backdoor roth and FUTURE possible IRAs..

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Fictionme
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backdoor roth and FUTURE possible IRAs..

Post by Fictionme »

hello,

Coming up to my second "backdoor roth" conversion. Currently only have a 401K acct (no other retirement accounts). I plan on staying with my current employer for the future but things always change. What happens if I decide to move jobs or my company merges in future and I have to roll out my 401K into an IRA in the middle of the year? Won't I run afoul of the Pro-Rata rule?

Say maybe my new company doesn't accept rollovers into their 401K or maybe they have bad options and I want to flip it out to an IRA

thanks a lot
Flyer24
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Re: backdoor roth and FUTURE possible IRAs..

Post by Flyer24 »

Yes it will cause an issue for a future Backdoor Roth.
DSInvestor
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Re: backdoor roth and FUTURE possible IRAs..

Post by DSInvestor »

A rollover to IRA will trigger IRA basis proration. Depending on your employer plan and balance you may have the option to keep assets where they are. Alternatively, your new employer plan may accept assets from the old plan. If you have self employed income and are eligible for Solo 401k, you could pick a solo 401k plan that would accept rollovers from your old employer's 401k.
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Senti
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Re: backdoor roth and FUTURE possible IRAs..

Post by Senti »

Yes it will cause issues.

There is an option to leave your 401K with the old employers plan. You won't be forced to move the money to another 401K or IRA.
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FiveK
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Re: backdoor roth and FUTURE possible IRAs..

Post by FiveK »

Fictionme wrote: Wed Dec 26, 2018 11:08 am What happens if I decide to move jobs or my company merges in future and I have to roll out my 401K into an IRA in the middle of the year?
It's unlikely you would be forced to do so, but even if that happens...
Won't I run afoul of the Pro-Rata rule?
...at worst it will apply for that year's conversion only.
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Earl Lemongrab
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Re: backdoor roth and FUTURE possible IRAs..

Post by Earl Lemongrab »

To clarify, if your balance is $5000 or more, they can't force you to take a distribution. Depending on plan rules, they might start charging fees that the company was picking up for employees.
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celia
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Re: backdoor roth and FUTURE possible IRAs..

Post by celia »

FiveK wrote: Wed Dec 26, 2018 12:53 pm
Fictionme wrote: Wed Dec 26, 2018 11:08 am What happens if I decide to move jobs or my company merges in future and I have to roll out my 401K into an IRA in the middle of the year?
It's unlikely you would be forced to do so, but even if that happens...
Won't I run afoul of the Pro-Rata rule?
...at worst it will apply for that year's conversion only.
Not quite. Once you run into the pro rata rule, some of the basis (nondeductible contributions) remains behind. It is not used up until all your tIRAs are empty.

However, if you contribute directly to a Roth IRA, there is no impact on any other accounts you may have (tIRA, Rollover IRA, 401K).

Here's a new upgrade to the Backdoor Roth wiki page: https://www.bogleheads.org/wiki/User:Ce ... kdoor_Roth
to tell you everything you need to know.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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FiveK
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Re: backdoor roth and FUTURE possible IRAs..

Post by FiveK »

celia wrote: Wed Dec 26, 2018 5:09 pm
FiveK wrote: Wed Dec 26, 2018 12:53 pm
Fictionme wrote: Wed Dec 26, 2018 11:08 am What happens if I decide to move jobs or my company merges in future and I have to roll out my 401K into an IRA in the middle of the year?
It's unlikely you would be forced to do so, but even if that happens...
Won't I run afoul of the Pro-Rata rule?
...at worst it will apply for that year's conversion only.
Not quite. Once you run into the pro rata rule, some of the basis (nondeductible contributions) remains behind. It is not used up until all your tIRAs are empty.
True. Reading between the lines of the OP's question, there seemed a concern that the pro-rata effect would apply to previous years also - which it doesn't. And if the pre-tax amount can be rolled back into another 401k by the end of the year, there won't be any problem at all. :)
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Fictionme
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Re: backdoor roth and FUTURE possible IRAs..

Post by Fictionme »

Yes to clarify I meant would having done a few years worth of tIRA conversions to Roth’s in the past be a problem if I had to roll out my 401K in the future. Say I continue to do these backdoor conversions for the next 5 years and then in 2024 my company is acquired (so I can’t leave behind my old 401K because the company no longer exists and it must be rolled out into IRA). So then in the year 2024 I will now have an IRA and have also done tIRA to Roth’s. How would you handle that?
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FiveK
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Re: backdoor roth and FUTURE possible IRAs..

