What happens with the Backdoor Roth IRA if one leaves their job?

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Pikachu0550
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What happens with the Backdoor Roth IRA if one leaves their job?

Post by Pikachu0550 » Tue Jun 30, 2020 9:42 pm

I am in the process of rolling over my RolloverIRA into my employer 401K. I won't have any other IRA accounts at all after that (I never had a personal one). After thats done, I plan to open a Traditional IRA and do the Backdoor Roth IRA maneuver, this year and every year after that. Because I don't have any other IRA accounts I won't be paying any taxes on this.

My question is, if (when) one of the years I leave my job, my 401K will become a RolloverIRA. So basically, my understanding is, on the year when I change jobs I shouldn't be doing the Backdoor Roth IRA, or I will have quite a bit of taxes to pay. Am I correct?

Thanks!
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tashnewbie
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by tashnewbie » Tue Jun 30, 2020 9:46 pm

When you leave an employer, you can choose to keep your money in the 401k. I don’t think employers can force you to take your money out if you have at least $5k in the plan.

mhalley
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by mhalley » Tue Jun 30, 2020 9:49 pm

I had a 401k from a previous job that I kept for 20 years after leaving the job. As long as it is a good plan, no need to roll it into an ira.

lazynovice
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by lazynovice » Tue Jun 30, 2020 9:50 pm

You should be able to leave it in the plan or you can roll it into your new employer’s plan. You could also look into a solo 401(k) and roll it into that- search the forum for ways to do that. It is more complicated but possible.

sport
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by sport » Tue Jun 30, 2020 9:51 pm

tashnewbie wrote:
Tue Jun 30, 2020 9:46 pm
When you leave an employer, you can choose to keep your money in the 401k. I don’t think employers can force you to take your money out if you have at least $5k in the plan.
This is correct. Alternatively, you may be able to roll the old 401k into a 401k with the new employer.

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MP123
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by MP123 » Tue Jun 30, 2020 9:59 pm

Pikachu0550 wrote:
Tue Jun 30, 2020 9:42 pm
My question is, if (when) one of the years I leave my job, my 401K will become a RolloverIRA. So basically, my understanding is, on the year when I change jobs I shouldn't be doing the Backdoor Roth IRA, or I will have quite a bit of taxes to pay. Am I correct?
Yes, doing a Backdoor Roth with a balance in a pretax IRA will cause a proportionate amount of the converted funds to be taxable. But as pointed out above you may have other choices.

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celia
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by celia » Tue Jun 30, 2020 10:32 pm

Note that if you can get that rollover to the 401K done soon, you can still contribute non-deductible contributions to a new IRA for 2019 (to keep the rollover and new contribution separate from each other) if you had wages last year and didn't contribute to an IRA last year. July 15 is the contribution deadline for 2019. Then when the 401K rollover is complete, you can do a Roth conversion. Repeat for your 2020 nondeductible contribution.

If you do this and have already filed your 2019 taxes, you will have to mail in a standalone Form 8606 to the IRS to report the 2019 non-deductible contribution.

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anon_investor
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by anon_investor » Tue Jun 30, 2020 10:41 pm

sport wrote:
Tue Jun 30, 2020 9:51 pm
tashnewbie wrote:
Tue Jun 30, 2020 9:46 pm
When you leave an employer, you can choose to keep your money in the 401k. I don’t think employers can force you to take your money out if you have at least $5k in the plan.
This is correct. Alternatively, you may be able to roll the old 401k into a 401k with the new employer.
I have left 401ks with prior employers in the past after changing jobs for varying periods of times (months to years) for a variety of reasons (no fees/super low expense ratio index funds, waiting for employer match true up), it is not a big deal, especially if you get the benefit for doing backdoor roth IRA contributions.

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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by Pikachu0550 » Wed Jul 01, 2020 12:54 am

celia wrote:
Tue Jun 30, 2020 10:32 pm
Note that if you can get that rollover to the 401K done soon, you can still contribute non-deductible contributions to a new IRA for 2019 (to keep the rollover and new contribution separate from each other) if you had wages last year and didn't contribute to an IRA last year. July 15 is the contribution deadline for 2019. Then when the 401K rollover is complete, you can do a Roth conversion. Repeat for your 2020 nondeductible contribution.

If you do this and have already filed your 2019 taxes, you will have to mail in a standalone Form 8606 to the IRS to report the 2019 non-deductible contribution.
Hmmm... Interesting idea, though I am not sure I could swing it by July 15th!

So what you are saying is that if I manage to swing this - the rollover into 401K, open a new IRA (I don't have any), deposit after tax money there, and roll it over to Roth IRA - all before July 15h - then it will still count for 2019? Ugh... I wish I initiated the rollover a week earlier! I am still waiting on the check from Schwab. Not sure it will be done in time. But I could try.
Thanks!
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by Pikachu0550 » Wed Jul 01, 2020 12:57 am

Thanks for everyone who replied. I was absolutely sure, for some reason, that after leaving a job my 401K will magically transform itself into a Rollover IRA. I didn't know it can stay being a 401K, even if I don't work for that employer anymore.
But I won't be able to contribute to it anymore, right?

