Author Topic: about to convert 401k to Traditional IRA, anything I should consider?  (Read 5685 times)

mrtimo

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Got married a few months ago. My wife has perhaps 50k in her 401k with the state retirement system (HS teacher). She will leave and be a "stay at home" mom. Want to convert the 401k to vanguard.

We are in the 25% bracket filing jointly. Anything we should consider before we convert the 401k to Vanguard traditional IRA? It does not seem like the backdoor Roth will help us here, or am I wrong?

milesdividendmd

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about to convert 401k to Traditional IRA, anything I should consider?
« Reply #1 on: August 05, 2015, 09:54:31 PM »
If you want to keep the possibility of a backdoor Roth open then do not convert your wife's 401(k) to a traditional IRA. This will make you subject to the dreaded pro rata rule. (You should also keep all of your own retirement savings in the form of a 401(k) for the same reason.)

Backdoor Roths are wonderful if you are looking for additional tax advantaged space after maxing out your 401(k) and HSA.
« Last Edit: August 06, 2015, 04:26:42 AM by milesdividendmd »

MDM

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #2 on: August 05, 2015, 11:12:29 PM »
We are in the 25% bracket filing jointly. Anything we should consider before we convert the 401k to Vanguard traditional IRA? It does not seem like the backdoor Roth will help us here, or am I wrong?

See the table below:

                             Bottom of the 25% bracket            Top of the 25% bracket
Low 401k fees:     Sharpen pencil and look closer       Stay with the 401k because you may need the backdoor Roth

High 401k fees:     Move to the IRA ASAP                     Sharpen pencil and look closer

milesdividendmd

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #3 on: August 06, 2015, 08:44:04 AM »
Your long-term capital gains will be taxed at 15%.

forummm

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #4 on: August 06, 2015, 09:09:46 AM »
Your long-term capital gains will be taxed at 15%.

Or 0% depending on marginal tax bracket for AGI, under current law.

astvilla

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #5 on: August 06, 2015, 09:10:35 AM »
I'm told that sometimes funds in your 401K are really good and you don't want to always give them up.  Depending on your fund choices in the 401K, it might be better than the choices available to you in the tIRA

milesdividendmd

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #6 on: August 06, 2015, 09:16:51 AM »

Your long-term capital gains will be taxed at 15%.

Or 0% depending on marginal tax bracket for AGI, under current law.

He's in the 25% tax bracket.

mrtimo

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #7 on: August 07, 2015, 03:10:07 PM »
Thanks for the replies.

Since this is my wife's 401k, and she will not need to do a backdoor Roth conversion in the future it seems like we should move it to vanguard... we can move it without paying taxes, right?

If it was my 401k, I would think twice about it, because I may want to do the backdoor Roth in the future. Is my thinking correct?

sisto

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #8 on: August 07, 2015, 03:19:11 PM »
Something else to consider going forward with your wife being a SAHM. In that tax bracket since she no longer has a work 401K plan you should still be able to get at least a partial tax credit/deduction by doing a tIRA for her every year. If you have Turbo Tax play around with the numbers. It works well for me.

milesdividendmd

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #9 on: August 07, 2015, 04:03:43 PM »

Thanks for the replies.

Since this is my wife's 401k, and she will not need to do a backdoor Roth conversion in the future it seems like we should move it to vanguard... we can move it without paying taxes, right?

If it was my 401k, I would think twice about it, because I may want to do the backdoor Roth in the future. Is my thinking correct?

FYI, Her IRA will fall under the pro rata rule if you do the Backdoor Roth.

mrtimo

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #10 on: August 07, 2015, 06:28:33 PM »
FYI, Her IRA will fall under the pro rata rule if you do the Backdoor Roth.
So, essentially her IRA could prevent me from doing the backdoor roth? Right?

MDM

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #11 on: August 07, 2015, 07:23:43 PM »
FYI, Her IRA will fall under the pro rata rule if you do the Backdoor Roth.
So, essentially her IRA could prevent me from doing the backdoor roth? Right?

I don't think that's correct.  Those IRAs are Individual accounts, regardless of your tax filing status.  Unless miles can reference IRS rulings to the contrary, yours is yours and hers is hers as far as backdoor Roth pro-rata calculations go.

Bogleheads does not trump IRS rulings, but see https://www.bogleheads.org/forum/viewtopic.php?t=99286.

milesdividendmd

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #12 on: August 07, 2015, 07:33:27 PM »

FYI, Her IRA will fall under the pro rata rule if you do the Backdoor Roth.
So, essentially her IRA could prevent me from doing the backdoor roth? Right?

