Would you roll Old 401K to tIRA = no more Backdoor Roth

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soccerrules
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Joined: Mon Nov 14, 2016 4:01 pm

Would you roll Old 401K to tIRA = no more Backdoor Roth

Post by soccerrules » Fri Jul 26, 2019 4:39 pm

Plan to retire in 5-6 years at 59/60
Have $450K (40% of portfolio) in former employers 401K. Vanguard Target date fund .14ER
I am not maxing current 401K but contributing 10% to max employer match of 7%. Spouse max's 403B (no match). I will have to move to the deferred comp plan in 2020 based on HCE rules but will still receive the same match. (not sure what my time frames are for distributions, assume 5-10 years)

We have very little in Roths currently (3-4% of portfolio). I had planned to contribute max each year via Backdoor method. I am not sure I will have the funds to do this each of the next 5-6 years.
I was thinking of simplifying and rolling old 401k to Trad IRA. (i had rolled tIRA to this 401K in 2018 to allow for Roths, had past non-deductible tIRAs contributions to convert)
I was going to live spouses alone for the opportunity to use Backdoor Roth for her.

Based on the time frame and end game of limited Backdoor Roth moves over next 5-6 years --is it worth it to try and keep either open or not?

I do plan to convert tIRAs to Roths between 60-67/70 to reduce RMD's

TIA
Don't let your outflow exceed your income or your upkeep will be your downfall.

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willthrill81
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Location: USA

Re: Would you roll Old 401K to tIRA = no more Backdoor Roth

Post by willthrill81 » Fri Jul 26, 2019 4:53 pm

Unless you're planning on using the '55 rule' to make 401k withdrawals between age 55 and 59.5 or there are worthwhile investment options in your 401k that you cannot access in a tIRA, I see little reason not to roll the 401k over. You can then do Roth conversions as needed. We plan to do this with an old 401k of mine that is rolled over to a tIRA, basically trading some of the tax-deferred space in my current employer plans for Roth space by doing conversions to the top of our bracket.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Would you roll Old 401K to tIRA = no more Backdoor Roth

Post by mhalley » Fri Jul 26, 2019 4:59 pm

what exactly is the worth of a backdoor Roth? POF calculates it as a tax savings of about $30- $50 for each spouse. Here are his posts on the subject:
. By tucking away $6,000 in a Roth account rather than a taxable account, you can save about 0.5% of $6,000 annually, or about $30 per year in taxes. Depending on where you live, what you invest in, and how much you earn, the value to you could be $0, but will probably be in the range of $20 to $50 a year.

That’s what we’re fretting over. We jump hoops to get this $20 to $50 annual benefit. We fill out page after page of paperwork to open a solo 401(k). We contemplate starting a business (or something that could be called a business) to be able to do this.
https://www.physicianonfire.com/value-of-backdoor-roth/
https://www.physicianonfire.com/backdoor-roth-value/

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dratkinson
Posts: 4717
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Would you roll Old 401K to tIRA = no more Backdoor Roth

Post by dratkinson » Fri Jul 26, 2019 6:11 pm

May not fully understand your question. Don't know the rules for HCEs (highly compensated employees).


1. If you want to preserve your ability to easily use a backdoor Roth, and get rid of your old 401k, can roll your old 401k into your current 401k.
--Allowed rollovers (IRS chart): https://www.irs.gov/pub/irs-tege/rollover_chart.pdf


2. If you want to be doing Roth conversions, but don't have the disposable income to do so (meaning #1 would be moot), then using the current time to convert your old 401k to a Roth sounds okay. And can start by converting it to a tIRA (assumes it would annoy old employer if you converted only a little each year from your old 401k). Then convert a little of the tIRA each year.

Question. Are you allowed to convert a little of your old 401k each year, into a rIRA? If so then you don't need this step: old 401k-->tIRA.


3. If at some point you have more disposable income, can roll your new tIRA (from #2) into your current 401k to allow for the backdoor Roths to resume from your current income.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

lakpr
Posts: 3039
Joined: Fri Mar 18, 2011 9:59 am

Re: Would you roll Old 401K to tIRA = no more Backdoor Roth

Post by lakpr » Fri Jul 26, 2019 7:16 pm

mhalley wrote:
Fri Jul 26, 2019 4:59 pm
what exactly is the worth of a backdoor Roth? POF calculates it as a tax savings of about $30- $50 for each spouse. Here are his posts on the subject:
. By tucking away $6,000 in a Roth account rather than a taxable account, you can save about 0.5% of $6,000 annually, or about $30 per year in taxes. Depending on where you live, what you invest in, and how much you earn, the value to you could be $0, but will probably be in the range of $20 to $50 a year.

