How can I roll over an old employer 401K?

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Topic Author
lisafrommiami
Posts: 3
Joined: Wed Oct 09, 2019 6:12 am

How can I roll over an old employer 401K?

Post by lisafrommiami » Wed Oct 09, 2019 6:25 am

I'm 29 and my annual AGI last year was a little over $250K. I have not yet contributed to any IRA's (I know, long story) but am really looking to set one up starting this year. I understand that given my AGI limits, I would need to contribute to traditional IRA and immediately roll over to Roth’s (the backdoor approach).

I have been a W-2 wage earner, but last month I just bought the business from my boss who has since retired. I will no longer be W-2 and instead just realize the profits from my business (it’s an LLC) going forward.

Here's where the tricky part comes in. My old boss just terminated her old 401K plan (for the business she sold to me) and they have given me 60 days to elect where I want to move the funds. I have not yet set up a new 401K plan for the business I acquired (I have 4 employees), but I plan to do so starting next year.

My accountant informed me that one option for me would be to to roll over the old 401K into a Roth IRA but I am concerned that this would have implications when I do a backdoor Roth. I consulted with another accountant and was told something different (that I could start a solo 401K but I think I'm not eligible for a solo since I have a business with 4 full time salaried W-2 employees). I'm confused. Please help!

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: How can I roll over an old employer 401K?

Post by livesoft » Wed Oct 09, 2019 6:51 am

Yes, you could rollover your 401(k) to a Roth IRA, but you will have to pay taxes on the "conversion" from tax-deferred to Roth. This would allow you to do the backdoor Roth IRA thing that you mentioned, so maybe that was the driving factor for the accountant to mention rollover to a Roth IRA. That is, this would not have implications for the backdoor Roth IRA that you mentioned. It would have other tax implications.

You could rollover the 401(k) to a traditional IRA. This would mean you would not have to pay taxes on this money. This is probably what you need to do. It would also mean that you could convert the traditional IRA that you created by this rollover to a Roth IRA at any time and in any partial or full amount(s) that you wanted to. In other words, this would have implications for the backdoor Roth thing that you mentioned.

Your company could start a 401(k) for you and your employers. This is not the same as a solo 401(k). The 401(k) you started could be set up to accept the rollover of your old 401(k) money into it. Or it could be setup to accept the rollover of IRA money into it.

So you could do: Old company 401(k) -> Rollover traditional IRA -> New company 401(k).

The individual 401(k) (aka solo 401(k)) does not appear to be an option for you.
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vrr106
Posts: 35
Joined: Wed Feb 11, 2015 10:27 am

Re: How can I roll over an old employer 401K?

Post by vrr106 » Wed Oct 09, 2019 2:52 pm

lisafrommiami wrote:
Wed Oct 09, 2019 6:25 am
I'm 29 and my annual AGI last year was a little over $250K. I have not yet contributed to any IRA's (I know, long story) but am really looking to set one up starting this year. I understand that given my AGI limits, I would need to contribute to traditional IRA and immediately roll over to Roth’s (the backdoor approach).

I have been a W-2 wage earner, but last month I just bought the business from my boss who has since retired. I will no longer be W-2 and instead just realize the profits from my business (it’s an LLC) going forward.

Here's where the tricky part comes in. My old boss just terminated her old 401K plan (for the business she sold to me) and they have given me 60 days to elect where I want to move the funds. I have not yet set up a new 401K plan for the business I acquired (I have 4 employees), but I plan to do so starting next year.

My accountant informed me that one option for me would be to to roll over the old 401K into a Roth IRA but I am concerned that this would have implications when I do a backdoor Roth. I consulted with another accountant and was told something different (that I could start a solo 401K but I think I'm not eligible for a solo since I have a business with 4 full time salaried W-2 employees). I'm confused. Please help!
Don't do the backdoor for 1 year, rollover to IRA and try and set up a 401k in the future where you can roll the IRA over to the 401k

Topic Author
lisafrommiami
Posts: 3
Joined: Wed Oct 09, 2019 6:12 am

Re: How can I roll over an old employer 401K?

Post by lisafrommiami » Thu Oct 10, 2019 12:02 pm

Thank you livesoft and vrr106! Really helpful!

I will follow this path:
Old company 401(k) -> Rollover traditional IRA -> Rollover to New company 401(k).

A question on the timing. Would it make sense to do the rollover from IRA to the new company 401K before Dec 31, 2019? Or is it okay to wait till January 2020? Just wondering regarding the timing so that I am able to do a backdoor Roth for 2020, if possible. Thanks!

Spirit Rider
Posts: 11678
Joined: Fri Mar 02, 2007 2:39 pm

Re: How can I roll over an old employer 401K?

Post by Spirit Rider » Thu Oct 10, 2019 1:50 pm

lisafrommiami wrote:
Thu Oct 10, 2019 12:02 pm
A question on the timing. Would it make sense to do the rollover from IRA to the new company 401K before Dec 31, 2019? Or is it okay to wait till January 2020? Just wondering regarding the timing so that I am able to do a backdoor Roth for 2020, if possible.
If you don't have the new 401k established before next year there will be no 401k to rollover to by 12/31/2019. If you have done any Roth conversions in 2019, they will be subject to pro-rata taxation with the rollover IRA balance.

If you rollover the IRA to a 401k by 12/31/2020, you can do Roth conversions during 2020 without any pro-rata taxation.

Topic Author
lisafrommiami
Posts: 3
Joined: Wed Oct 09, 2019 6:12 am

Re: How can I roll over an old employer 401K?

Post by lisafrommiami » Thu Oct 10, 2019 2:31 pm

Spirit Rider wrote:
Thu Oct 10, 2019 1:50 pm
If you rollover the IRA to a 401k by 12/31/2020, you can do Roth conversions during 2020 without any pro-rata taxation.
Thank you for the info! Just to clarify, would I have to complete the rollover from the IRA to a 401k by 12/31/2019 in order to do a backdoor Roth in 2020 without any tax implications?
Thanks!

Spirit Rider
Posts: 11678
Joined: Fri Mar 02, 2007 2:39 pm

Re: How can I roll over an old employer 401K?

Post by Spirit Rider » Thu Oct 10, 2019 7:06 pm

lisafrommiami wrote:
Thu Oct 10, 2019 2:31 pm
Spirit Rider wrote:
Thu Oct 10, 2019 1:50 pm
If you rollover the IRA to a 401k by 12/31/2020, you can do Roth conversions during 2020 without any pro-rata taxation.
Thank you for the info! Just to clarify, would I have to complete the rollover from the IRA to a 401k by 12/31/2019 in order to do a backdoor Roth in 2020 without any tax implications?
No.

You would have to complete a rollover by 12/31/2019 for Roth Conversions done in 2019 to not be subject to pro-rata taxation. You would have to complete a rollover by 12/31/2020 for Roth Conversions done in 2020 to not be subject to pre-rata taxation.

Any pre-tax balances in all traditional, SEP and SIMPLE IRA accounts by 12/31 are reported on Form 8606 Line 6. Any year you do Roth conversions where that balance in not $0, the Roth conversion will be subject to non-deductible basis/pre-tax pro-rata taxation.

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