May need to move 401k money by end of year, but not eligible for new 401k until February

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E5797
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May need to move 401k money by end of year, but not eligible for new 401k until February

Post by E5797 » Thu Nov 07, 2019 7:38 pm

I may need move my 401k money by the end of 2019 but I won't be eligible for my new job's 401k until February. Is the only way to roll into an IRA then move it into my new 401k in February 2020? If possible I'd prefer not to have an IRA balance at the end of 2019 in order to continue to make backdoor Roth contributions.

Background:
I have a large 401k balance from a business that is in the process of winding down. I am not eligible for my new job's 401k plan until February 2020. We may not be able to wind down the business before the end of 2019, and in that case, I would just roll my old 401k into my new jobs 401k in once we close in 2020. If we are able to wind down the business by the end of the year or my partner wants to end our 401k plan before February what would be my options?

fyre4ce
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by fyre4ce » Thu Nov 07, 2019 7:57 pm

I think your options are:

1) Rollover to a tIRA this year, and then either not do a Backdoor Roth IRA, or just eat the tax bill on the conversion if you already have.

2) If you can generate any 1099 income, open a Solo 401k and use that as a temporary holding account. It's a bit of extra work, but the payoff is avoiding the tax bill on a $6000 Roth conversion, so probably worth it on a per-hour basis.

3) Even though you may not be able to contribute to the new 401k, you could check and see if it could accept an incoming rollover. When do you start employment?

I'm not seeing any other options.

Katietsu
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Katietsu » Thu Nov 07, 2019 8:04 pm

Have you made any conversions in 2019 yet? If not, this is not a problem. Just do your next Roth conversion in 2020. You can make your 2019 non deductible contribution in either 2019 or before the April tax filing deadline in 2020.

Topic Author
E5797
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by E5797 » Thu Nov 07, 2019 8:11 pm

Katietsu wrote:
Thu Nov 07, 2019 8:04 pm
Have you made any conversions in 2019 yet? If not, this is not a problem. Just do your next Roth conversion in 2020. You can make your 2019 non deductible contribution in either 2019 or before the April tax filing deadline in 2020.
Not yet. But if I have an IRA balance on December 31st, 2019 from my 401k rollowever even if I make my 2019 contribution in 2020 am I going to run into issues with the Pro-Rata rule?,

fyre4ce
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by fyre4ce » Thu Nov 07, 2019 8:26 pm

E5797 wrote:
Thu Nov 07, 2019 8:11 pm
Katietsu wrote:
Thu Nov 07, 2019 8:04 pm
Have you made any conversions in 2019 yet? If not, this is not a problem. Just do your next Roth conversion in 2020. You can make your 2019 non deductible contribution in either 2019 or before the April tax filing deadline in 2020.
Not yet. But if I have an IRA balance on December 31st, 2019 from my 401k rollowever even if I make my 2019 contribution in 2020 am I going to run into issues with the Pro-Rata rule?,
Katietsu had a good idea. The sequence would be:

2019: make tIRA contribution for 2019
2019: roll over old 401k into a new tIRA
2020: make tIRA contribution for 2020
2020: roll over previously rolled over tIRA into new 401k
2020: convert both 2019 and 2020 tIRA contributions to Roth. As long as the tIRA balance is $0 on Dec 31, 2020 then you'll only owe takes on the gains, as normal

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celia
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by celia » Thu Nov 07, 2019 8:29 pm

E5797 wrote:
Thu Nov 07, 2019 8:11 pm
Katietsu wrote:
Thu Nov 07, 2019 8:04 pm
Have you made any conversions in 2019 yet? If not, this is not a problem. Just do your next Roth conversion in 2020. You can make your 2019 non deductible contribution in either 2019 or before the April tax filing deadline in 2020.
Not yet. But if I have an IRA balance on December 31st, 2019 from my 401k rollowever even if I make my 2019 contribution in 2020 am I going to run into issues with the Pro-Rata rule?,
No, not if you don't convert this year.