That’s what we’re fretting over. We jump hoops to get this $20 to $50 annual benefit. We fill out page after page of paperwork to open a solo 401(k). We contemplate starting a business (or something that could be called a business) to be able to do this.
https://www.physicianonfire.com/value-of-backdoor-roth/
https://www.physicianonfire.com/backdoor-roth-value/
From what I see, even at a modest 4% return rate per year, the tax drag compounds quite quickly!
See below

Code: Select all

Growth Rate 	4%										
Capital gains rate	20%										
Rate at which dividends are generated	2%										
Qualified Dividends Tax Rate	20%										
Roth							Taxable							
Year Begin_bal	Earnings	Ending_Bal	Year 	Begin_Bal	Earnings Ending_Bal	Dividends	Tax drag 	Ending Balance Net of Tax	Difference
1	$6,000	 	$240 	$6,240 		1	$6,000 		$240 	$6,240 		$120.00 	$24.00 		$6,216.00 	($24.00)
2	$12,240 	$490 	$12,730 	2	$12,216 	$489 	$12,705 	$244.32 	$48.86 		$12,655.78 	($73.82)
3	$18,730 	$749 	$19,479 	3	$18,656 	$746 	$19,402 	$373.12 	$74.62 		$19,327.38 	($151.40)
4	$25,479 	$1,019 	$26,498 	4	$25,327 	$1,013 	$26,340 	$506.55 	$101.31 	$26,239.17 	($258.77)
5	$32,498 	$1,300 	$33,798 	5	$32,239 	$1,290 	$33,529 	$644.78 	$128.96 	$33,399.78 	($398.07)
6	$39,798 	$1,592 	$41,390 	6	$39,400 	$1,576 	$40,976 	$788.00 	$157.60 	$40,818.17 	($571.59)
7	$47,390 	$1,896 	$49,285 	7	$46,818 	$1,873 	$48,691 	$936.36 	$187.27 	$48,503.63 	($781.73)
8	$55,285 	$2,211 	$57,497 	8	$54,504 	$2,180 	$56,684 	$1,090.07 	$218.01 	$56,465.76 	($1,031.02)
9	$63,497 	$2,540 	$66,037 	9	$62,466 	$2,499 	$64,964 	$1,249.32 	$249.86 	$64,714.52 	($1,322.12)
10	$72,037 	$2,881 	$74,918 	10	$70,715 	$2,829 	$73,543 	$1,414.29 	$282.86 	$73,260.25 	($1,657.86)
11	$80,918 	$3,237 	$84,155 	11	$79,260 	$3,170 	$82,431 	$1,585.20 	$317.04 	$82,113.62 	($2,041.22)
12	$90,155 	$3,606 	$93,761 	12	$88,114 	$3,525 	$91,638 	$1,762.27 	$352.45 	$91,285.71 	($2,475.32)
13	$99,761 	$3,990 	$103,751 	13	$97,286 	$3,891 	$101,177 	$1,945.71 	$389.14 	$100,787.99 	($2,963.48)
14	$109,751 	$4,390 	$114,142 	14	$106,788 	$4,272 	$111,060 	$2,135.76 	$427.15 	$110,632.36 	($3,509.17)
15	$120,142 	$4,806 	$124,947 	15	$116,632 	$4,665 	$121,298 	$2,332.65 	$466.53 	$120,831.12 	($4,116.06)
16	$130,947 	$5,238 	$136,185 	16	$126,831 	$5,073 	$131,904 	$2,536.62 	$507.32 	$131,397.04 	($4,788.03)
17	$142,185 	$5,687 	$147,872 	17	$137,397 	$5,496 	$142,893 	$2,747.94 	$549.59 	$142,343.34 	($5,529.14)
18	$153,872 	$6,155 	$160,027 	18	$148,343 	$5,934 	$154,277 	$2,966.87 	$593.37 	$153,683.70 	($6,343.68)
19	$166,027 	$6,641 	$172,668 	19	$159,684 	$6,387 	$166,071 	$3,193.67 	$638.73 	$165,432.31 	($7,236.16)
20	$178,668 	$7,147 	$185,815 	20	$171,432 	$6,857 	$178,290 	$3,428.65 	$685.73 	$177,603.87 	($8,211.34)
21	$191,815 	$7,673 	$199,488 	21	$183,604 	$7,344 	$190,948 	$3,672.08 	$734.42 	$190,213.61 	($9,274.20)
22	$205,488 	$8,220 	$213,707 	22	$196,214 	$7,849 	$204,062 	$3,924.27 	$784.85 	$203,277.30 	($10,430.03)
23	$219,707 	$8,788 	$228,496 	23	$209,277 	$8,371 	$217,648 	$4,185.55 	$837.11 	$216,811.29 	($11,684.34)
The last column shows the difference between contributing $6k per year to Roth (through backdoor) vs. contributing the same $6k per year to taxable.

