Spouses old forgotten 401k impact on my Backdoor Roth Contribution

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Topic Author
Hullmet
Posts: 6
Joined: Wed Aug 21, 2019 3:38 pm

Spouses old forgotten 401k impact on my Backdoor Roth Contribution

Post by Hullmet » Thu Nov 07, 2019 6:44 pm

Hi,

Myself (36) and spouse (34) recently set up most of our retirement plans with vanguard. My roth ira was transferred, my spouses employment plan (traditional 401k) was already with VG, and we set up 2 additional brokerage accounts.

We are likely to be over the roth ira contribution income limits this year, so i created a traditional ira with VG, added 6k, and rolled it over.

The issue: It came to light that my wife had approx. 1500 USD with a previous employer from over 10 yers ago in a 401k account. How common is it for old employers to change this to an ira plan without the account holders knowledge? and, if they did, what tax implications would an old traditional ira have on my backdoor roth ira contribution? We are going to try and find out what happened to this money over the comping weeks.

I hope that all makes sense.

Thank you

Makefile
Posts: 59
Joined: Fri Apr 22, 2016 11:03 pm

Re: Spouses old forgotten 401k impact on my Backdoor Roth Contribution

Post by Makefile » Thu Nov 07, 2019 6:54 pm

One way she could find out if she has such an "invisible IRA" would be to get one of the IRS tax return transcripts that shows you form 5498 filings against your SSN.

Topic Author
Hullmet
Posts: 6
Joined: Wed Aug 21, 2019 3:38 pm

Re: Spouses old forgotten 401k impact on my Backdoor Roth Contribution

Post by Hullmet » Thu Nov 07, 2019 6:58 pm

Makefile wrote:
Thu Nov 07, 2019 6:54 pm
One way she could find out if she has such an "invisible IRA" would be to get one of the IRS tax return transcripts that shows you form 5498 filings against your SSN.
Any idea of to the tax implications of this if it does exist? I am in panic mode somewhat... best laid plans

TropikThunder
Posts: 1799
Joined: Sun Apr 03, 2016 5:41 pm

Re: Spouses old forgotten 401k impact on my Backdoor Roth Contribution

Post by TropikThunder » Thu Nov 07, 2019 7:01 pm

Hullmet wrote:
Thu Nov 07, 2019 6:44 pm
Hi,

Myself (36) and spouse (34) recently set up most of our retirement plans with vanguard. My roth ira was transferred, my spouses employment plan (traditional 401k) was already with VG, and we set up 2 additional brokerage accounts.

We are likely to be over the roth ira contribution income limits this year, so i created a traditional ira with VG, added 6k, and rolled it over.

The issue: It came to light that my wife had approx. 1500 USD with a previous employer from over 10 yers ago in a 401k account. How common is it for old employers to change this to an ira plan without the account holders knowledge? and, if they did, what tax implications would an old traditional ira have on my backdoor roth ira contribution? We are going to try and find out what happened to this money over the comping weeks.

I hope that all makes sense.

Thank you
IRS rules allow an employer to require that 401k balances <$5,000 be removed from the plan upon termination but does not require that the employer do so. First step is to check whether the money is still in that 401k. I'm not aware of a mechanism whereby an employer could change it without the employee's knowledge but I guess that depends on the employer policy and a parsing of the phrase "your employer may require you to move it". If they say you have to move it and you don't take action, I don't know what specifically the employer can do.

That said, if it did get rolled over to a traditional IRA, that won't affect your Roth conversion since IRA's are never joint accounts. And if your wife does a backdoor Roth as well, she can just convert the rollover along with it. You would just need to pay taxes on the tIRA balance when/if she does so (can't be that much).

Ocean77
Posts: 27
Joined: Wed Oct 23, 2019 3:20 pm

Re: Spouses old forgotten 401k impact on my Backdoor Roth Contribution

Post by Ocean77 » Thu Nov 07, 2019 7:13 pm

I highly doubt that an employer would be allowed to or even able to change an employee's 401k plan to an IRA without the person's knowledge. In my experience, employers either keep the account active, or they give the employee some time to roll it over, and after that time simply mail a check to the employee. The whole idea of getting rid of small accounts is to avoid the costs of bookkeeping, mailing statements and tax returns etc. Changing a 401k into an IRA would not help the employer to begin with.

So bottom line: I would relax and look forward to locating that account.

retiredjg
Posts: 38129
Joined: Thu Jan 10, 2008 12:56 pm

Re: Spouses old forgotten 401k impact on my Backdoor Roth Contribution

Post by retiredjg » Thu Nov 07, 2019 7:23 pm

To my knowledge, the old plan cannot "change" anything to an IRA.

What they can do with a small account is distribute it to the owner even if the owner does not request it. The money is likely sitting in an old 401k or was distributed and forgotten or it may be unclaimed if distributed to an old address.

Katietsu
Posts: 2394
Joined: Sun Sep 22, 2013 1:48 am

Re: Spouses old forgotten 401k impact on my Backdoor Roth Contribution

Post by Katietsu » Thu Nov 07, 2019 8:53 pm

Yes, an old 401k can involuntarily convert to a traditional IRA.
If your balance is $1,000 to $5,000, your employer can move the money into an IRA of the company's choice. These mandatory distributions, also called involuntary cash-outs, have different thresholds depending on what your employer has chosen.
They do notify you. But sometimes people move and do not update addresses.

If I understand correctly, you want to know if there would be an impact on your back door Roth if a traditional IRA existed in wife’s name. The answer to that specific question is that there is no impact as IRAs are individual and the pro rata rule is applied individually.

If your wife does a back door Roth herself, then a rogue traditional IRA would make part of the Roth conversion taxable. Honestly, if I wanted to do a back door Roth and had just $1500 in a traditional IRA, I would just convert it all and pay the tax on the $1500. The alternative would be to roll the traditional IRA into the current 401k if allowed by the current plan rules.

lakpr
Posts: 2762
Joined: Fri Mar 18, 2011 9:59 am

Re: Spouses old forgotten 401k impact on my Backdoor Roth Contribution

Post by lakpr » Fri Nov 08, 2019 11:42 am

If the old employer is a small business, and if the owners decided that the 401k plan is too expensive to administer and move all 401k assets to a SEP IRA or a SIMPLE IRA, the old 401k assets can end up in an IRA as part of transition. This is the only scenario that I can think of when money from a 401k plan can end up in an IRA without the plan participant knowledge or active action.

The more common scenario is where the money gets escheated to the state where the custodian is (PA for Vanguard, MD for T Rowe Price, MA for Fidelity, etc.) if lying dormant for a long time, without the participant even logging in to check the balances.

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