. for 2018

Can I just ask Vanguard to recategorize $2080 to Roth?

lakpr
Posts: 1108
Joined: Fri Mar 18, 2011 9:59 am

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Sun Apr 14, 2019 11:19 pm

lepa71 wrote:
Sun Apr 14, 2019 9:55 pm
I found notes from my CPA. My split is $2080 for Roth and $3420 for Tard. for 2018

Can I just ask Vanguard to recategorize $2080 to Roth?
I suppose you can do that for 2018. That's the most urgent thing that should do on Monday when you talk to Vanguard.

Unfortunately you are not out of the woods yet. There is also an additional problem -- a few posts above you said this about Form 8606 Line 2
lepa71 wrote:
Sun Apr 14, 2019 9:55 pm
I made about $44,061.00 in income for rental properties but expenses were $49K. I couldn't itemize this year because of the tax changes. So 24K were deducted.
Here is the tIRA layout Nondeductible Trad IRA tax form
line 1 nondeductible to tIRA for 2018 = $2080
line 2 total basic in tIRA = $2160
line 3 add line 1 and 2 = 4240
This is telling me that you have $2160 still in non-deductible basis within the same traditional IRA. As long as this money remains in the IRA, you will not be able to roll the money over into the 401k plan.

I am not very sure about the exact mechanism on how to correct this. My speculation only: it could be these steps.
1. First, find out what exact date the $2160 was contributed into the Traditional IRA. You will have to look at Vanguard transaction history. I suspect you made a single $5500 transaction for 2016 tax year, and this basis is coming from that. That's the date you need to locate.

2. Ask Vanguard if they can separate this $2160 basis, AND the associated earnings since contribution date, into a separate fund. Choose another target date fund or bond fund or whatever else fund that you can find from Vanguard line up, that you did not previously contribute to.

3. Now that your main account is free of the basis and associated earnings, initiate a roll over of the main account balance into 401k plan (as you said, if Fidelity 401k accepts the incoming rollover, GREAT!). Be super-clear on your transfer forms that you want to initiate rollover of only this particular mutual fund, NOT A PENNY from the new fund you chose in step 2!! If either Vanguard or you or your new 401k custodian (Fidelity or Principal) makes the tiniest mistake, you are up the creek without a paddle.

4. Unless and until step 3 is complete and executed flawlessly, you cannot convert the separated monies from step 2 to Roth IRA.

5. ALL these steps need to be completed before December 31, 2019 if you don't want to be trapped into the pro-rata rule.

Again I emphasize, this is only my speculation. We need heavyweights like either Alan S or Grabiner to take a look and suggest if these steps are kosher, or even possible.

Topic Author
lepa71
Posts: 241
Joined: Sat Mar 05, 2016 5:12 pm

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 8:08 am

I was interested in that line 2 with $2160 as well but this is the 1st year I had to have 8606 form. Do you think I should have seen 8606 for a prior year?

I'm thinking I might let it go. I might just have to retire early :wink: to do Roth conversion before I become 72 or start contributing to Roth more.
I do have a couple more questions.
  1. If I'm keeping the thing as is, should I still recategorize $2080 as Roth and from now on just do full IRA contribution into Roth without a split? This way I will start building up my Roth side of the portfolio.
  2. If I do a thing from 1, do I still need tax amendment?
  3. I posted above that I already contribute/split to both Roth and Trad in my current 401k. Should change contribution to 401k to full Trad, keep it as it is( right now 10% to Trad and 8% Roth) or change it to something else? Keeping in mind that $5500(2019 $6000) will go fully into Roth IRA.
  4. Do you still think I'm in 12% tax bracket? I was trying to get there but wasn't sure I could.
I'm still planning to call Vanguard to figure out where that $$2160 came from.

lakpr
Posts: 1108
Joined: Fri Mar 18, 2011 9:59 am

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Mon Apr 15, 2019 8:35 am

Yes, you should have seen a form 8606 from a prior year. If you are using the same accountant to do your taxes, he might be able to locate which year’s tax return this $2160 came from.