With a 5% assumed return, the difference is $1000 by year 8, $5000 by year 16, $10k by year 21.
With a 7% assumed return, the difference is $1200 by year 8, $6500 by year 16, $14.5k by year 21.

The filling out of paperwork *IS* worth $14k !! (assuming there are at least 20 years to go before retirement). It may be small potatoes for "physicians", but big bucks for general folks.

Topic Author
soccerrules
Posts: 946
Joined: Mon Nov 14, 2016 4:01 pm

Re: Would you roll Old 401K to tIRA = no more Backdoor Roth

Post by soccerrules » Sat Jul 27, 2019 12:46 pm

dratkinson wrote:
Fri Jul 26, 2019 6:11 pm
May not fully understand your question. Don't know the rules for HCEs (highly compensated employees).


1. If you want to preserve your ability to easily use a backdoor Roth, and get rid of your old 401k, can roll your old 401k into your current 401k.
--Allowed rollovers (IRS chart): https://www.irs.gov/pub/irs-tege/rollover_chart.pdf


2. If you want to be doing Roth conversions, but don't have the disposable income to do so (meaning #1 would be moot), then using the current time to convert your old 401k to a Roth sounds okay. And can start by converting it to a tIRA (assumes it would annoy old employer if you converted only a little each year from your old 401k). Then convert a little of the tIRA each year.

Question. Are you allowed to convert a little of your old 401k each year, into a rIRA? If so then you don't need this step: old 401k-->tIRA.


3. If at some point you have more disposable income, can roll your new tIRA (from #2) into your current 401k to allow for the backdoor Roths to resume from your current income.
being an HCE and not being able to contribute to a trad 401K means contributing to 457 plan that requires yearly distributions within 5-10 years of leaving that employer. So basically added income for that 5-10 years after leaving company.
The old 401k actually includes my tIRA that I had rolled over to do backdoor roth. I do not want to roll old 401k into current 401k as ER's are higher than old 401k
doing conversions now will i am working ensures i am paying higher taxes versus waiting until i stop having earned income to allow for more room to covert at lowest possible tax rates (assuming no marked changes to tax brackets in 5-6 years)
I assume once past age 59.5 one could withdraw whatever amounts yearly from old 401k and might be better than moving to tIRA if pro-rata rules impact conversion amounts while filling current year IRA limits
Don't let your outflow exceed your income or your upkeep will be your downfall.

Bfwolf
Posts: 1962
Joined: Thu Oct 14, 2010 11:19 am

Re: Would you roll Old 401K to tIRA = no more Backdoor Roth

Post by Bfwolf » Sat Jul 27, 2019 11:31 pm

lakpr wrote:
Fri Jul 26, 2019 7:16 pm
mhalley wrote:
Fri Jul 26, 2019 4:59 pm
what exactly is the worth of a backdoor Roth? POF calculates it as a tax savings of about $30- $50 for each spouse. Here are his posts on the subject:
. By tucking away $6,000 in a Roth account rather than a taxable account, you can save about 0.5% of $6,000 annually, or about $30 per year in taxes. Depending on where you live, what you invest in, and how much you earn, the value to you could be $0, but will probably be in the range of $20 to $50 a year.

That’s what we’re fretting over. We jump hoops to get this $20 to $50 annual benefit. We fill out page after page of paperwork to open a solo 401(k). We contemplate starting a business (or something that could be called a business) to be able to do this.
https://www.physicianonfire.com/value-of-backdoor-roth/
https://www.physicianonfire.com/backdoor-roth-value/
From what I see, even at a modest 4% return rate per year, the tax drag compounds quite quickly!
See below

