Roll over IRA to 401K?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
intendi
Posts: 5
Joined: Sat Oct 17, 2020 10:16 am

Roll over IRA to 401K?

Post by intendi »

Hello! I've been coming here for over 10 years and I'm so very grateful for all I've learned. I hope you can see that I've applied the Boglehead principles to my investment strategy and I'm always happy to direct folks to this site. I feel awkward that my first post is in the form of asking a question but my level of knowledge is better suited for lurking/listening/learning status!

Briefly, I recently started investing in a taxable account and fund selection has introduced a future problem with tax loss harvesting. I also finally started learning more about the backdoor Roth process and realized I'd have to make changes to facilitate that. Most of my portfolio is in a SEP-IRA (was an independent contractor and had a LLC/S-corp up until last year when I opted to become an employee) and I have two rollover IRAs to deal with before I can do a backdoor Roth.

I'm at an impasse as I try to decide what to do next so I appreciate any and all input!

Emergency funds: Yes 12+ months
Debt: Mortgage 360K Recently refinanced to 15 year/2.375%

Tax Filing Status: Single, head of household

Tax Rate: 24% Federal, 0% State

State of Residence: WA

Age: 47

Desired Asset allocation: 75% stocks 25% bonds/fixed income
Desired International allocation: 30-40% of stocks

Portfolio size: Borderline between 6/7 figures

Current retirement assets:
Taxable at Fidelity
5.3% Vanguard Total Stock Index VTI (.03)
3.4% Vanguard Total International Stock Index VXUS (.08)

401k at Principal
1.5% Vanguard 500 Index Admiral Fund VFIAX (.04)
0.7% iShares MSCI EAFE International Index K Fund BTMKX (.03)
0.7% Vanguard Intermediate Term Bond Index Admiral Fund VBILX (.07)
Company match? No

SEP-IRA at Vanguard
38.2% Vanguard Total Stock Market Index Fund Admiral VTSAX (.04)
16.2% Vanguard Total International Stock Index Fund Admiral VTIAX (.11)
6.5% Vanguard Total Bond Index VBTLX (.05)

Roth IRA at Vanguard
1.0% Vanguard Total World Stock Index (VTWAX) (.10)

Rollover IRA at Vanguard
1.0% Medtronic MDT (0)

Rollover IRA at Fidelity
2.2% Fidelity ZERO Total Market Index Fund FZROX (0)
1.0% Fidelity ZERO International Index Fund FZILX (0)
1.3% Fidelity U.S. Bond Index Fund FXNAX (.025)

HSA at Fidelity
1.0% Fidelity ZERO Total Market Index Fund FZROX (0)
0.4% Fidelity ZERO International Index Fund FZILX (0)

HSA at Discovery Benefits
0.6% Vanguard Total World Stock Index (VTWAX) (.10)

6.0% High yield savings account (rate currently 0.6%)

13.0% No penalty CD (rate 1.55%)

529 at Vanguard for 2 kids (aggressive age based plan): Not included in retirement investment portfolio above and currently around 90K for each kid (age 14 and 12).


_______________________________________________________________


Contributions:

New annual Contributions
$19.5K to 401k (no employer match)
Goal is to put at least $25K per year in taxable moving forward (for retirement, not short term goals)
Backdoor Roth?

Funds available in his 401(k):
Vanguard Treasury Money Market Investor Fund VUSXX (.09)
DFA Inflation Protection Series I fund DIPSX (.11)
Vanguard Intermediate Term Bond Index Admiral Fund VBILX (.07)
Vanguard Intermediate Term Treasury Index Admiral Fund VSIGX (.07)
JP Morgan SmartRetirement Blend Income R6 Fund JIYBX (.67)
JP Morgan SmartRetirement Blend 2020-2060 R6 Fund (Range: 0.62-1.27)
Vanguard Balanced Index Admiral Fund VBIAX (.07)
Vanguard Growth Index Admiral Fund VIGAX (.05)
Vanguard Value Index Admiral Fund VVIAX (.05)
Vanguard 500 Index Admiral Fund VFIAX (.04)
Vanguard Mid Cap Index Admiral Fund VIMAX (.05)
Vanguard Mid Cap Value Index Admiral Fund VMVAX (.07)
Vanguard Real Estate Index Admiral Fund VGSLX (.12)
Vanguard Small Cap Growth Index Admiral Fund VSGAX (.07)
Vanguard Small Cap Value Index Admiral Fund VSIAX (.07)
iShares MSCI EAFE International Index K Fund BTMKX (.03)