You also said you are planning to call Vanguard to figure out about the $2160. Vanguard wouldn’t know. Form 8606 is between you and the IRS. You might have contributed a full $5500 (or $5000 if from earlier years), and only after taxes are filed it turns out that you are only able to deduct part of the contribution. Vanguard would have only $5500 in their records.

Just saying your first stop should be your accountant.

By today though, please do “recharacterize” $2080 to Roth IRA. No point in missing the deadline.

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Mon Apr 15, 2019 9:09 am

Wanted to answer your other questions.

1. I do not think that you will need to file an amendment of your tax return. You might have to send only the corrected Form 8606, with Line 1 showing zero instead of $2080. I believe you can send this as a stand-alone form.

2. Seeing that you are pretty close to the 12% tax bracket based on the AGI — it is your rental income that pushed you over into 22% bracket — yes, I think you should make the entire 401k contribution to Traditional, and ensure that even with the rental income you stay in the 12% tax bracket. Your IRA contributions from now on should this be made only to Roth, not to Traditional IRA.

niceguy7376
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Location: Metro ATL

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by niceguy7376 » Mon Apr 15, 2019 9:16 am

The whole idea of contributing the full amount of IRA on first day of Jan has some issues that goes along with it.
If you skip one year and do the 2019 contribution on first day of 2020 and then continue the same, you still are mental math wise in same flow.

OP contributed the max to trad ira (based on his prev employer not having 401k plan at work for the past 6+ years. Now that OP had a 401k in middle of last year, the deductible trad ira amount came into picture.

Going forward, following is my suggestion.
With the income that you currently have, unless something drastically changes, you have a lot of way to go to get to direct roth ira limits (190K ish for MFJ). So you have a lot less to worry about the backdoor roth.

Contribute full amount to trad 401k and full amount to two Roth IRAs each year and you should be good.
As for moving existing trad ira to 401k plans and such, check if your current 401k allows that.

Topic Author
lepa71
Posts: 241
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 9:38 am

lakpr wrote:
Mon Apr 15, 2019 9:09 am
Wanted to answer your other questions.

1. I do not think that you will need to file an amendment of your tax return. You might have to send only the corrected Form 8606, with Line 1 showing zero instead of $2080. I believe you can send this as a stand-alone form. Filing was done electronically. I don't think I can just send corrected 8606 form. I can't get my CPA today but another person from their staff told me that I can't just submit a new 8606 form. I would have to do an amendment. If and when I find another $2160 I would have to do another amendment. Am I right?
So my questions to you. Can I keep this tIRA account as is and it will be the 1st account to be converted to Roth when the time comes? It only has $95K. I won't contribute to it because as you said all my IRA contributions will go to Roth anyway. My wife trad IRA was fully deductible. Should I continue to contribute hers to Trad?


2. Seeing that you are pretty close to the 12% tax bracket based on the AGI — it is your rental income that pushed you over into 22% bracket — yes, I think you should make the entire 401k contribution to Traditional, and ensure that even with the rental income you stay in the 12% tax bracket. Your IRA contributions from now on should this be made only to Roth, not to Traditional IRA. Ok. That's the plan but it feels like I should contribute a portion to Roth for current 401k just with the adjustment to take into account that IRA now goes into Roth 100%. What do you think?
Just to show what I have
Company B 401k

Code: Select all

Contributions 		Employee Deferral 	Employer Match 	Rollover 		Roth Deferral 
Total Account Balance 	$11,490.99 		$1,724.17 	$231,433.99 		$6,320.36
tIRA = $95K
Last edited by lepa71 on Mon Apr 15, 2019 9:55 am, edited 3 times in total.

Topic Author
lepa71
Posts: 241
Joined: Sat Mar 05, 2016 5:12 pm

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 9:54 am

niceguy7376 wrote:
Mon Apr 15, 2019 9:16 am
The whole idea of contributing the full amount of IRA on first day of Jan has some issues that goes along with it.
If you skip one year and do the 2019 contribution on first day of 2020 and then continue the same, you still are mental math wise in same flow.

OP contributed the max to trad ira (based on his prev employer not having 401k plan at work for the past 6+ years. Now that OP had a 401k in middle of last year, the deductible trad ira amount came into picture.

