Roth 401k rollover to Roth IRA + backdoor Roth in same year?

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flyingmonkey
Posts: 4
Joined: Sat Jan 06, 2018 7:19 pm

Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by flyingmonkey » Sat Jan 06, 2018 7:24 pm

I have a Roth 401k with my employer. I may leave them in the coming year and would plan on performing a Roth 401k rollover to Roth IRA after I leave.

In the same year, because of my income levels, I want to perform a backdoor Roth to the same Roth IRA.

Are there any rules preventing me from doing so? All my accounts are Roth, so I know that all of these conversions/rollovers are tax free.

Thanks

nolesrule
Posts: 557
Joined: Thu Feb 26, 2015 10:59 am

Re: Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by nolesrule » Sat Jan 06, 2018 9:36 pm

Do you have any employer matching in your 401k? Because that is always pre-tax (traditional), not Roth.

On a side note, if your income is high enough that you need to do a backdoor Roth, I'm curious why you aren't making Traditional 401k contributions?

flyingmonkey
Posts: 4
Joined: Sat Jan 06, 2018 7:19 pm

Re: Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by flyingmonkey » Sun Jan 07, 2018 4:52 pm

nolesrule wrote:
Sat Jan 06, 2018 9:36 pm
Do you have any employer matching in your 401k? Because that is always pre-tax (traditional), not Roth.
No, my employer does not do matching.
nolesrule wrote:
Sat Jan 06, 2018 9:36 pm
On a side note, if your income is high enough that you need to do a backdoor Roth, I'm curious why you aren't making Traditional 401k contributions?
Because if I leave my employer I will also be leaving the US and returning to my home country (Canada). In Canada I am allowed to keep Roth IRA's without penalty but not traditional IRA's. Therefore my choice has pretty much been Roth IRA (401k) or no IRA (401k).

Do you have an answer to my question?

Alan S.
Posts: 7452
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by Alan S. » Sun Jan 07, 2018 6:23 pm

flyingmonkey wrote:
Sat Jan 06, 2018 7:24 pm
I have a Roth 401k with my employer. I may leave them in the coming year and would plan on performing a Roth 401k rollover to Roth IRA after I leave.

In the same year, because of my income levels, I want to perform a backdoor Roth to the same Roth IRA.

Are there any rules preventing me from doing so? All my accounts are Roth, so I know that all of these conversions/rollovers are tax free.

Thanks
No problem doing this, and no reason to maintain more than one Roth IRA account. You will have to keep close track of the composition of your Roth IRA which will be more complex because you have various funding sources, probably past regular Roth contribution, and now a conversion of the TIRA contribution and future direct rollover of the Roth 401k.

flyingmonkey
Posts: 4
Joined: Sat Jan 06, 2018 7:19 pm

Re: Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by flyingmonkey » Mon Jan 08, 2018 11:05 am

Alan S. wrote:
Sun Jan 07, 2018 6:23 pm
No problem doing this, and no reason to maintain more than one Roth IRA account.
Awesome, and yes, I want to consolidate everything into one account which is a Roth IRA I used as the destination of a backdoor Roth I did last year.
Alan S. wrote:
Sun Jan 07, 2018 6:23 pm
You will have to keep close track of the composition of your Roth IRA which will be more complex because you have various funding sources, probably past regular Roth contribution, and now a conversion of the TIRA contribution and future direct rollover of the Roth 401k.
Why do I have to keep track? As I understood, once everything is in the Roth, since it all came from Roth's, everything is tax free during the conversion/rollovers and once it is in there it is all treated the same. Am I missing something?

For clarity the sources would be the following:

1) 5500 from 2017 Backdoor Roth
2) 5500 from 2018 Backdoor Roth
3) 20000 from 2018 Roth 401k Rollover

CppCoder
Posts: 787
Joined: Sat Jan 23, 2016 9:16 pm

Re: Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by CppCoder » Mon Jan 08, 2018 11:49 am

nolesrule wrote:
Sat Jan 06, 2018 9:36 pm
On a side note, if your income is high enough that you need to do a backdoor Roth, I'm curious why you aren't making Traditional 401k contributions?
Not to hijack flyingmonkey's thread, but there are lots of reasons (flyingmonkey gave one above) to contribute to a Roth 401k rather than a Traditional 401k. For high income people, here are a few:
  • High income allows you to tax defer more money by using Roth versus traditional.
  • High income comes with a big pension.
  • High income means you want to leave a legacy, and Roth is a better legacy vehicle than pretax.
  • High income, but no expectation of a lower tax rate in retirement, especially with tax brackets known to be increasing in a decade without intervention (based on new tax law).

nolesrule
Posts: 557
Joined: Thu Feb 26, 2015 10:59 am

Re: Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by nolesrule » Mon Jan 08, 2018 12:14 pm

Yes, I am aware of those reasons, but it is often a better strategy (under a normal circumstance not related to this OP's situation) to have some tax deferred money and then convert during low income years rather than have all assets in Roth from the start.

