Where to go from here - SIMPLE IRA, HSA, Roth conversion

[brandino29]

Hey MMM gang,

I'm in need of some help clarifying my retirement options moving forward with some big life changes coming up. The quick overview is that I am a medical resident finishing my residency in 4 months when I'll be going from total compensation of ~$60,000 to ~$240,000 overnight. I've been procrastinating some money moves I need to make but I'm not clear yet on what exactly I need to do.

Primarily I have three issues I need to figure out - what to do with my small HSA, funding a new Roth, and what to do with a previous SIMPLE IRA.

First and simplest I think is the HSA - I'm married and have 3 kids but they're currently insured through my wife's job while I have a HDHP at my current position. I've been contributing only a modest amount to the HSA over the past few years and currently have $1,980 in the account - it's not even met the plan threshold of $2k to transfer to an investment option so it's sitting in cash right now. There are expense fees of $2.50/month so I'm literally losing value in this thing right now though after the next paycheck when it exceeds $2,000 it should dump all of that into VFIAX.  With my new employer I am going to have full coverage health insurance for my family paid for entirely by my employer so I will no longer qualify for an HSA. I'm wondering if I should just withdraw this money now and take the relatively small tax hit this year. My biggest fear if I leave this account open I'll forget of its existence over the years to come. As I see it here - 2 options - 1) leave it be, let it grow, make sure not to forget about it, use it as needed for medical expenses or b) withdraw it now and dump it into some other account.

Second and third problems go hand in hand - the SIMPLE IRA and a Roth. I have this SIMPLE IRA from a previous employer prior to med school. The current value is $10,300 and is invested 100% in a Vanguard Target 2040 retirement fund. I do not currently have a Roth (my retirement situation laid out below). I am currently investing 8% of my annual salary in the hospital 401k (+ 4.5% employer match). My new employer starting in July will contribute $19,500 to any retirement account I want so my plan is to max my individual contribution as well for a total of $39,000 to a new vanguard 401k. We'll also max my wife's 457 account separately. I want to max out Roths for each of us as well but we'll be over the Roth contribution limits after this year though so I'll have to do the backdoor conversion starting in 2022. But my understanding is I can't do a backdoor Roth with that SIMPLE IRA in existence so I don't know what to do with that money right now. My thought is that I need to open a new Roth IRA, roll over the SIMPLE IRA into it, but as a rollover does that count against my annual contribution limits? Also, because we have enough in cash savings right now that I'd like to fully fund a 2020 (last year) Roth before filing our taxes in the coming weeks. If the SIMPLE is going to get in the way though I'm wondering if I just need to withdraw it all and dump that into my 401k for 2020?

Appreciate the input. Apologies if this is a convoluted mess - happy to clarify anything.

Current retirement situation:
457 (previous employer) $22,200 - 100% VFIAX
SIMPLE IRA (previous employer > 2 years ago) $10,300 - 100% Vanguard 2040 Target Retirement
401k (current employer) $14,100 - 85% FXAIX, 15% FXNAX
HSA (current employer) $1,980 - currently in cash, will move 100% to FXAIX in coming weeks

[bacchi]

There's a lot going on here.

@PhysicianOnFIRE

First, the physicianonfire or whitecoatinvestor blogs might be helpful to you.



* Re: HSA

Transfer it to Fidelity, which is fee free. But, at that amount, if you're not going to fund it in the future, I'd figure out how to spend it down on medical expenses and get rid of it.


* Re: SIMPLE IRA

Nm. You mentioned that it's older than 2 years.




* Re: 401k contributions

Generally, your employEE 401k contributions can only equal $19,500 for 2021. You can't contribute $3000 (for example) to your current resident plan and then $19,500 to your new  plan. Maybe you meant this and I didn't understand what you wrote.

[bacchi]

Further answers,

* SIMPLE, again

You can not roll over a SIMPLE to a Roth. The IRS specifically mentions this.

https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-distributions (at the bottom)

You may be able to transfer money in a tax-free rollover from your SIMPLE IRA to:

    another IRA (except a Roth IRA), or
    an employer-sponsored retirement plan (such as a 401(k), 403(b), or governmental 457(b) plan).

(bolded)

A trustee-to-trustee transfer does not count against any contribution limits, even if you first roll it to a tIRA and then to a Roth.


* Mega backdoor conversion

The contributions, total, for a 401k can't exceed $58,000. You can't convert your pre-tax contribution. You also can't convert any matching contributions. If the employer's $19,500 is considered a matching contribution, that leaves you converting $19,000 max.

The pro-rata rule for backdoor conversions only applies to IRAs, not 401ks/403bs. See these discussions.

https://www.bogleheads.org/forum/viewtopic.php?t=209891
https://forum.whitecoatinvestor.com/retirement-accounts/9134-mega-backdoor-pro-rata-rules

You can leave your SIMPLE where it is or transfer it to a tIRA.

[MDM]

You might
1) convert the SIMPLE to a Roth IRA
2) move the HSA to Fidelity and just let it grow

Reasons
1) this may be your lowest marginal rate opportunity for a Roth IRA conversion, it's a relatively small amount anyway.  You may convert SIMPLE to Roth after the money has been in the SIMPLE for two years.  This clears the way for the backdoor Roth. 

2) It wouldn't be terrible to withdraw the HSA based on qualifying medical expenses now, but "set and forget (for a few decades)" for the tax-free benefit is also reasonable and probably ever so slightly better.

Rollovers of any kind do not count against annual contribution limits.

[brandino29]

Thanks @bacchi and @MDM for the responses.

I went back and re-reviewed the WCI's post on backdoor Roths. I somehow previously completely overlooked the fact that I can roll that SIMPLE IRA into my current 401k without any tax hit. So with about 60 minutes of work on Friday afternoon and a couple of phon calls to Vanguard and Fidelity I got that done.

I'll look into transferring that HSA into Fidelity for a fee free HSA. We really haven't had any medical expenses since our youngest was born but (as long as I don't forget to use it) letting it grow tax free invested in a total stock market fund makes plenty of sense.