Going forward, following is my suggestion.
With the income that you currently have, unless something drastically changes, you have a lot of way to go to get to direct roth ira limits (190K ish for MFJ). So you have a lot less to worry about the backdoor roth.

Contribute full amount to trad 401k and full amount to two Roth IRAs each year and you should be good.
As for moving existing trad ira to 401k plans and such, check if your current 401k allows that.
I don't think I'm concern about backdoor Roth. I was planning to use 401k Roth conversion instead of tIRA to Roth conversion.

lakpr
Posts: 1108
Joined: Fri Mar 18, 2011 9:59 am

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Mon Apr 15, 2019 9:55 am

Glad to be corrected that you do need to do an amendment of the tax return. But really no big deal.

Given that an amendment is anyway in your future, I would locate the source of $2160, separate it out and it’s earnings, then file the single amendment. Yes I agree with your plan.

Lastly, while you could take the deduction on your wife’s Traditional IRA contributions, given that your AGI (after full traditional 401k contributions) is in the 12% bracket, I would change her contributions also to Roth IRA. Actually, even if you are in the 22% bracket I would encourage Roth IRA for both of you, given that the tax rates are temporarily lower. Until tax year 2025.

Reevaluate whether you want to do Roth IRA or Traditional IRA for your wife in 2026 when the tax rates return to 2017 levels.

Topic Author
lepa71
Posts: 241
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 10:00 am

lakpr wrote:
Mon Apr 15, 2019 9:55 am
Glad to be corrected that you do need to do an amendment of the tax return. But really no big deal.

Given that an amendment is anyway in your future, I would locate the source of $2160, separate it out and it’s earnings, then file the single amendment. Yes I agree with your plan.

Lastly, while you could take the deduction on your wife’s Traditional IRA contributions, given that your AGI (after full traditional 401k contributions) is in the 12% bracket, I would change her contributions also to Roth IRA. Actually, even if you are in the 22% bracket I would encourage Roth IRA for both of you, given that the tax rates are temporarily lower. Until tax year 2025.

Reevaluate whether you want to do Roth IRA or Traditional IRA for your wife in 2026 when the tax rates return to 2017 levels.
I tried to call Vanguard and it is at least 2 hours wait time. Is there a point to recategorize 2080 today as I no longer contributing to it? Are you suggesting that the reason to "clean up" my tIRA is for the future possibility of rolling it over into 401K?

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Mon Apr 15, 2019 10:11 am

lepa71 wrote:
Mon Apr 15, 2019 10:00 am
I tried to call Vanguard and it is at least 2 hours wait time. Is there a point to recategorize 2080 today as I no longer contributing to it? Are you suggesting that the reason to "clean up" my tIRA is for the future possibility of rolling it over into 401K?
If you miss today’s deadline, you can no longer recategorize it, you can only convert it to Roth IRA.

Also Yes, cleaning up the tIRA is for the future possibility of rolling over to 401k.

If you are willing to take the tax hit in a single year, I believe one shot conversion of the entire tIRA will still only place you in the 22% bracket, that is something you might want to consider as well. But if you decide this is the route for you, constrain the growth of this tIRA by investing it fully into Total Bond Market Index fund, increase the Equities exposure in your 401k to 100%. Once the Roth conversion is done, reverse.

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 10:34 am

I understand about $2080 but I still cannot recategorize $2160. What do I need to do with $2160? I feel like if I only would have $2080 then would go for it and make it done today and amended late this year. Maybe I should keep it as is and use the next 5 years to convert this tIRA into Roth while contributing to the same Roth IRA. I don't see anything in my life that would be changed that much. My CPA told me more than once. She does not like amendments as they might trigger audits. She worked for IRS for 15 years before becoming CPA.

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Mon Apr 15, 2019 10:49 am

Problem here is that you cannot take 5 to 6 years to convert your traditional IRA to Roth without triggering the pro-rata rule. You will have to commit to doing it all in one single year. And in that year, you might want to maximize tax deferrals to your 401k full $19k, and contribute to your wife’s traditional IRA, to reduce the tax sting somewhat.