Think of it like this. I assume you don't have any basis (non-deductible contributions) in an IRA yet. So rolling over the 401K to an tIRA would be the same as if that money had always been there. Come Dec 31, that money is still in the tIRA. In February, you will be getting ready to do your "first (ie, next)" Backdoor Roth. So you clear out the tIRA by rolling the money to your 401K. Then you can make a non-deductible contribution for 2019, then convert.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Paisley
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Paisley » Thu Nov 07, 2019 8:47 pm

what about this:
1. do a 60 day rollover and hold the cash
2. fund the tIRA as you normally would for 2019 and do Roth conversion if yoy want
3. complete the rollover in 2020
4. fund the 401k if the plan accepts IRA transfers (check the fund lineup)

Topic Author
E5797
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by E5797 » Fri Nov 08, 2019 8:14 am

Paisley wrote:
Thu Nov 07, 2019 8:47 pm
what about this:
1. do a 60 day rollover and hold the cash
2. fund the tIRA as you normally would for 2019 and do Roth conversion if yoy want
3. complete the rollover in 2020
4. fund the 401k if the plan accepts IRA transfers (check the fund lineup)
I had considered this, but then the money would be out of the market for a month or two. Plus the balance is sort of high (around 800k), so I think the employer would hold 20% back for taxes and I'd have to come up with that money in to refund the new 401k.

Maybe it seems the best option is to fund the IRA in 2019 and 2020 but then convert to Roth in 2020 after I have refunded my new 401k. Would the tax reporting on this be complicated? If too complicated, I could consider just skipping the 2019 contribution, but I feel I'd be missing out.

retiredjg
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by retiredjg » Fri Nov 08, 2019 8:26 am

If you have to go this route, you need to be sure of two things.
  • -the 401k money goes into a Rollover IRA and nothing else gets put into that IRA; the law does not require this but a lot of plans don't want money that has been co-mingled

    -the new 401k will actually accept a rollover from an IRA; most do but an occasional one will not.

Would the tax reporting on this be complicated? If too complicated, I could consider just skipping the 2019 contribution, but I feel I'd be missing out.
It is not complicated if you know what you are doing. It appears you have been using the back door so you should probably understand it.

2019 Form 8606 - would capture your 2019 contribution, but there would be no conversion; (note that you can do your contribution up till tax day in 2020)

2020 Form 8606 - would capture your 2020 contribution and the conversion of both contributions in 2020

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BL
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by BL » Fri Nov 08, 2019 9:27 am

E5797 wrote:
Thu Nov 07, 2019 8:11 pm
Katietsu wrote:
Thu Nov 07, 2019 8:04 pm
Have you made any conversions in 2019 yet? If not, this is not a problem. Just do your next Roth conversion in 2020. You can make your 2019 non deductible contribution in either 2019 or before the April tax filing deadline in 2020.
Not yet. But if I have an IRA balance on December 31st, 2019 from my 401k rollowever even if I make my 2019 contribution in 2020 am I going to run into issues with the Pro-Rata rule?,
It sounds like you have not made your 2019 contribution yet. Perhaps you could just wait as long as April 2020 to do your 2019 contribution and conversion to Roth IRA to allow your 401k to go in and out of the IRA first, leaving nothing in the IRA.

Paisley
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Paisley » Sat Nov 09, 2019 11:09 am

There is a lot of great tax information on this thread, but I am a little lost as to what exactly is the primary concern.
Woulf you be willing to restate the problem?

lakpr
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by lakpr » Sat Nov 09, 2019 11:19 am

Paisley wrote:
Sat Nov 09, 2019 11:09 am
There is a lot of great tax information on this thread, but I am a little lost as to what exactly is the primary concern.
Woulf you be willing to restate the problem?
I am not OP, but let me volunteer.

Old employer is closing, along with the 401k. The OP will be likely forced to roll over the 401k money to an IRA before December.
New job does not have the 401k open yet, so he cannot roll it to a 401k.

But if he does so, he cannot do backdoor Roth IRA for 2019 { or to be more precise, he can only make the non-deductible contribution but not the subsequent conversion }

So the responses are trying to suggest to him that he defer making the non-deductible contribution to the IRA until next year (he has until April 15, 2020) and the Roth conversion -- both steps -- only after he's sure that the rollover IRA is rolled over into the new company 401k once it becomes active.

