401K Rollover Implications to Backdoor Roth IRA and other pros/cons

[vjam23]

Would love some insight and advice.

I recently seperated from my employer. My 401k is sitting in fidelity, but after I separated from my employer I'm getting hit with material fees (recordkeeping / advisor fees). Now I am tempting to get rid of the 401k and roll it over into either a) Existing IRA and Roth IRAs I also have with Fidelity or b) New IRA and Roth IRA accounts. The composition of my 401k is mix of Pre-Tax and Roth Contributions. My current IRA is basically a placeholder account at nominal value as I have always focused on roth ira backdoor conversions

I want to maintain the flexibility if I do this roll over of the 401k accounts to maintain flexibility to continue to do back door roth IRA conversions moving forward. My understanding is If i move a huge balance of this 401k to IRA I will be saddled by Pro-Rata Rule, making any future backdoor conversions essentially pointless as they would be "heavily taxed" since the IRA balance will be so high. Is this right? Is the Pro-rata apply to each yearly conversion or one time?

Also, If i move the 401k to existing IRA vs setting up a new IRA would i ever be able to roll the $ back into a future employer's 401k?

What are the trade offs here? Just feels crazy to be saddled with substantial fees but dont love limiting this future flexibility too, suggestions?

Thanks in advance for your insight and advice!!

[retiredjg]

My current IRA is basically a placeholder account at nominal value as I have always focused on roth ira backdoor conversions

Nominal value? What does this mean? There should be nothing in there (other than maybe a few pennies).

I want to maintain the flexibility if I do this roll over of the 401k accounts to maintain flexibility to continue to do back door roth IRA conversions moving forward.

You can't.

My understanding is If i move a huge balance of this 401k to IRA I will be saddled by Pro-Rata Rule, making any future backdoor conversions essentially pointless as they would be "heavily taxed" since the IRA balance will be so high. Is this right?

Yes.

Is the Pro-rata apply to each yearly conversion or one time?

Applies to every withdrawal or conversion until you no longer have any money in IRA.

What are the trade offs here? Just feels crazy to be saddled with substantial fees but dont love limiting this future flexibility too, suggestions?

You can have an IRA and no future backdoor Roth. Or keep your money in the 401k so that you can use the backdoor Roth. Or roll the 401k into your next 401k - which allows you to continue to use backdoor Roth.

Warning. If you decide to do the rollover to IRA, do not do it during the same year you use the backdoor Roth process. Wait until the next year and do not use backdoor Roth anymore.

[vjam23]

Thanks @retireddjg

Thanks for the insights. So each year I would want to do a conversion i would be paying a pretty hefty tax amount given a lot of that conversion $ would be considered taxable given the high roll over balance right?

Is the only than upside that once those $ are converted into Roth account all the gains are tax free.

I.e pay 98%+ on the $7K i want to convert each year as taxes at time of conversion, but than the growth of $7K will grow tax free? Probably a wash but potentially still of a lower tax rate in the future its still make sense? What do you think?

[HausaPain]

Continuing to do back door contributions implies you have earned income from another job. Does this other job have a 401k? If so, does it allow moving the old 401k into it? This would shield it from the prorata issue.

Mike

[retiredjg]

Thanks for the insights. So each year I would want to do a conversion i would be paying a pretty hefty tax amount given a lot of that conversion $ would be considered taxable given the high roll over balance right?

Yes.

Is the only than upside that once those $ are converted into Roth account all the gains are tax free.

Tax free if you wait long enouth (you are over 59.5 and your first contribution to Roth IRA was at least 5 tax years ago).

However, it is better to wait until your income drops (such as retirement) and do Roth conversions of the IRA then, at a lower rate than you would pay now. You end up with more money,

[retiredjg]

Something that is unclear - are you now retired and want to do Roth conversions? Or have you changed jobs and want to continue to use the backdoor Roth process to "contribute" to Roth IRA?

Backdoor Roth and Roth conversions are NOT the same thing. Which are you asking about?

[exodusNH]

Would love some insight and advice.

I recently seperated from my employer. My 401k is sitting in fidelity, but after I separated from my employer I'm getting hit with material fees (recordkeeping / advisor fees). Now I am tempting to get rid of the 401k and roll it over into either a) Existing IRA and Roth IRAs I also have with Fidelity or b) New IRA and Roth IRA accounts. The composition of my 401k is mix of Pre-Tax and Roth Contributions. My current IRA is basically a placeholder account at nominal value as I have always focused on roth ira backdoor conversions

I want to maintain the flexibility if I do this roll over of the 401k accounts to maintain flexibility to continue to do back door roth IRA conversions moving forward. My understanding is If i move a huge balance of this 401k to IRA I will be saddled by Pro-Rata Rule, making any future backdoor conversions essentially pointless as they would be "heavily taxed" since the IRA balance will be so high. Is this right? Is the Pro-rata apply to each yearly conversion or one time?

Also, If i move the 401k to existing IRA vs setting up a new IRA would i ever be able to roll the $ back into a future employer's 401k?

What are the trade offs here? Just feels crazy to be saddled with substantial fees but dont love limiting this future flexibility too, suggestions?

Thanks in advance for your insight and advice!!

How big are the fees?

Whether you can roll money back into a 401k depends on the rules of that 401k. The IRS permits rolling any of your IRAs, regardless of the fund source. However, 401k plans can have more restrictions than the IRS. Chances are you'll be able to roll the money in, but it's a question you'll have to as a prospective new employer.