Questions:
1. As I noted above, I've relatively recently started investing in a taxable account and couldn't resist VTI/VXUS. I now have matching funds in my taxable and Vanguard SEP-IRA accounts and this poses a challenge for tax loss harvesting down the road. As I started to think about ways to remedy this I came up with some options:
A: Roll both the Vanguard and Fidelity IRAs over to the Principal 401K so that I can start to backdoor Roth (and also tax loss harvest).
B: Roll over the Vanguard IRAs to Fidelity and convert to equivalent Fidelity funds.
C: Keep the Vanguard SEP-IRA at Vanguard, turn off VTSAX and VTIAX dividend re-investment and invest the dividends in the bond fund within my SEP-IRA.
D: Keep the IRAs at Vanguard and convert VTSAX and VTIAX in the SEP-IRA into VTWAX.
E: Keep the IRAs at Vanguard and convert everything to Lifestrategy Growth

On the surface, option A seems like the best choice but the 401K options at Principal aren't ideal for what is the majority of my portfolio. Some downsides of the 401K as I see it: I'd have to construct a total US market fund (not a big deal), the only international fund doesn't include emerging markets and the target date funds are pricey. I'm also not sure what fees Principal charges - I've spent some time on the site and the fee structure isn't obvious which is troubling.

Regarding the backdoor Roth process in general I have to confess that I'm hesitant to add any complexity tax wise - simplicity is becoming increasingly an overriding goal in life. Does the benefit of the backdoor Roth override these concerns?

One other thing I've learned about is the creditor protection offered by the 401K over the IRAs. I believe that as a resident of the state of Washington that my IRAs have some protection here so I'm hoping that isn't a deciding factor.

2. I'd like to stay at about 25% bonds/fixed income for the next five years and then will begin transitioning to something more conservative. I'm including my emergency fund for now which will be in hysa and/or no penalty CD. If I need to tap into my emergency fund I'll exchange stock for bonds in my tax deferred accounts. Is this reasonable or should I separate the emergency fund from the mix?

3. Not a question here but I'll address an obvious flaw in my portfolio. I'll confess I've held onto the Medtronic rollover IRA for sentimental reasons. It's becoming a smaller and smaller percentage of my portfolio but I know I should get that into an index fund.

Thank you for reading this far! I really appreciate this community and look forward to any advice and feedback.
Last edited by intendi on Mon Oct 19, 2020 1:28 pm, edited 1 time in total.
JBTX
Posts: 6983
Joined: Wed Jul 26, 2017 12:46 pm

Re: Portfolio question

Post by JBTX »

Just to grt things started

TLH - I'll reserve that response for others. My only response it don't get too wrapped up thinking you need to do it.

Bonds - I'd look into ibonds, and possibly eebonds, on treasury direct. They can serve as your bond allocation and your emergency funds, and currently have higher yields than most "risk free" bonds. Ibonds now match inflation, whixh is better than bank accounts and CDS. Eebonds earn basically nothing, but if you hold them 20 years they double, which amounts to about 3.5%, which far exceeds current bond yields. Starting at your age means you start tapping them in your 60s when your income/tax rates should be lower.

Finally if you are self employed often a solo 401k provides for more tax advantaged savings opportunities than SEP.
Topic Author
intendi
Posts: 5
Joined: Sat Oct 17, 2020 10:16 am

Re: Portfolio question

Post by intendi »

^Thank you! I will definitely look into I bonds and EE bonds - a much better option than treating a savings account like a bond. I see the rate for I bonds is 1.06% for bonds issued May 2020 - October 2020. Probably should jump on that.

Edit: Picked up an I bond*. Thanks again @JBTX!
Edit#2: You're probably right about the TLH bit. No real urgency there. Maybe it should become more of a point of emphasis if the taxable account grows to a bigger percentage of the overall portfolio.

*Purchasing in November.
Last edited by intendi on Sun Oct 18, 2020 4:36 pm, edited 1 time in total.
User avatar
Peter Foley
Posts: 5114
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Portfolio question

Post by Peter Foley »

Before you move things around I would first take a look at simplification.

For example, you hold an international fund in a number of accounts. You would simplify your holdings considerable by holding your international allocation in one account. You are also holding equivalent bond funds in multiple accounts.
ivgrivchuck
Posts: 196
Joined: Sun Sep 27, 2020 6:20 pm

Re: Portfolio question

Post by ivgrivchuck »

1. Why are carrying a significant amount of money in CDs and savings accounts (which yield 0.6%-1.5%) and at the same time having a mortgage with 2.3% interest? Very simple math shows that putting all your money (excluding emergency fund) from CDs/savings account towards paying the mortgage is a clear win.