Paisley
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Paisley » Sat Nov 09, 2019 10:25 pm

What does the rollover have to do with the backdoor Roth?

niceguy7376
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by niceguy7376 » Sat Nov 09, 2019 10:38 pm

lakpr wrote:
Sat Nov 09, 2019 11:19 am
Old employer is closing, along with the 401k. The OP will be likely forced to roll over the 401k money to an IRA before December.
So in general, if the business is shutting down, the accounts should be emptied before the 401k plan is closed?
This is something that i never thought before.

lakpr
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by lakpr » Sun Nov 10, 2019 5:54 am

Paisley wrote:
Sat Nov 09, 2019 10:25 pm
What does the rollover have to do with the backdoor Roth?
For the second step of the backdoor Roth, the conversion, you need to have $0 in traditional IRA ( and this does include rollover IRA ) by December 31 of that tax year you are filing tax returns for. Otherwise you are subject to the pro rata rule.

Please read the wiki page on Backdoor Roth
Last edited by lakpr on Sun Nov 10, 2019 5:59 am, edited 1 time in total.

lakpr
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by lakpr » Sun Nov 10, 2019 5:58 am

niceguy7376 wrote:
Sat Nov 09, 2019 10:38 pm
So in general, if the business is shutting down, the accounts should be emptied before the 401k plan is closed?
This is something that i never thought before.
Yes, this is a risk with the 401k plans of small businesses, which are at more risk of failure than large corporations.

Paisley
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Paisley » Sun Nov 10, 2019 9:13 pm

Just do a 60 day rollover.

Paisley
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Paisley » Sun Nov 10, 2019 9:43 pm

just my own 2 cents :wink:

lakpr
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by lakpr » Sun Nov 10, 2019 11:14 pm

Paisley wrote:
Sun Nov 10, 2019 9:13 pm
Just do a 60 day rollover.
OP did respond to that suggestion above. He would need to come up with $160k (The check cut to the OP would have taxes withheld, and to do a 60 day rollover he would need to come up with that tax money from his other sources). Not an easy job.

Considered and discarded as not financially feasible.

shess
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by shess » Mon Nov 11, 2019 1:23 am

fyre4ce wrote:
Thu Nov 07, 2019 8:26 pm
E5797 wrote:
Thu Nov 07, 2019 8:11 pm
Katietsu wrote:
Thu Nov 07, 2019 8:04 pm
Have you made any conversions in 2019 yet? If not, this is not a problem. Just do your next Roth conversion in 2020. You can make your 2019 non deductible contribution in either 2019 or before the April tax filing deadline in 2020.
Not yet. But if I have an IRA balance on December 31st, 2019 from my 401k rollowever even if I make my 2019 contribution in 2020 am I going to run into issues with the Pro-Rata rule?,
Katietsu had a good idea. The sequence would be:

2019: make tIRA contribution for 2019
2019: roll over old 401k into a new tIRA
2020: make tIRA contribution for 2020
2020: roll over previously rolled over tIRA into new 401k
2020: convert both 2019 and 2020 tIRA contributions to Roth. As long as the tIRA balance is $0 on Dec 31, 2020 then you'll only owe takes on the gains, as normal
Since I'm lazy, I always did my backdoor Roth contributions every other February, batching two years together and doing one conversion, which is similar to the above. The contributions can be made in the tax year they are for OR before April 15 filing date for that tax year. Conversions only care about which tax year they are made in, they don't care about the tax year of the contributions.

The nice thing about waiting to make this year's contribution until next year is that you can get the contribution and conversion closer together so you don't have to worry about additional gains. If your new 401k allows rollins of traditional IRA funds, you can easily clean it up that way, but if not, you'll have to convert the gains, too.