Code: Select all

Growth Rate 	4%										
Capital gains rate	20%										
Rate at which dividends are generated	2%										
Qualified Dividends Tax Rate	20%										
Roth							Taxable							
Year Begin_bal	Earnings	Ending_Bal	Year 	Begin_Bal	Earnings Ending_Bal	Dividends	Tax drag 	Ending Balance Net of Tax	Difference
1	$6,000	 	$240 	$6,240 		1	$6,000 		$240 	$6,240 		$120.00 	$24.00 		$6,216.00 	($24.00)
2	$12,240 	$490 	$12,730 	2	$12,216 	$489 	$12,705 	$244.32 	$48.86 		$12,655.78 	($73.82)
3	$18,730 	$749 	$19,479 	3	$18,656 	$746 	$19,402 	$373.12 	$74.62 		$19,327.38 	($151.40)
4	$25,479 	$1,019 	$26,498 	4	$25,327 	$1,013 	$26,340 	$506.55 	$101.31 	$26,239.17 	($258.77)
5	$32,498 	$1,300 	$33,798 	5	$32,239 	$1,290 	$33,529 	$644.78 	$128.96 	$33,399.78 	($398.07)
6	$39,798 	$1,592 	$41,390 	6	$39,400 	$1,576 	$40,976 	$788.00 	$157.60 	$40,818.17 	($571.59)
7	$47,390 	$1,896 	$49,285 	7	$46,818 	$1,873 	$48,691 	$936.36 	$187.27 	$48,503.63 	($781.73)
8	$55,285 	$2,211 	$57,497 	8	$54,504 	$2,180 	$56,684 	$1,090.07 	$218.01 	$56,465.76 	($1,031.02)
9	$63,497 	$2,540 	$66,037 	9	$62,466 	$2,499 	$64,964 	$1,249.32 	$249.86 	$64,714.52 	($1,322.12)
10	$72,037 	$2,881 	$74,918 	10	$70,715 	$2,829 	$73,543 	$1,414.29 	$282.86 	$73,260.25 	($1,657.86)
11	$80,918 	$3,237 	$84,155 	11	$79,260 	$3,170 	$82,431 	$1,585.20 	$317.04 	$82,113.62 	($2,041.22)
12	$90,155 	$3,606 	$93,761 	12	$88,114 	$3,525 	$91,638 	$1,762.27 	$352.45 	$91,285.71 	($2,475.32)
13	$99,761 	$3,990 	$103,751 	13	$97,286 	$3,891 	$101,177 	$1,945.71 	$389.14 	$100,787.99 	($2,963.48)
14	$109,751 	$4,390 	$114,142 	14	$106,788 	$4,272 	$111,060 	$2,135.76 	$427.15 	$110,632.36 	($3,509.17)
15	$120,142 	$4,806 	$124,947 	15	$116,632 	$4,665 	$121,298 	$2,332.65 	$466.53 	$120,831.12 	($4,116.06)
16	$130,947 	$5,238 	$136,185 	16	$126,831 	$5,073 	$131,904 	$2,536.62 	$507.32 	$131,397.04 	($4,788.03)
17	$142,185 	$5,687 	$147,872 	17	$137,397 	$5,496 	$142,893 	$2,747.94 	$549.59 	$142,343.34 	($5,529.14)
18	$153,872 	$6,155 	$160,027 	18	$148,343 	$5,934 	$154,277 	$2,966.87 	$593.37 	$153,683.70 	($6,343.68)
19	$166,027 	$6,641 	$172,668 	19	$159,684 	$6,387 	$166,071 	$3,193.67 	$638.73 	$165,432.31 	($7,236.16)
20	$178,668 	$7,147 	$185,815 	20	$171,432 	$6,857 	$178,290 	$3,428.65 	$685.73 	$177,603.87 	($8,211.34)
21	$191,815 	$7,673 	$199,488 	21	$183,604 	$7,344 	$190,948 	$3,672.08 	$734.42 	$190,213.61 	($9,274.20)
22	$205,488 	$8,220 	$213,707 	22	$196,214 	$7,849 	$204,062 	$3,924.27 	$784.85 	$203,277.30 	($10,430.03)
23	$219,707 	$8,788 	$228,496 	23	$209,277 	$8,371 	$217,648 	$4,185.55 	$837.11 	$216,811.29 	($11,684.34)
The last column shows the difference between contributing $6k per year to Roth (through backdoor) vs. contributing the same $6k per year to taxable.

With a 5% assumed return, the difference is $1000 by year 8, $5000 by year 16, $10k by year 21.
With a 7% assumed return, the difference is $1200 by year 8, $6500 by year 16, $14.5k by year 21.

The filling out of paperwork *IS* worth $14k !! (assuming there are at least 20 years to go before retirement). It may be small potatoes for "physicians", but big bucks for general folks.
Are you only including the tax drag of the dividends or also of the capital gains when the investments are eventually sold?

lakpr
Posts: 3039
Joined: Fri Mar 18, 2011 9:59 am

Re: Would you roll Old 401K to tIRA = no more Backdoor Roth

Post by lakpr » Sun Jul 28, 2019 6:38 am

Bfwolf,

I am considering the tax drag on dividends, but not the capital gains taxes when they are eventually sold. If you include capital gains, the taxable investments would fare even worse

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