Backdoor Roth Issue with Vanguard

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ENT Doc
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Backdoor Roth Issue with Vanguard

Post by ENT Doc »

Question for the group. My wife and I are in similar situations and the answer to the question will likely address both concerns. I have pre and post-tax money in a traditional IRA (~$74K total, $16,500 was non-deductible). I recently set up an individual 401K for work I do outside of my employed position. My wife has a SEP IRA that she was previously contributing to prior to setting up her 401K last year. All accounts are with Vanguard. Vanguard has a specific rule that doesn't allow for my (pre-tax plus growth) money from my TIRA to be rolled over into my i401K, or my wife's SEP money to be rolled over into her i401K. This does not appear to be an IRS-specific rule. My goal is ultimately to have the $16,500 of contributions to my TIRA converted to my Roth account (backdoor Roth) and get all the money taxed at ordinary income into my 401K. The reason to get my wife's SEP money over into her 401K is to also avoid the pro-rata rule (not sure if it will affect my Roth conversion or not) for a spousal IRA that I want to set up to do a Roth conversion from here on out. It seems like the only option here is to open up 2 new i401Ks with other banks, have the aforementioned money transferred into those i401Ks and then roll those funds back into the Vanguard i401Ks (which is allowed). This seems a bit ludicrous, but just wanted to see if this was correct, has been seen before, or if I'm making any mistakes. Thanks!
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BolderBoy
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Re: Backdoor Roth Issue with Vanguard

Post by BolderBoy »

ENT Doc wrote:It seems like the only option here is to open up 2 new i401Ks with other banks, have the aforementioned money transferred into those i401Ks and then roll those funds back into the Vanguard i401Ks (which is allowed). This seems a bit ludicrous, but just wanted to see if this was correct, has been seen before, or if I'm making any mistakes. Thanks!
I think that is still the only way to do it. It is the way I did it in 2009.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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ENT Doc
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Re: Backdoor Roth Issue with Vanguard

Post by ENT Doc »

How annoying. Good to hear others have navigated these waters with this plan. Thanks!
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Earl Lemongrab
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Re: Backdoor Roth Issue with Vanguard

Post by Earl Lemongrab »

I can't figure out why you want to go through the trouble of going back to Vanguard. Are you aware in addition to the lack of support for rollovers, they also don't allow Admiral or ETF shares? I would pick a better custodian and stay with it.
Last edited by Earl Lemongrab on Fri Feb 10, 2017 12:32 am, edited 1 time in total.
PFInterest
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Re: Backdoor Roth Issue with Vanguard

Post by PFInterest »

Set it up at Fidelity. Leave it there.
retiredjg
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Re: Backdoor Roth Issue with Vanguard

Post by retiredjg »

The problem is that you opened your i401ks without knowing the ground rules of your custodian. Vanguard i401ks do not accept rollovers from IRA. There is nothing new or unusual about that.

If you want to roll IRA into 401k, open new i401k accounts at Fidelity for next year and roll everything into there. There are a few places other than Fidelity that will do that, but I'm less familiar with them. However, I believe WhiteCoatInvestor has a blog entry about it.
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tfb
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Re: Backdoor Roth Issue with Vanguard

Post by tfb »

ENT Doc wrote:It seems like the only option here is to open up 2 new i401Ks with other banks, have the aforementioned money transferred into those i401Ks and then roll those funds back into the Vanguard i401Ks (which is allowed). This seems a bit ludicrous, but just wanted to see if this was correct, has been seen before, or if I'm making any mistakes.
It's not the only option and it is ludicrous. The best option is to move it to Fidelity and stay there. As others already mentioned, Vanguard doesn't allow Admiral funds or ETFs. There is no point in going through the trouble to come back to higher cost.
Last edited by tfb on Fri Feb 10, 2017 2:21 am, edited 1 time in total.
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Topic Author
ENT Doc
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Re: Backdoor Roth Issue with Vanguard

Post by ENT Doc »

I was aware that Vanguard only allowed investor shares, but I made the perhaps improper assumption that their investor shares would still have lower fees than somewhere like Fidelity. Admittedly, these 401Ks were set up prior to knowledge about backdoor Roths. We're a little late in the game to the spousal IRA and backdoor roth concept. Will explore Fidelity in further detail and consider leaving it there depending on investment options. Thanks!
cherijoh
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Re: Backdoor Roth Issue with Vanguard

Post by cherijoh »

ENT Doc wrote:I was aware that Vanguard only allowed investor shares, but I made the perhaps improper assumption that their investor shares would still have lower fees than somewhere like Fidelity. Admittedly, these 401Ks were set up prior to knowledge about backdoor Roths. We're a little late in the game to the spousal IRA and backdoor roth concept. Will explore Fidelity in further detail and consider leaving it there depending on investment options. Thanks!
Fidelity has a limited number of index funds that are priced to compete with VG. Just don't stray to far off of that path - they have many funds that are more expensive than VGs. ETF's are another option if Fido allows them for an i401k.
retiredjg
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Re: Backdoor Roth Issue with Vanguard

Post by retiredjg »

ENT Doc wrote:Will explore Fidelity in further detail and consider leaving it there depending on investment options. Thanks!
If you are looking for basic broad index mutual funds, Fidelity's options are similar to Vanguard's. And, unlike Vanguard, you are allowed to use the cheaper ER version when your investments pass the minimum.

If you are interested in tilting to value, you can find what you want on Fidelity's no-transaction-fee list of iShares ETFs. However, I don't know if ETFs can be used in their i401k or not.

Here is a list of their index funds. https://www.fidelity.com/mutual-funds/f ... ndex-funds

They also have index target funds.
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tfb
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Re: Backdoor Roth Issue with Vanguard

Post by tfb »

retiredjg wrote:If you are interested in tilting to value, you can find what you want on Fidelity's no-transaction-fee list of iShares ETFs. However, I don't know if ETFs can be used in their i401k or not.
ETFs can be used. It's just a brokerage account. Any funds or ETFs can be used.
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Topic Author
ENT Doc
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Re: Backdoor Roth Issue with Vanguard

Post by ENT Doc »

Thank you all!
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