Roth Conversion: IRA or 401K?

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Chicago60
Posts: 468
Joined: Tue Jan 29, 2013 3:40 pm

Roth Conversion: IRA or 401K?

Post by Chicago60 » Fri Feb 14, 2020 10:05 am

I have a 401 K and Roth 401K at Vanguard. I also have a tIRA and Roth IRA at Schwab. I plan on converting a sizable amount this year. Are there any pros or cons to converting from 401K to Roth 401K vs converting tIRA to Roth IRA?

Alaric
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Joined: Tue Feb 05, 2019 1:38 pm

Re: Roth Conversion: IRA or 401K?

Post by Alaric » Fri Feb 14, 2020 10:25 am

Roth 401Ks have RMDs just as traditional 401Ks do. But Roth IRAs have no RMDs. So convert the IRA funds first.

Topic Author
Chicago60
Posts: 468
Joined: Tue Jan 29, 2013 3:40 pm

Re: Roth Conversion: IRA or 401K?

Post by Chicago60 » Fri Feb 14, 2020 6:17 pm

Good call. Thanks. Any other differences I should consider?

Hydromod
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Re: Roth Conversion: IRA or 401K?

Post by Hydromod » Fri Feb 14, 2020 8:08 pm

Operationally it doesn’t make a difference, because you can just roll the 401k into a Roth IRA once you leave the plan. That takes care of the RMDs.

Spirit Rider
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Re: Roth Conversion: IRA or 401K?

Post by Spirit Rider » Fri Feb 14, 2020 8:42 pm

You can only convert from a traditional account to a designated Roth account at the same 401k plan and then only if the plan supports an in-plan Roth rollover (IRR).

You didn't indicate whether or not you are still employed or if you are < age 59 1/2. The IRS prohibits the in-service rollover of employee deferrals < age 59 1/2.

The IRS allows but does not require the in-service rollover of employer contributions < age 59 1/2. Of the plans that allow such rollovers, almost all have length of service, age or other restrictions.

If you are separated from the 401k employer or >= age 59 1/2 and the plan allows in-service rollovers. It might be better to do direct rollovers from the traditional 401k to a Roth IRA.

Topic Author
Chicago60
Posts: 468
Joined: Tue Jan 29, 2013 3:40 pm

Re: Roth Conversion: IRA or 401K?

Post by Chicago60 » Sat Feb 15, 2020 12:17 pm

I am now over 59 1/2 and have my solo 401K with Vanguard, but am not familiar with whether the "form plan" Vanguard offers to solo 401Ks authorizes an in plan Roth rollover. I suppose I will simply continue conversions in the Schwab tIRA.

userwithconcern
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Re: Roth Conversion: IRA or 401K?

Post by userwithconcern » Sat Feb 15, 2020 1:06 pm

Spirit Rider wrote:
Fri Feb 14, 2020 8:42 pm
You can only convert from a traditional account to a designated Roth account at the same 401k plan and then only if the plan supports an in-plan Roth rollover (IRR).

You didn't indicate whether or not you are still employed or if you are < age 59 1/2. The IRS prohibits the in-service rollover of employee deferrals < age 59 1/2.

The IRS allows but does not require the in-service rollover of employer contributions < age 59 1/2. Of the plans that allow such rollovers, almost all have length of service, age or other restrictions.

If you are separated from the 401k employer or >= age 59 1/2 and the plan allows in-service rollovers. It might be better to do direct rollovers from the traditional 401k to a Roth IRA.
Sprit Rider, can you please provide a source for your claim that the IRS prohibits in-service rollover of employee deferrals for employees younger than 59.5?

This is not my reading of the IRC or of the IRS guidelines pertaining thereto. Here I am quoting some text from the following IRS page:

https://www.irs.gov/retirement-plans/re ... h-accounts
Which retirement plans may offer in-plan Roth rollovers?
401(k), 403(b) and 457(b) governmental plans that have designated Roth accounts may offer in-plan Roth rollovers.

Who is eligible to do an in-plan Roth rollover?
Participants, surviving spouse beneficiaries and alternate payees who are current or former spouses are eligible to do an in-plan Roth rollover in a plan offering these rollovers.
and
What amounts may I roll over in an in-plan Roth rollover?
If your plan allows it, you can roll over any vested plan balance, including earnings, to a designated Roth account, even if these amounts can’t be distributed to you. You can make an in-plan Roth rollover of:
  • elective deferrals,
  • matching contributions (including qualified matching contributions),
  • nonelective contributions (including qualified nonelective contributions),
  • rollover contributions,
  • after-tax employee contributions and
  • earnings on the above contributions.
The plan can specify which of these amounts are eligible for in-plan Roth rollovers and how often these rollovers can be done.
I see no mention whatsoever of the age of the participant to roll over elective deferrals. Moreover, Section 902 of Public Law 112-240 passed in 2013 amended IRC section 402A(c)(4) like so:
(a) IN GENERAL.—Section 402A(c)(4) is amended by adding
at the end the following:
‘‘(E) SPECIAL RULE FOR CERTAIN TRANSFERS.—In the
case of an applicable retirement plan which includes a
qualified Roth contribution program—
  • ‘‘(i) the plan may allow an individual to elect to
    have the plan transfer any amount not otherwise
    distributable under the plan to a designated Roth
    account maintained for the benefit of the individual,
    ‘‘(ii) such transfer shall be treated as a distribution
    to which this paragraph applies which was contributed
    in a qualified rollover contribution (within the meaning
    of section 408A(e)) to such account, and
    ‘‘(iii) the plan shall not be treated as violating
    the provisions of section 401(k)(2)(B)(i), 403(b)(7)(A)(i),
    403(b)(11), or 457(d)(1)(A), or of section 8433 of title
    5, United States Code, solely by reason of such
    transfer.’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to transfers after December 31, 2012, in taxable years
ending after such date.
The wording of this 2013 statute now incorporated into section 402A(c)(4) of the IRC seems to put no constraints on the age of the individual and is incredibly generous in using wording like "the plan may allow an individual ... to ... transfer any amount not otherwise distributable".

