Author Topic: Should I rollover my tIRA into my 401k?  (Read 2763 times)

gluskap

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Should I rollover my tIRA into my 401k?
« on: February 16, 2015, 03:07:47 PM »
So we are no longer able to do direct contributions to our roth IRA since we make too much.  So I would like to take advantage of the backdoor Roth.  However I have a traditional IRA with pre-tax contributions and it's worth about $13k.  I can do a rollover of this into my current 401k and thus do a backdoor Roth without paying any taxes.  Should I do this though?  The best choice in my 401k is an index fund with an expense ratio of 0.58 which is still pretty high.

Or I could just make after tax contributions of $5500 into the tIRA and then convert during retirement when my taxes due would be low.  Would this be better to take advantage of lower ER?  I don't want to pay taxes on the conversion currently since I'm in the 28% marginal tax bracket.  Thanks in advance for any advice!

maizeman

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Re: Should I rollover my tIRA into my 401k?
« Reply #1 on: February 16, 2015, 04:49:27 PM »
Personally I've decided that from an FI perspective saving pre-tax (traditional IRA/401k) right now makes more sense than saving post-tax (roth IRA/401k). A huge amount of ink and electrons have been wasted on comparing the two, but at the end of the day it boils down to two questions:

1. Which do you think will be higher: your marginal tax rate today or your marginal tax rate in retirement.
2. Is this primarily money to support yourself, or money to pass on to your descendants?

If your answer to #1 is "today" AND your answer to #2 is "for myself" then it makes more sense to save in in a traditional account than a Roth. Keep in mind that answering #1 isn't as simple as comparing your anticipated retirement income to today's income tax brackets, it also requiring making your best guess about how tax policy might change over the next half century or more.

gluskap

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Re: Should I rollover my tIRA into my 401k?
« Reply #2 on: February 16, 2015, 04:54:32 PM »
Personally I've decided that from an FI perspective saving pre-tax (traditional IRA/401k) right now makes more sense than saving post-tax (roth IRA/401k). A huge amount of ink and electrons have been wasted on comparing the two, but at the end of the day it boils down to two questions:

1. Which do you think will be higher: your marginal tax rate today or your marginal tax rate in retirement.
2. Is this primarily money to support yourself, or money to pass on to your descendants?

If your answer to #1 is "today" AND your answer to #2 is "for myself" then it makes more sense to save in in a traditional account than a Roth. Keep in mind that answering #1 isn't as simple as comparing your anticipated retirement income to today's income tax brackets, it also requiring making your best guess about how tax policy might change over the next half century or more.

Yes I agree if I could deduct the contribution for the tIRA I would just keep it there as I think my marginal tax rate is higher today than when I will retire. And the money is mostly to support myself.  If there is anything left over when we pass away then I would like to pass it on to kids but I don't want them to count on that but to make their own way in the world.  But since I can't deduct the contributions to tIRA it makes sense to do the backdoor Roth right?

dandarc

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Re: Should I rollover my tIRA into my 401k?
« Reply #3 on: February 16, 2015, 05:01:10 PM »
Non-deductible tIRA is not a very good deal.  You get the same tax-treatment today as a Roth IRA, with none of the tax benefits on withdrawal.  It will grow tax-deferred, but you will pay ordinary income tax rates on the earnings when you convert later.  http://www.bogleheads.org/wiki/Non-deductible_traditional_IRA indicates a taxable account could be favorable compared to a non-deductible tIRA.

So yes, I'd roll 13K into the 401K, even with the higher ER, to make your backdoor Roth easier to manage.  Unless we're only talking about 1 or 2 years here, that makes a lot of sense to me.

SaintM

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Re: Should I rollover my tIRA into my 401k?
« Reply #4 on: February 16, 2015, 05:07:51 PM »

1. Which do you think will be higher: your marginal tax rate today or your marginal tax rate in retirement.
2. Is this primarily money to support yourself, or money to pass on to your descendants?


One more consideration: The tax for a Roth is on contributions today.  The tax on a tIRA is on all withdrawals--contributions + earnings down the road.  If you expect/hope for/gamble that your account value will grow substantially, you may come out ahead with a Roth regardless of your bracket now versus later.

This is how the well-connected avoid substantial taxes. Buy $5000 of a private start-up, sell for millions after the IPO, pay no taxes, repeat. One win forests all the losses and then some.

Catbert

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Re: Should I rollover my tIRA into my 401k?
« Reply #5 on: February 16, 2015, 05:09:25 PM »
I would probably roll the tIRA to your 401k. The longer hyou plan on working, the better this option becomes.

Whether you invest in brokerage account or a backdoor Roth, you'll be paying 28% Federal tax.  When you access the money you'll owe nothing from the Roth but likely owe 20% capital gains taxes on your brokerage account.  (When you retire if you're in the 15% income tax bracket and tax laws don't change you'd owe no capital gains.  But I think cap gains tax laws are likely to change - YMMV.)

If you could do a deductible tIRA then I'd go that route since I'm a strong believer in diversity of tax treatment.














gluskap

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Re: Should I rollover my tIRA into my 401k?
« Reply #6 on: February 16, 2015, 05:34:16 PM »
The plan is to retire in 8-10 years for now.  Is that enough for earnings to grow in a Roth to be worth the hassle of doing backdoor Roth each year?