IRAs, 401ks, Roths, Oh My!

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atxll
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Joined: Tue Jun 12, 2018 5:20 pm

IRAs, 401ks, Roths, Oh My!

Post by atxll » Wed Jun 13, 2018 9:22 am

I could use some help getting my retirement balances shifted around so that I can take easily switch strategies or do conversions in the future.

I don't have any concrete idea as to whether I will be in a high tax or low environment when I retire. My income may be low in some years and high in others. I may be in the US or overseas. So I need to be flexible.

I currently have everything with Vanguard in the following accounts - Traditional IRA, Roth IRA and Solo/Individual 401k.

Traditional IRA - approx. $190,000. Only $5,500 of that was after-tax annual contribution, rest was from 401k rollovers + one tax deductible contribution
Roth IRA - approx. $40,000. Entire balance is from regular yearly $5,500 contributions + earnings
Solo 401k - new account, negligible balance

I know I screwed up the traditional IRA a couple of years ago. Prior to that my traditional IRA balance purely consisted of funds that came from 401k rollovers. My income was too high for tax deductible contributions so I just made Roth ones instead.

Then I got hasty and made a full Roth IRA contribution of $5,500 in April of the taxable year rather than waiting until the following year to see what happened with my income. My income turned out to be over the Roth limit and I was facing a penalty. I didn't realize until yesterday that I could have just withdrawn the offending Roth contribution tax and penalty free. Instead I had the brokerage recharacterize it in April the following year to be a non-deductible traditional IRA contribution.

This past year my income was low enough that I could even do a tax deductible traditional IRA contribution for the first time but I don't expect it to be that low again for awhile. Usually I will be looking to do the Roth and I may be in the situation again where income is too high even for the Roth.

I think I've made it difficult for myself to take advantage of backdoor Roth IRA strategies in the future with commingling of the traditional IRA monies ( $5500/$190,000)

My understanding is that I cannot roll the pre-tax money into my solo 401k with Vanguard but I could open a new one with Fidelity and roll it in. Then I would just need to figure out the amount of that original $5500 contribution plus it's earnings, leave it behind in the Traditional IRA and roll it over to the Roth IRA. I think I should only owe taxes on the earnings in that scenario.

I would have to leave the tax-free money in the Fidelity 401k indefinitely basically, to keep the IRA open for immediate backdoor conversions. It would also be simpler to do a future pre-tax to Roth conversion because everything in that account would be taxable.

Am I thinking about this right?

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Earl Lemongrab
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Joined: Tue Jun 10, 2014 1:14 am

Re: IRAs, 401ks, Roths, Oh My!

Post by Earl Lemongrab » Wed Jun 13, 2018 11:15 am

atxll wrote:
Wed Jun 13, 2018 9:22 am

My understanding is that I cannot roll the pre-tax money into my solo 401k with Vanguard but I could open a new one with Fidelity and roll it in.
That's correct. As far as I know, there's no problem doing that during the year. It's called a "restatement" or something.
Then I would just need to figure out the amount of that original $5500 contribution plus it's earnings, leave it behind in the Traditional IRA and roll it over to the Roth IRA. I think I should only owe taxes on the earnings in that scenario.
No. You would roll any earnings into the 401(k) as well, leaving only the basis.
I would have to leave the tax-free money in the Fidelity 401k indefinitely basically, to keep the IRA open for immediate backdoor conversions. It would also be simpler to do a future pre-tax to Roth conversion because everything in that account would be taxable.
I don't know what this means. You would convert the non-deductible as soon as possible. If Fidelity closed the empty TIRA you'd just open a new one. These days most custodians just leave old accounts alone.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

atxll
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Joined: Tue Jun 12, 2018 5:20 pm

Re: IRAs, 401ks, Roths, Oh My!

Post by atxll » Wed Jun 13, 2018 12:02 pm

Earl Lemongrab wrote:
Wed Jun 13, 2018 11:15 am
atxll wrote:
Wed Jun 13, 2018 9:22 am
Then I would just need to figure out the amount of that original $5500 contribution plus it's earnings, leave it behind in the Traditional IRA and roll it over to the Roth IRA. I think I should only owe taxes on the earnings in that scenario.
No. You would roll any earnings into the 401(k) as well, leaving only the basis.
Ok that makes sense thank you.
Earl Lemongrab wrote:
Wed Jun 13, 2018 11:15 am
atxll wrote:
Wed Jun 13, 2018 9:22 am
I would have to leave the tax-free money in the Fidelity 401k indefinitely basically, to keep the IRA open for immediate backdoor conversions. It would also be simpler to do a future pre-tax to Roth conversion because everything in that account would be taxable.
I don't know what this means. You would convert the non-deductible as soon as possible. If Fidelity closed the empty TIRA you'd just open a new one. These days most custodians just leave old accounts alone.
If I wanted to do a backdoor roth (non deductible TIRA contribution immediately rolled into Roth), that means I would need to not have any pre tax money sitting in a TIRA anywhere correct? It would need to stay a 401k (Fidelity rather than Vanguard in this case, since Vanguard won't let me roll in TIRA money).

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Earl Lemongrab
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Re: IRAs, 401ks, Roths, Oh My!

Post by Earl Lemongrab » Wed Jun 13, 2018 12:07 pm

atxll wrote:
Wed Jun 13, 2018 12:02 pm
If I wanted to do a backdoor roth (non deductible TIRA contribution immediately rolled into Roth), that means I would need to not have any pre tax money sitting in a TIRA anywhere correct? It would need to stay a 401k (Fidelity rather than Vanguard in this case, since Vanguard won't let me roll in TIRA money).
You need to not have any by the end of the year in which you do the conversion. These days it's recommended that you do the rollover of the pretax to the 401(k) first in case there are problems. You aren't allowed to recharacterize conversions anymore. Rolling to an i401(k) is probably pretty safe.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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