Alan S.
Posts: 7452
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by Alan S. » Mon Jan 08, 2018 12:41 pm

flyingmonkey wrote:
Mon Jan 08, 2018 11:05 am
Alan S. wrote:
Sun Jan 07, 2018 6:23 pm
No problem doing this, and no reason to maintain more than one Roth IRA account.
Awesome, and yes, I want to consolidate everything into one account which is a Roth IRA I used as the destination of a backdoor Roth I did last year.
Alan S. wrote:
Sun Jan 07, 2018 6:23 pm
You will have to keep close track of the composition of your Roth IRA which will be more complex because you have various funding sources, probably past regular Roth contribution, and now a conversion of the TIRA contribution and future direct rollover of the Roth 401k.
Why do I have to keep track? As I understood, once everything is in the Roth, since it all came from Roth's, everything is tax free during the conversion/rollovers and once it is in there it is all treated the same. Am I missing something?

For clarity the sources would be the following:

1) 5500 from 2017 Backdoor Roth
2) 5500 from 2018 Backdoor Roth
3) 20000 from 2018 Roth 401k Rollover
I guess you really do not need to keep track if you are dead sure that you will not take any Roth distributions before your Roth is qualified at age 59.5. Most people cannot be that sure, and if you suddenly want to take a Roth IRA distribution if you do not know the composition of your Roth IRA, you will have no idea how much you can take out without incurring tax or penalty. You also will not be able to correctly report the distribution on Form 8606. Form 8606 requests your basis in Roth IRA contributions, and also Roth conversion if you take out more than your regular contributions balance.

Your source 1 and 2 is considered a non taxable Roth conversion. These come out after all your regular Roth contributions and after older conversions.
Your source 3 will be treated as a regular Roth IRA contribution up to the amount of your elective deferrals shown in Box 5 of Form 1099 R for the rollover out of the Roth 401k. If the 20,000 is higher than the Box 5 amount, the difference is your Roth 401k earnings. These earnings are not part of your Roth IRA basis, essentially they are treated as Roth IRA earnings and would be subject to tax and penalty if you withdraw them before 59.5.

These 3 sources will increase the appropriate categories that were already in your Roth IRA such as your regular Roth IRA contributions back to day 1 or older conversions you might have done, either back door or regular. If you do not keep track of this at least annually, you will have a massive reconstruction job to report any Roth IRA distribution you would take before 59.5.

flyingmonkey
Posts: 4
Joined: Sat Jan 06, 2018 7:19 pm

Re: Roth 401k rollover to Roth IRA + backdoor Roth in same year?

Post by flyingmonkey » Sun Jan 14, 2018 1:01 am

Alan S. wrote:
Mon Jan 08, 2018 12:41 pm
I guess you really do not need to keep track if you are dead sure that you will not take any Roth distributions before your Roth is qualified at age 59.5. Most people cannot be that sure, and if you suddenly want to take a Roth IRA distribution if you do not know the composition of your Roth IRA, you will have no idea how much you can take out without incurring tax or penalty. You also will not be able to correctly report the distribution on Form 8606. Form 8606 requests your basis in Roth IRA contributions, and also Roth conversion if you take out more than your regular contributions balance.

Your source 1 and 2 is considered a non taxable Roth conversion. These come out after all your regular Roth contributions and after older conversions.
Your source 3 will be treated as a regular Roth IRA contribution up to the amount of your elective deferrals shown in Box 5 of Form 1099 R for the rollover out of the Roth 401k. If the 20,000 is higher than the Box 5 amount, the difference is your Roth 401k earnings. These earnings are not part of your Roth IRA basis, essentially they are treated as Roth IRA earnings and would be subject to tax and penalty if you withdraw them before 59.5.

These 3 sources will increase the appropriate categories that were already in your Roth IRA such as your regular Roth IRA contributions back to day 1 or older conversions you might have done, either back door or regular. If you do not keep track of this at least annually, you will have a massive reconstruction job to report any Roth IRA distribution you would take before 59.5.
I think I understand but I am not quite sure what the elective deferrals in Box 5 of Form 1099 R are. Basically you are saying that when I rollover the Roth 401k, it includes both a basis and earnings, and the earnings I cannot use to take as distributions before 59.5. So I just need to keep track of what the basis is for the 401k.

However, the actual basis for the Roth 401k is not what will become the basis in the Roth IRA. It is some other amount calculated based on Form 1099?

Anyway you can link more details on this?

Thanks for your responses btw.

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