2. About tax loss harvesting. There are many good alternatives to VTI/VXUS that you can use in taxable for tax-loss harvesting. See: https://www.bogleheads.org/wiki/Tax_loss_harvesting

For example:

* For U.S. stocks you could use: (make sure that these don't conflict with any other investments you have)
- SCHB, ITOT

* For internationational stocks you could use: (make sure that these don't conflict with any other investments)
- 70% VEA, SCHF
- 30% VWO, IEMG

3. For your emergency fund: Consider I-bonds (and possibly EE-bonds).
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
Topic Author
intendi
Posts: 5
Joined: Sat Oct 17, 2020 10:16 am

Re: Portfolio question

Post by intendi »

Thank you both for the input!

@Peter Foley: I do need to continue to clean things up. I will try to simplify things - I probably have psychological difficulty treating everything as one portfolio. Eventually I should have everything at one brokerage too. The HSA is keeping me at Fidelity. I'd have a hard time leaving Vanguard and I do like the new 529 they are rolling out. I don't have a choice with Principal while I'm working.

@ivgrivchuck: I have thought about taking a chunk out of the mortgage and that does make the most sense with my fixed income side of things. I may be moving in roughly 6 years so I'm not sure if that is holding me back. Thank you very much for listing the TLH partners as well! Hopefully I won't have to use them!
Topic Author
intendi
Posts: 5
Joined: Sat Oct 17, 2020 10:16 am

Roll over IRA to 401K?

Post by intendi »

Gentle bump and clarification of my major question:

Should I roll over my SEP-IRA (Vanguard) and a rollover IRA (Fidelity) to my current 401K (Principal)?

Pluses: Ability to backdoor Roth (edit: removed creditor protection as this seems to not be an issue in Washington State).
Minuses: Fees*, fund choices


*Principal fees:
For the current year, an annual Plan administrative expense of 0.28% applies to your account balance. One-twelfth of the total amount will be deducted from your account balance each month.

Plan administrative expenses typically cover items such as record keeping, participant website access, participant statements, Plan compliance services and financial professional services. Occasionally, there may be additional Plan expenses during normal Plan operation for services such as legal,auditing, other service provider, consulting or investment advice. The Plan Fiduciary determines how these expenses are allocated at the time the expenses are paid. These expenses are typically allocated among participants based on participant account balance, but may be allocated by dividing the total expenses to be deducted by the total number of participants in the Plan. You can view the dollar amount of applicable expenses under your account at principal.com and on your statement.

Participant-level fees

Participant transaction fees will be charged to your account balance for the services you choose to use. Participant transaction fees for the Plan include:
•Distribution fee:$50.00
•Distribution installment fee:$12.50 per quarter
•Enhanced Hardship Withdrawal Service fee:$80.00
•Loan maintenance fee for newloans:$12.00 per quarter
•Loan setup fee:$75.00
•Qualified Domestic Relations Order fee:$220.00 Per hour for each Domestic Relations Order reviewed. The fee is divided between the participant and the alternate payee involved unless specified differently within theDomestic Relations Order or the Plan's administrative procedures.
•Qualified Domestic Relations Order processing fee:$350.00 for each Domestic Relations Order processed.The fee is divided equally between the participant and the alternate payee involved unless specified differentlywithin the Domestic Relations Order or the Plan's Administrative Procedures.
•Wire transfer fee:$25.00
•Fee for overnight mailing a check:$25.00
•Stop payment fee:$25.00
•402(g) refund fee (deferral contributions made in excess of IRS limit):$50.00
User avatar
Peter Foley
Posts: 5114
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Roll over IRA to 401K?

Post by Peter Foley »

I think it is helpful to have funds in taxable, tax free and tax deferred. It help control one's tax obligation when withdrawing in retirement.

So moving existing IRA's to 401k's to allow for backdoor Roth is a good approach.
Spirit Rider
Posts: 13494
Joined: Fri Mar 02, 2007 2:39 pm

Re: Roll over IRA to 401K?

Post by Spirit Rider »

intendi wrote: Mon Oct 19, 2020 1:26 pm Should I roll over my SEP-IRA (Vanguard) and a rollover IRA (Fidelity) to my current 401K (Principal)?
Under 401c, a self-employed individual eligible to adopt a 401k is defined as some with self-employed earned income in the current or any prior year. You would be eligible to adopt a one-participant 401k.

A one-participant 401k at the low cost brokerages except for Vanguard (E-Trade, Fidelity, Schwab and TD Ameritrade) would accept pre-tax rollovers from your SEP and traditional IRA accounts.
lakpr
Posts: 6064
Joined: Fri Mar 18, 2011 9:59 am

Re: Roll over IRA to 401K?

