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401K / IRA Question
Posted on 9/26/22 at 10:14 am
Posted on 9/26/22 at 10:14 am
My previous employer filed bankruptcy and laid off all employees. At the time we had 30 days to rollover our employer 401k. I set up and transferred the balance to a Vanguard IRA. The money has been in the IRA for about 4 years now. Wondering if it would make more sense to roll it into my new employers 401k?
The main reason I’m looking to do this is I will need to back door my Roth this year and don’t want to get caught with tax implications. Everything Ive read says to avoid any tax implications you should transfer the money immediately after putting it in an IRA.
The main reason I’m looking to do this is I will need to back door my Roth this year and don’t want to get caught with tax implications. Everything Ive read says to avoid any tax implications you should transfer the money immediately after putting it in an IRA.
3
Posted on 9/26/22 at 10:31 am to Dtiger19
Not a bad idea. How much money is it? I ask because if it's a lot, I'd hesitate to put it in your 401k unless you have really good options. If it's not much, maybe you could just convert it to Roth. Just a couple of thoughts...
Posted on 9/26/22 at 10:51 am to UpstairsComputer
Around $150k.
Posted on 9/26/22 at 11:20 am to Dtiger19
If you want to do a backdoor Roth, then yes you need to roll what's in the IRA now into your current employers 401k do avoid any taxes due to the pro rata rule.
It's up to you to decide if the benefits of a backdoor Roth outweighs the potential limited investment options in your employers 401k vs what you have it invested now within your trad/rollover IRA.
It's up to you to decide if the benefits of a backdoor Roth outweighs the potential limited investment options in your employers 401k vs what you have it invested now within your trad/rollover IRA.
Posted on 9/26/22 at 12:40 pm to Puffoluffagus
quote:
It's up to you to decide if the benefits of a backdoor Roth outweighs the potential limited investment options in your employers 401k vs what you have it invested now within your trad/rollover IRA.
What this guy said.
Posted on 9/26/22 at 1:10 pm to Puffoluffagus
Thank you for the info.
Posted on 9/26/22 at 2:36 pm to Puffoluffagus
quote:Just want to emphasize the importance of this statement. I've sat down with several people who had no idea this rule existed and paid dearly.
If you want to do a backdoor Roth, then yes you need to roll what's in the IRA now into your current employers 401k do avoid any taxes due to the pro rata rule.
Posted on 9/27/22 at 12:55 pm to Dtiger19
Most everyone is hitting the high points, already, but:
-You can make nondeductible contributions to your IRA now and leave them there, not converting them to Roth. It gives you basis in your IRA so withdrawals will be taxed a bit less. The pro-rata rule makes it difficult to do Roth conversions, and it makes it difficult to calculate now what your taxable rate on withdrawals in retirement will be, but having basis in those withdrawals is a strategy that some people use. It's not my favorite.
-You can convert your entire IRA now to Roth. Assuming the entire $150K (later post- I think that's what you said was in there), you'll owe taxes at your top marginal rate on the $150K (or a step up in marginal rate, as that could easily push you through a bracket). Then you can keep the current investments relatively the same, though this is going to be very expensive now. Will it be the right choice in 50 years? Impossible to guess, thanks to a retirement plan system that changes constantly because those who don't take advantage of it whine about fairness.
-You can roll the IRA funds into the 401k. You are probably paying less in fees with the Vanguard IRA than you would with the company 401k. Your company that offers a 401k has a fiduciary responsibility to you. You have a leg to stand on to demand decent funds. But the average fee in a 401k is something like 1.5%, and your options are still going to be more limited than they would in an IRA.
-You can make nondeductible contributions to your IRA now and leave them there, not converting them to Roth. It gives you basis in your IRA so withdrawals will be taxed a bit less. The pro-rata rule makes it difficult to do Roth conversions, and it makes it difficult to calculate now what your taxable rate on withdrawals in retirement will be, but having basis in those withdrawals is a strategy that some people use. It's not my favorite.
-You can convert your entire IRA now to Roth. Assuming the entire $150K (later post- I think that's what you said was in there), you'll owe taxes at your top marginal rate on the $150K (or a step up in marginal rate, as that could easily push you through a bracket). Then you can keep the current investments relatively the same, though this is going to be very expensive now. Will it be the right choice in 50 years? Impossible to guess, thanks to a retirement plan system that changes constantly because those who don't take advantage of it whine about fairness.
-You can roll the IRA funds into the 401k. You are probably paying less in fees with the Vanguard IRA than you would with the company 401k. Your company that offers a 401k has a fiduciary responsibility to you. You have a leg to stand on to demand decent funds. But the average fee in a 401k is something like 1.5%, and your options are still going to be more limited than they would in an IRA.
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