So when I start working with a new employer who offers a 401K - what will happen if I don't roll over my old 401k into the new one? Will I now have two 401k? One with the old employer and one with the new one?
-- Late starter, fast learner ---

HomeStretch
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by HomeStretch » Wed Jul 01, 2020 6:41 am

Pikachu0550 wrote:
Wed Jul 01, 2020 12:57 am
Thanks for everyone who replied. I was absolutely sure, for some reason, that after leaving a job my 401K will magically transform itself into a Rollover IRA. I didn't know it can stay being a 401K, even if I don't work for that employer anymore.
But I won't be able to contribute to it anymore, right?
Correct. Also, it’s possible that your old employer plan may charge a (small) periodic administrative fee to former-employee participants.
Pikachu0550 wrote: So when I start working with a new employer who offers a 401K - what will happen if I don't roll over my old 401k into the new one? Will I now have two 401k? One with the old employer and one with the new one?
Yes, you would have two 401k accounts.

retiredjg
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by retiredjg » Wed Jul 01, 2020 6:59 am

Pikachu0550 wrote:
Wed Jul 01, 2020 12:54 am
celia wrote:
Tue Jun 30, 2020 10:32 pm
Note that if you can get that rollover to the 401K done soon, you can still contribute non-deductible contributions to a new IRA for 2019 (to keep the rollover and new contribution separate from each other) if you had wages last year and didn't contribute to an IRA last year. July 15 is the contribution deadline for 2019. Then when the 401K rollover is complete, you can do a Roth conversion. Repeat for your 2020 nondeductible contribution.

If you do this and have already filed your 2019 taxes, you will have to mail in a standalone Form 8606 to the IRS to report the 2019 non-deductible contribution.
Hmmm... Interesting idea, though I am not sure I could swing it by July 15th!

So what you are saying is that if I manage to swing this - the rollover into 401K, open a new IRA (I don't have any), deposit after tax money there, and roll it over to Roth IRA - all before July 15h - then it will still count for 2019? Ugh... I wish I initiated the rollover a week earlier! I am still waiting on the check from Schwab. Not sure it will be done in time. But I could try.
Thanks!
No. You only need to do the 2019 contribution by July 15. However, do not do this unless you are confident that your 401k will accept the rollover.

If you do make the contribution now and something happens to prevent the rollover you should "un do" the contribution by contacting your IRA custodian (don't just take the money out yourself0. You can do that until October 15th. Sounds like you will know something by then.

If you make the contribution for 2019 in 2020, you will need to send a 2019 Form 8606 to the IRS. Just sign it and send it to the usual address.

The conversion stage of the back door will presumably be completed in 2020 - and that is captured on the 2020 Form 8606. You can do a contribution and conversion for 2020 at the same time if you want.

Sounds like you are not yet familiar with this 8606 paperwork. You need to get very familiar with it before tax time.

retiredjg
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by retiredjg » Wed Jul 01, 2020 7:01 am

Pikachu0550 wrote:
Wed Jul 01, 2020 12:57 am
Thanks for everyone who replied. I was absolutely sure, for some reason, that after leaving a job my 401K will magically transform itself into a Rollover IRA. I didn't know it can stay being a 401K, even if I don't work for that employer anymore.
But I won't be able to contribute to it anymore, right?
Correct. You cannot contribute to it after you leave the employer.
So when I start working with a new employer who offers a 401K - what will happen if I don't roll over my old 401k into the new one? Will I now have two 401k? One with the old employer and one with the new one?
Yes. You will have two if you do not roll the old one into the new one.

Living Free
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by Living Free » Wed Jul 01, 2020 7:08 am

Pikachu0550 wrote:
Wed Jul 01, 2020 12:54 am
celia wrote:
Tue Jun 30, 2020 10:32 pm
Note that if you can get that rollover to the 401K done soon, you can still contribute non-deductible contributions to a new IRA for 2019 (to keep the rollover and new contribution separate from each other) if you had wages last year and didn't contribute to an IRA last year. July 15 is the contribution deadline for 2019. Then when the 401K rollover is complete, you can do a Roth conversion. Repeat for your 2020 nondeductible contribution.

If you do this and have already filed your 2019 taxes, you will have to mail in a standalone Form 8606 to the IRS to report the 2019 non-deductible contribution.
Hmmm... Interesting idea, though I am not sure I could swing it by July 15th!