Post by lakpr »

+1 to Spirit Rider’s suggestion. I would not roll over those funds to employer 401k plan with 0.28% extra fees. Open a Solo 401k at E*Trade or Fidelity, as an owner of SEP IRA you were obviously self employed in prior years do you are eligible. Choose low cost investments within that Solo 401k plan and avoid 0.28% drag.

That will still clear the decks for Backdoor Roth.

Note that you cannot have Solo 401k plan and SEP IRA active for the same tax year, I am assuming there haven’t been any contributions to the SEP IRA in 2020 for the year 2020. If true, I would suggest starting on the process of setting up Solo 401k for 2020 now. It has to be completed before 12/31/2020.

About future tax loss harvesting, I believe in having a plan ready. Make sure your taxable investments in the Solo 401k aren’t same as those in your employer 401k or your Roth IRA. One quick way of doing this is to choose different fund families in each account. Something like State Street funds in your Solo 401k, Fidelity zero funds in Roth IRA (funded through Backdoor), and Vanguard/Principal funds in your 401k.

IRS did, at one time, issue a statement in one of its publications that “ordinarily”, they do not consider shares of one mutual fund as “substantially identical” to those of another mutual fund. But then that language disappeared from the same IRS publication after 2009. I think we can still rely on the gist of that statement, though, to plan for a future TLH opportunity.
Topic Author
intendi
Posts: 5
Joined: Sat Oct 17, 2020 10:16 am

Re: Roll over IRA to 401K?

Post by intendi »

Roger that. I had no idea I was still eligible for the solo 401K option. Thank you all!
lakpr
Posts: 6064
Joined: Fri Mar 18, 2011 9:59 am

Re: Roll over IRA to 401K?

Post by lakpr »

intendi wrote: Tue Oct 20, 2020 5:06 am Roger that. I had no idea I was still eligible for the solo 401K option. Thank you all!
Wishing you the best of luck.

Please don’t ignore the warning that you CANNOT open this Solo 401k at Vanguard, as V does not allow rollovers into its prototype plan from external accounts like SEP-IRA. E*Trade is really the best in class when it comes to Individual 401k plans. They even allow Roth conversions within the plan, something Fidelity or Schwab plans do not. You may find that feature particularly helpful in the future should you want to manipulate your income for tax purposes, and do not particularly care for opening an IRA for that specific purpose.
Spirit Rider
Posts: 13494
Joined: Fri Mar 02, 2007 2:39 pm

Re: Roll over IRA to 401K?

Post by Spirit Rider »

lakpr wrote: Tue Oct 20, 2020 1:36 am Note that you cannot have Solo 401k plan and SEP IRA active for the same tax year, I am assuming there haven’t been any contributions to the SEP IRA in 2020 for the year 2020. If true, I would suggest starting on the process of setting up Solo 401k for 2020 now. It has to be completed before 12/31/2020.
The SECURE ACT changed the 401k adoption deadline effective 1/2020. You now have until the businesses tax deadline including extensions to adopt a 401k.

While this does not appear to apply to the OP, I include it for completeness. 401k plans adopted after 12/31 appear to only allow employer contributions. The SECURE ACT did not change the tax code requirements for:
  • An S-Corp's 2% shareholder-employee's deferrals to come from compensation not already received with a "pay date" on or before 12/31.
  • A self-employed individual's employee deferral election to be completed on or before 12/31.
lakpr
Posts: 6064
Joined: Fri Mar 18, 2011 9:59 am

Re: Roll over IRA to 401K?

Post by lakpr »

Spirit Rider wrote: Tue Oct 20, 2020 7:43 am
lakpr wrote: Tue Oct 20, 2020 1:36 am Note that you cannot have Solo 401k plan and SEP IRA active for the same tax year, I am assuming there haven’t been any contributions to the SEP IRA in 2020 for the year 2020. If true, I would suggest starting on the process of setting up Solo 401k for 2020 now. It has to be completed before 12/31/2020.
The SECURE ACT changed the 401k adoption deadline effective 1/2020. You now have until the businesses tax deadline including extensions to adopt a 401k.

While this does not appear to apply to the OP, I include it for completeness. 401k plans adopted after 12/31 appear to only allow employer contributions. The SECURE ACT did not change the tax code requirements for:
  • An S-Corp's 2% shareholder-employee's deferrals to come from compensation not already received with a "pay date" on or before 12/31.
  • A self-employed individual's employee deferral election to be completed on or before 12/31.
Spirit Rider,

As always, thank you for filling me in with the updates!! Sincerely appreciate it, wasn't aware of it
Post Reply