Hi everyone,
I'm a long-time follower of MMM, although a new forum poster, and I'm starting to seriously consider the tax consequences of my retirement savings.
I currently have a rollover IRA at Vanguard (from a prior employer) with around $50k of traditional pre-tax contributions. Now that I'm done with grad school, my income has increased and I'd like to be able to take advantage of the Backdoor Roth strategy in future years. I know that having my current IRA will subject me to the pro-rata rule, so I'm trying to determine the best way to eliminate the traditional IRA this year.
As far as I can tell, there are two options:
1. Roll the traditional IRA into a Roth IRA this year. I'll have to pay taxes on the $50k balance, but presumably at the lower tax rate I enjoy this year versus next year. The benefit of this is that I can keep my investments at Vanguard. The downside is having to pay taxes on the balance this year.
2. Reverse rollover the traditional IRA into my employer's 401(k) plan. My employer allows reverse rollovers and the selection on the investment menu is good (3-7 bps expense ratio, not appreciably worse than I would get at Vanguard). The benefit here is that I wouldn't owe taxes on this transfer. Frankly, I'm not sure what the downside is to following this strategy, given that the 401(k) plan menu isn't overly expensive.
To summarize, I'm trying to eliminate my traditional IRA this year so that I can take advantage of the Backdoor Roth strategy going forward. I'm not sure how to best implement that, and I think that there are are some restrictions that I'm not properly considering (different withdrawal timelines, relative tax rates now versus retirement, etc.).
I'm hoping that the fine ladies and gentlemen of MMM can help me out!
Thanks,
RealChi