So what you are saying is that if I manage to swing this - the rollover into 401K, open a new IRA (I don't have any), deposit after tax money there, and roll it over to Roth IRA - all before July 15h - then it will still count for 2019? Ugh... I wish I initiated the rollover a week earlier! I am still waiting on the check from Schwab. Not sure it will be done in time. But I could try.
Thanks!
Did you have the money in the traditional/rollover IRA on Dec 31st 2019? If so then I believe that figure is used to calculate the pro rata rule for the conversion. I haven't had time to fill out a dummy 8606 to verify this though.

retiredjg
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by retiredjg » Wed Jul 01, 2020 8:25 am

Living Free wrote:
Wed Jul 01, 2020 7:08 am
Pikachu0550 wrote:
Wed Jul 01, 2020 12:54 am
celia wrote:
Tue Jun 30, 2020 10:32 pm
Note that if you can get that rollover to the 401K done soon, you can still contribute non-deductible contributions to a new IRA for 2019 (to keep the rollover and new contribution separate from each other) if you had wages last year and didn't contribute to an IRA last year. July 15 is the contribution deadline for 2019. Then when the 401K rollover is complete, you can do a Roth conversion. Repeat for your 2020 nondeductible contribution.

If you do this and have already filed your 2019 taxes, you will have to mail in a standalone Form 8606 to the IRS to report the 2019 non-deductible contribution.
Hmmm... Interesting idea, though I am not sure I could swing it by July 15th!

So what you are saying is that if I manage to swing this - the rollover into 401K, open a new IRA (I don't have any), deposit after tax money there, and roll it over to Roth IRA - all before July 15h - then it will still count for 2019? Ugh... I wish I initiated the rollover a week earlier! I am still waiting on the check from Schwab. Not sure it will be done in time. But I could try.
Thanks!
Did you have the money in the traditional/rollover IRA on Dec 31st 2019? If so then I believe that figure is used to calculate the pro rata rule for the conversion. I haven't had time to fill out a dummy 8606 to verify this though.
Somehow a lot of people have gotten that idea, but it is what is in IRA on 12/31 of the year in which you did the conversion. Contribution year is irrelevant.

Unless I missed it, I don't think a conversion has occurred yet in this case.

lakpr
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by lakpr » Wed Jul 01, 2020 8:45 am

sport wrote:
Tue Jun 30, 2020 9:51 pm
tashnewbie wrote:
Tue Jun 30, 2020 9:46 pm
When you leave an employer, you can choose to keep your money in the 401k. I don’t think employers can force you to take your money out if you have at least $5k in the plan.
This is correct. Alternatively, you may be able to roll the old 401k into a 401k with the new employer.
Just to be super-technical about it, the plans CAN require that the $5k amount be contributory amount, not a rollover amount, nor market gains. In other words, one should have contributed a minimum of $5k while being employed at the firm that is offering the 401k plan. You cannot roll $100k from an IRA into the plan, but contribute only $2k while employed at the firm, then leave the firm and expect to not be forced out ...

Although in practice, no 401k plan actually does that ('that' == force the contribution amount to be > $5k, even though total amount in the plan is > $5k). It is usually bad public relations.

IF the plan does decide to force an ex-employee out for low balance reason, per IRS regulations it must make good-faith efforts to contact the ex-employee and give reasonable time. For this reason, make sure the phone / email / residence addresses with the plan are current.

Of course, as pointed up thread, 401k plans CAN also make, and frequently do force, ex-employees pick up the administrative charges that were being paid by the employer. Depending on the costs, that could be a criterion to decide whether to leave the 401k plan in place or rollover to an IRA.

Living Free
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Re: What happens with the Backdoor Roth IRA if one leaves their job?

Post by Living Free » Wed Jul 01, 2020 10:02 am

retiredjg wrote:
Wed Jul 01, 2020 8:25 am
Living Free wrote:
Wed Jul 01, 2020 7:08 am
Pikachu0550 wrote:
Wed Jul 01, 2020 12:54 am
celia wrote:
Tue Jun 30, 2020 10:32 pm
Note that if you can get that rollover to the 401K done soon, you can still contribute non-deductible contributions to a new IRA for 2019 (to keep the rollover and new contribution separate from each other) if you had wages last year and didn't contribute to an IRA last year. July 15 is the contribution deadline for 2019. Then when the 401K rollover is complete, you can do a Roth conversion. Repeat for your 2020 nondeductible contribution.

If you do this and have already filed your 2019 taxes, you will have to mail in a standalone Form 8606 to the IRS to report the 2019 non-deductible contribution.
Hmmm... Interesting idea, though I am not sure I could swing it by July 15th!

So what you are saying is that if I manage to swing this - the rollover into 401K, open a new IRA (I don't have any), deposit after tax money there, and roll it over to Roth IRA - all before July 15h - then it will still count for 2019? Ugh... I wish I initiated the rollover a week earlier! I am still waiting on the check from Schwab. Not sure it will be done in time. But I could try.
Thanks!
Did you have the money in the traditional/rollover IRA on Dec 31st 2019? If so then I believe that figure is used to calculate the pro rata rule for the conversion. I haven't had time to fill out a dummy 8606 to verify this though.
Somehow a lot of people have gotten that idea, but it is what is in IRA on 12/31 of the year in which you did the conversion. Contribution year is irrelevant.

Unless I missed it, I don't think a conversion has occurred yet in this case.
good to know, thanks

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