Paisley
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Paisley » Mon Nov 11, 2019 7:08 am

why would taxes be withheld from a 60 day rollover? you can just tell them not to withhold any taxes.

retiredjg
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by retiredjg » Mon Nov 11, 2019 7:31 am

Paisley wrote:
Mon Nov 11, 2019 7:08 am
why would taxes be withheld from a 60 day rollover? you can just tell them not to withhold any taxes.
You can do that with an IRA. The withholding from a 401k is mandatory 20%.

https://www.irs.gov/retirement-plans/pl ... tributions

Paisley
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Paisley » Mon Nov 11, 2019 8:23 am

sorry - what I meant was do a regular rollover but just hold the check until 2020

retiredjg
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by retiredjg » Mon Nov 11, 2019 8:29 am

Paisley wrote:
Mon Nov 11, 2019 8:23 am
sorry - what I meant was do a regular rollover but just hold the check until 2020
Interesting concept, but I don't think it will work.

Form 8606, line 6 asks for the 12/31 value of all your IRAs plus any outstanding rollovers. That is the number that gets pro-rated.

Spirit Rider
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Spirit Rider » Mon Nov 11, 2019 8:31 am

niceguy7376 wrote:
Sat Nov 09, 2019 10:38 pm
lakpr wrote:
Sat Nov 09, 2019 11:19 am
Old employer is closing, along with the 401k. The OP will be likely forced to roll over the 401k money to an IRA before December.
So in general, if the business is shutting down, the accounts should be emptied before the 401k plan is closed?

This is something that i never thought before.
All participant accounts must have a $0 balance before terminating a 401k plan. The plan sponsor usually has one year to terminate the plan after the business ceases to exist. This employer has no requirement to terminate the plan prior to the end of the year. Even if the business ceases to exist on 12/31/2019.

Paisley
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Paisley » Mon Nov 11, 2019 9:10 am

Okay then - create an LLC, create an Owner(k), roll the 401(k) into the Owner(k) in 2019, roll the Owner(k) to 401(k) in 2020. Hurry hurry!

niceguy7376
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by niceguy7376 » Mon Nov 11, 2019 9:54 am

Spirit Rider wrote:
Mon Nov 11, 2019 8:31 am
All participant accounts must have a $0 balance before terminating a 401k plan. The plan sponsor usually has one year to terminate the plan after the business ceases to exist. This employer has no requirement to terminate the plan prior to the end of the year. Even if the business ceases to exist on 12/31/2019.
Thanks Spirit Rider.
What are the rules of termination regarding balances for Solo 401k and SIMPLE IRA if moving to a different 401k provider.

Spirit Rider
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Re: May need to move 401k money by end of year, but not eligible for new 401k until February

Post by Spirit Rider » Mon Nov 11, 2019 10:27 am

niceguy7376 wrote:
Mon Nov 11, 2019 9:54 am
Spirit Rider wrote:
Mon Nov 11, 2019 8:31 am
All participant accounts must have a $0 balance before terminating a 401k plan. The plan sponsor usually has one year to terminate the plan after the business ceases to exist. This employer has no requirement to terminate the plan prior to the end of the year. Even if the business ceases to exist on 12/31/2019.
Thanks Spirit Rider.

What are the rules of termination regarding balances for Solo 401k and SIMPLE IRA if moving to a different 401k provider.
You don't terminate a one-participant 401k when moving from one provider to another. You amend the plan to the new provider by using the new provider's adoption agreement and selecting to amend an existing plan. Then you do a trustee -> trustee transfer from the old provider to the new provider.

A SIMPLE IRA can be the only employer retirement plan in a calendar year. A new 401k plan could be effective no earlier than 1/1 of the following year. With a SEP or SIMPLE IRA, there is a distinction between the plan and the IRA accounts. The termination of a SIMPLE IRA has no effect on the IRA accounts.

IRA accounts are always owned by the individual. All contributions are the property of the account owner as soon as deposited regardless of source. The account owners can always leave the assets in the SIMPLE IRA account from a terminated plan if they so wish.

If it has been < two (2) years since the first contribution, the account owner can only rollover the assets to the new SIMPLE IRA custodian or another SIMPLE IRA account at a third custodian. The one custodian I am aware of that offers rollover only SIMPLE IRA accounts is Vanguard. They refer to them as "frozen" accounts.

If it has been >= two (2) years since the first contribution, the account owner can; make a withdrawal, rollover to a traditional IRA, do a Roth conversion or rollover to any other eligible retirement plan such as a one-participant 401k.

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