Convert 401K to tIRA?

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Topic Author
tyrian
Posts: 3
Joined: Mon Dec 31, 2018 4:17 pm

Convert 401K to tIRA?

Post by tyrian » Sat Jan 12, 2019 8:38 pm

I have about 300K in a 401K from a previous job. About 50K of the 401K is in company stock, with a cost basis of something like 5-10K. I have more company stock in taxable that has grown a lot, and I should sell most of it to reduce exposure. I'm mid 30s, unmarried, highest tax bracket, and large majority of assets are in taxable accounts.

I want to a) roll the 401K into tIRA if it makes sense and b) reduce total position in company stock.

The biggest benefit to rolling over the 401K would be to have better investment options that would allow me to balance my portfolio better, making it more tax efficient and have smaller expense ratios. However, my tIRA balance is currently zero, so rolling over the 401K to a tIRA would cause any future tIRA to Roth IRA conversions to incur taxes on nearly 100% of the conversions. So nondeductible tIRA contributions I do could no longer be converted to Roth w/o incurring taxes. This seems to be a drawback of rolling the 401k over that most materials I've looked at do not call out. Is this reason alone enough to avoid the rollover?

If I keep the 401K, should I sell the employee stock inside the 401k? Selling it gives up the opportunity to do NUA and only pay cap gains on it in the future. Keeping it wastes tax-efficient space in the 401K that could be used for a more tax inefficient investments (the stock has zero dividends). Even pulling the NUA stock out if I rollover to tIRA is questionable, given it reduces the size of tax sheltered space in exchange for paying cap gained on the NUA.

Thoughts? Thanks!

motorcyclesarecool
Posts: 718
Joined: Sun Dec 14, 2014 7:39 am

Re: Convert 401K to tIRA?

Post by motorcyclesarecool » Sat Jan 12, 2019 9:03 pm

tyrian wrote:
Sat Jan 12, 2019 8:38 pm
However, my tIRA balance is currently zero, so rolling over the 401K to a tIRA would cause any future tIRA to Roth IRA conversions to incur taxes on nearly 100% of the conversions. So nondeductible tIRA contributions I do could no longer be converted to Roth w/o incurring taxes. This seems to be a drawback of rolling the 401k over that most materials I've looked at do not call out. Is this reason alone enough to avoid the rollover?

How often do you expect to need to do Backdoor Roth (conversion of non deductible Traditional IRA money to Roth)?

Why not do a series of annual rollovers, up to the top of your current marginal tax bracket, and convert it to Roth over a period of years?

Better yet, find out whether your current employer plan will accept rollovers. If self employed, establish one of your own.


If I keep the 401K, should I sell the employee stock inside the 401k? Selling it gives up the opportunity to do NUA and only pay cap gains on it in the future. Keeping it wastes tax-efficient space in the 401K that could be used for a more tax inefficient investments (the stock has zero dividends). Even pulling the NUA stock out if I rollover to tIRA is questionable, given it reduces the size of tax sheltered space in exchange for paying cap gained on the NUA.

Thoughts? Thanks!

I just learned something new Re: NUA (Net Unrealized Appreciation) and company stock in a §401(k). There are many dimensions to consider and your post is pretty general. My general thought is that single stocks are risky, although stock in a former employer is not as bad as stock in a current employer. Your dilemma sure is a nice one to have.

If you reformat your post to give details (check out the stickied thread) you’ll get much better answers.
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Topic Author
tyrian
Posts: 3
Joined: Mon Dec 31, 2018 4:17 pm

Re: Convert 401K to tIRA?

Post by tyrian » Sat Jan 12, 2019 9:43 pm

motorcyclesarecool wrote:
Sat Jan 12, 2019 9:03 pm
How often do you expect to need to do Backdoor Roth (conversion of non deductible Traditional IRA money to Roth)?

Why not do a series of annual rollovers, up to the top of your current marginal tax bracket, and convert it to Roth over a period of years?

Better yet, find out whether your current employer plan will accept rollovers. If self employed, establish one of your own.
re backdoor Roth: every year. Regarding annual rollovers and convert to Roth, as mentioned I'm in top tax bracket so I assume it's preferable to continue deferring those taxes.
motorcyclesarecool wrote:
Sat Jan 12, 2019 9:03 pm
I just learned something new Re: NUA (Net Unrealized Appreciation) and company stock in a §401(k). There are many dimensions to consider and your post is pretty general. My general thought is that single stocks are risky, although stock in a former employer is not as bad as stock in a current employer. Your dilemma sure is a nice one to have.
I definitely want to sell the company stock, it's a question of how I sell it... can either sell it inside the tax shelter and keep that space for other investments, or pull it out as NUA and sell it (which would require me also choosing to roll the 401K over to tIRA). According to this Kitces post, longer time horizon favors not utilizing NUA so that there's more tax sheltered space over the years to come, while lower cost basis of the NUA shares favors utilizing NUA due to larger tax savings. I hit both of these dimensions though -- long time horizon and low basis. Also note even if I pull the NUA stock out and only incur cap gains, the cap gains aren't cheap due to my current tax bracket, so the cap gains rate may not save much versus my distributions in retirement while in a lower tax bracket.

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