Alternatively, you can follow my previous 5 step plan, except that you start with a basis figure of $4240, and all the associated earnings.

Topic Author
lepa71
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 11:05 am

I think I know the year. In 2017 I took an ESOP pension distribution and rolled it over into the same this tIRA. That was about $52K and I also did $5500 contribution that year. I will have to confirm if that is the year. I monkey around quite a bit with funds in that tIRA, so I'm not sure if Vanguard can isolate the earnings for that not-deductible $2160. That is my biggest fear here.

I will try to call Vanguard. Vanguard shows Investment returns = $20,028.59. If I do Roth conversion in one year, would I pay 22% of that or 22% out $95K?

lakpr
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Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Mon Apr 15, 2019 11:29 am

lepa71 wrote:
Mon Apr 15, 2019 11:05 am
I think I know the year. In 2017 I took an ESOP pension distribution and rolled it over into the same this tIRA. That was about $52K and I also did $5500 contribution that year. I will have to confirm if that is the year. I monkey around quite a bit with funds in that tIRA, so I'm not sure if Vanguard can isolate the earnings for that not-deductible $2160. That is my biggest fear here.

I will try to call Vanguard. Vanguard shows Investment returns = $20,028.59. If I do Roth conversion in one year, would I pay 22% of that or 22% out $95K?
ESOP pension distribution is pretax, so if you convert everything in one year, you will pay 22% taxes on $91k ($95k balance - $4k basis).

Vanguard should be able to tell you precisely how much earnings those $2160 basis have. I base this observation on IRS guidelines that custodians should have ability to recharacterize IRAs from tIRA to rIRA and vice versa. That is a til at least a decade old, not a new one with TCJA.

Doesn’t Vanguard offer a call back option?

Topic Author
lepa71
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Joined: Sat Mar 05, 2016 5:12 pm

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 11:53 am

How did you come up with $4K basis? I still don't know for sure which year I had a non-deductible contribution.

lakpr
Posts: 1108
Joined: Fri Mar 18, 2011 9:59 am

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lakpr » Mon Apr 15, 2019 12:12 pm

lepa71 wrote:
Mon Apr 15, 2019 11:53 am
How did you come up with $4K basis? I still don't know for sure which year I had a non-deductible contribution.
Line 3 of the Form 8606 is the total basis ($4240)
$2080 from 2018
$2160 from 2017, or at least from a previous tax year

Topic Author
lepa71
Posts: 241
Joined: Sat Mar 05, 2016 5:12 pm

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 2:24 pm

I spoke with IRS and they did find 2017 be the year. They confirmed that I will have to do amendment for both those ears. The rep from IRS at her level could not confirm that there no penalty to have deductible and non-deductible contributions in the same tIRA. She said she could tranfer me to tax law level but I don't have time today. She did say that I will have 3 years to file an amendment for 8606 form change. I'm kind of running out of time. I don't have Roth IRA account setup yet. I may still try to call Vanguard but if I commit to recategorize that $2080 I will have to do amendment. Lately my CPA office is bugging me on how and who does my taxes. I might need to look for a new CPA.
I'm concerned about those in red have to be done flawlessly.
3. Now that your main account is free of the basis and associated earnings, initiate a roll over of the main account balance into 401k plan (as you said, if Fidelity 401k accepts the incoming rollover, GREAT!). Be super-clear on your transfer forms that you want to initiate rollover of only this particular mutual fund, NOT A PENNY from the new fund you chose in step 2!! If either Vanguard or you or your new 401k custodian (Fidelity or Principal) makes the tiniest mistake, you are up the creek without a paddle.

4. Unless and until step 3 is complete and executed flawlessly, you cannot convert the separated monies from step 2 to Roth IRA.

Topic Author
lepa71
Posts: 241
Joined: Sat Mar 05, 2016 5:12 pm

Re: pros and cons for rollover to tIRA or other 401k from previous employer

Post by lepa71 » Mon Apr 15, 2019 2:26 pm

another thought. Can I just isolate $2080 and $2160 with their earning in to different fund for right now?

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