Post by FiveK »

Fictionme wrote: Wed Dec 26, 2018 7:41 pm Yes to clarify I meant would having done a few years worth of tIRA conversions to Roth’s in the past be a problem if I had to roll out my 401K in the future.
No. Not a problem for previous years' actions at all.
Say I continue to do these backdoor conversions for the next 5 years and then in 2024 my company is acquired (so I can’t leave behind my old 401K because the company no longer exists and it must be rolled out into IRA). So then in the year 2024 I will now have an IRA and have also done tIRA to Roth’s. How would you handle that?
Preferably, not do a conversion until I could roll the pre-tax IRA amount into a new 401k.
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celia
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Re: backdoor roth and FUTURE possible IRAs..

Post by celia »

Fictionme wrote: Wed Dec 26, 2018 7:41 pm Yes to clarify I meant would having done a few years worth of tIRA conversions to Roth’s in the past be a problem if I had to roll out my 401K in the future. Say I continue to do these backdoor conversions for the next 5 years and then in 2024 my company is acquired (so I can’t leave behind my old 401K because the company no longer exists and it must be rolled out into IRA). So then in the year 2024 I will now have an IRA and have also done tIRA to Roth’s. How would you handle that?
If the company goes out of business or is acquired, the 401K will still be with the custodian. That is part of the reason the custodian manages and reports on it to the IRS, not the company. (If the custodian goes out of business, the company is responsible for finding a new custodian and moving the account for you.)

Your past IRA activity is irrelevant to the 401K. Note that the 401K should be rolled into a Rollover IRA and not be co-mingled with your other traditional IRAs. This will keep it eligible for future rollovers to a future 401K you may have access to.

I recommend reading the new and improved Backdoor Roth wiki page. We are looking for comments on the wiki page in this thread:
viewtopic.php?f=2&t=265828&p=4281542#p4281542
(which also links to the new wiki page).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
Fictionme
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Re: backdoor roth and FUTURE possible IRAs..

Post by Fictionme »

I thought rolling over the 401k to a rollover IRA was the problem? As you can’t have any Pretax IRA money in your name in the same year you do your “backdoor roth”.

Sorry I’m sure this has been covered elsewhere but I’m curious because last year they told me my company was being acquired the day I opened my post tax dollars tIRA, with the goal of converting to roth the next day. So I just left it there for a few months because I wasn’t sure what I would do with my 401k. The deal never went through so I just went ahead with Backdoor Roth conversion. But this situation may come up again. Thanks
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FiveK
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Re: backdoor roth and FUTURE possible IRAs..

Post by FiveK »

celia wrote: Thu Dec 27, 2018 1:58 pmNote that the 401K should be rolled into a Rollover IRA and not be co-mingled with your other traditional IRAs. This will keep it eligible for future rollovers to a future 401K you may have access to.
Fictionme wrote: Thu Dec 27, 2018 8:20 pm I thought rolling over the 401k to a rollover IRA was the problem? As you can’t have any Pretax IRA money in your name in the same year you do your “backdoor roth”.
If you assume celia's note begins with "If you must roll your 401k into an IRA, then..." and recognize that some 401k plans will accept incoming IRA money only from a "rollover IRA", does it all make more sense?
Topic Author
Fictionme
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Re: backdoor roth and FUTURE possible IRAs..

Post by Fictionme »

Ok so this assumes the new company would accept roll over IRAs? Then the entire thing would occur within the tax year and then it shouldn’t be a problem right? Sorry I’ve only ever worked at 1 job for my career and only have 1 401k. I’ve never dealt with rolling my 401k out/into another plan. This also assumes that I would want to roll it into my new company plan. What if I don’t like any of the options and would rather keep it as an IRA? Then I wouldn’t be able to do backdoor conversions from that point on right? It wouldn’t cause a retro active pro-rats problem?
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FiveK
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Re: backdoor roth and FUTURE possible IRAs..

Post by FiveK »

Fictionme wrote: Thu Dec 27, 2018 10:01 pm Ok so this assumes the new company would accept roll over IRAs? Then the entire thing would occur within the tax year and then it shouldn’t be a problem right?
If that happens, then no problem - correct.
What if I don’t like any of the options and would rather keep it as an IRA? Then I wouldn’t be able to do backdoor conversions from that point on right?
You are always able to do conversions of any money in a tIRA. You just have to decide if any pro-rata tax consequences for that year make it a good idea or not.
It wouldn’t cause a retro active pro-rats problem?
Still the same answer on this one: no problem for past years' actions.
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