My understanding is that a vested 401(k) trust balance amount is typically non-distributable only when the beneficiary individual continues to be employed by the employer that set up the trust, and that individual is below 59.5. So this IRC wording has to be explicitly permitting plans to choose to include in-service Roth rollovers for all pretax monies for all individuals below 59.5. Please tell me what I am missing here. Thanks.

Spirit Rider
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Re: Roth Conversion: IRA or 401K?

Post by Spirit Rider » Sat Feb 15, 2020 2:11 pm

First of all, do you understand the difference between an in-plan rollover and in-service rollover? An in-plan rollover stays within the plan and an in-service rollover is out of the plan. You start referring to in-service rollovers of employee deferrals, but all of your quotes are referring to in-plan rollovers.

In-service rollovers are most definitely prohibited prior to age 59 1/2. This not remotely a gray area and is right at the front of IRC Section 401(k)(2)(i).

See 26 U.S. Code § 401.Qualified pension, profit-sharing, and stock bonus plans, (k) Cash or deferred arrangements
  1. General rule A profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan shall not be considered as not satisfying the requirements of subsection (a) merely because the plan includes a qualified cash or deferred arrangement.
  2. Qualified cash or deferred arrangement A qualified cash or deferred arrangement is any arrangement which is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets the requirements of subsection (a)—
    1. under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash;
    2. under which amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election—
      1. may not be distributable to participants or other beneficiaries earlier than—
        1. severance from employment, death, or disability,
        2. an event described in paragraph (10), plan termination
        3. in the case of a profit-sharing or stock bonus plan, the attainment of age 59½,
        4. subject to the provisions of paragraph (14), upon hardship of the employee not rollover eligible, or
        5. in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii)), the date on which a period referred to in subclause (III) of such section begins, and
      2. will not be distributable merely by reason of the completion of a stated period of participation or the lapse of a fixed number of years;

    In-service rollovers are prohibited unless you are partially disabled, >= age 59 1/2 or a qualified reservist on deployment >= 180 days.

userwithconcern
Posts: 5
Joined: Mon Dec 23, 2019 12:35 pm

Re: Roth Conversion: IRA or 401K?

Post by userwithconcern » Sun Feb 16, 2020 12:14 am

Spirit Rider wrote:
Sat Feb 15, 2020 2:11 pm
First of all, do you understand the difference between an in-plan rollover and in-service rollover? An in-plan rollover stays within the plan and an in-service rollover is out of the plan. You start referring to in-service rollovers of employee deferrals, but all of your quotes are referring to in-plan rollovers.

In-service rollovers are most definitely prohibited prior to age 59 1/2. This not remotely a gray area and is right at the front of IRC Section 401(k)(2)(i).

See 26 U.S. Code § 401.Qualified pension, profit-sharing, and stock bonus plans, (k) Cash or deferred arrangements
  1. General rule A profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan shall not be considered as not satisfying the requirements of subsection (a) merely because the plan includes a qualified cash or deferred arrangement.
  2. Qualified cash or deferred arrangement A qualified cash or deferred arrangement is any arrangement which is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets the requirements of subsection (a)—
    1. under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash;
    2. under which amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election—
      1. may not be distributable to participants or other beneficiaries earlier than—
        1. severance from employment, death, or disability,
        2. an event described in paragraph (10), plan termination
        3. in the case of a profit-sharing or stock bonus plan, the attainment of age 59½,
        4. subject to the provisions of paragraph (14), upon hardship of the employee not rollover eligible, or
        5. in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii)), the date on which a period referred to in subclause (III) of such section begins, and
      2. will not be distributable merely by reason of the completion of a stated period of participation or the lapse of a fixed number of years;

    In-service rollovers are prohibited unless you are partially disabled, >= age 59 1/2 or a qualified reservist on deployment >= 180 days.
Ah, okay, thanks. I was thinking of in-service as being anything done while employed, including in-plan, but it seems like that word is only used in the context of moving money out of a 401(k), making it so that in-plan and in-service rollovers are totally distinct disjoint things :)

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