I don't think that's correct.  Those IRAs are Individual accounts, regardless of your tax filing status.  Unless miles can reference IRS rulings to the contrary, yours is yours and hers is hers as far as backdoor Roth pro-rata calculations go.

Bogleheads does not trump IRS rulings, but see https://www.bogleheads.org/forum/viewtopic.php?t=99286.

You are right. I was wrong.

Thanks for setting the record straight!

MDM

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #13 on: August 07, 2015, 07:49:36 PM »
Thanks for setting the record straight!

No problem.  Being not without error in these forums myself, I shan't be casting any stones. ;)

mrtimo

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #14 on: August 08, 2015, 09:53:52 AM »
Thanks Everyone!

2Saving4Life

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #15 on: August 08, 2015, 11:09:21 AM »
Check the fees on the funds in her 401k.  My wife worked for the state (Washington) for a brief time and the fees on index funds were lower than Vanguard because they had access to institutional shares.  Hers was a 457 or 403b, I don't think it was a 401k.  Something to look at before making a decision.

BrianT

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #16 on: August 11, 2015, 03:29:12 PM »
Hmm...I wish I looked this up more before rolling over approximately 140k into a Traditional IRA. Anyways...now that my money is in the IRA, what options are there to do something similar to a 401k Roth back door and what will it cost?

dandarc

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #17 on: August 11, 2015, 03:44:03 PM »
BrianT -

Your standard backdoor Roth IRA is putting money into your traditional IRA, then fairly immediately converting it to Roth.  The 140K you have in the traditional IRA is going to get in the way of this - you have 2 options:

1.  Roll the money into a 401K or similar, zeroing the tIRA out before you do the backdoor Roth IRA.
2.  Convert the 140K and pay taxes on it.  Unless you spread this out over a long time (thus rendering the backdoor Roth IRA somewhat useless), you'll likely pay a lot of tax if you go this route.


Now, if by "401K Roth back door" you mean the "Mega Backdoor Roth IRA", that is a totally different procedure.  The Mega-Backdoor Roth is wholly dependent on the terms of your 401K plan.  You make after-tax contributions to your 401K (these are NOT Roth 401K contributions - this is important).  Then roll those over to your Roth IRA as soon as possible.  Not all plans even allow after-tax contributions, and even if they do, if they do not allow in-service rollovers, the awesomeness of the mega backdoor Roth is curtailed some.  The IRS has provided guidance that these after-tax contributions can be segregated and rolled over separately, so you're not going to run into the pro-rata rule and get hammered with taxes, except to the extent there are earnings on the after-tax contributions.

BrianT

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #18 on: August 11, 2015, 03:59:08 PM »
BrianT -

Your standard backdoor Roth IRA is putting money into your traditional IRA, then fairly immediately converting it to Roth.  The 140K you have in the traditional IRA is going to get in the way of this - you have 2 options:

1.  Roll the money into a 401K or similar, zeroing the tIRA out before you do the backdoor Roth IRA.
2.  Convert the 140K and pay taxes on it.  Unless you spread this out over a long time (thus rendering the backdoor Roth IRA somewhat useless), you'll likely pay a lot of tax if you go this route.


Now, if by "401K Roth back door" you mean the "Mega Backdoor Roth IRA", that is a totally different procedure.  The Mega-Backdoor Roth is wholly dependent on the terms of your 401K plan.  You make after-tax contributions to your 401K (these are NOT Roth 401K contributions - this is important).  Then roll those over to your Roth IRA as soon as possible.  Not all plans even allow after-tax contributions, and even if they do, if they do not allow in-service rollovers, the awesomeness of the mega backdoor Roth is curtailed some.  The IRS has provided guidance that these after-tax contributions can be segregated and rolled over separately, so you're not going to run into the pro-rata rule and get hammered with taxes, except to the extent there are earnings on the after-tax contributions.

Just so I understand: it sounds like it isn't possible to slowly move partial amounts from my tIRA into the Roth IRA. Is that correct? I always thought I simply move my money from 401k to Rollover IRA (tIRA), and then whenever I'm ready, each year I move money from the tIRA to the Roth IRA in chunks equal to what I want to withdraw each year when the 5 year rule is done.

dandarc

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #19 on: August 11, 2015, 08:47:20 PM »
BrianT -

Your standard backdoor Roth IRA is putting money into your traditional IRA, then fairly immediately converting it to Roth.  The 140K you have in the traditional IRA is going to get in the way of this - you have 2 options:

1.  Roll the money into a 401K or similar, zeroing the tIRA out before you do the backdoor Roth IRA.
2.  Convert the 140K and pay taxes on it.  Unless you spread this out over a long time (thus rendering the backdoor Roth IRA somewhat useless), you'll likely pay a lot of tax if you go this route.


Now, if by "401K Roth back door" you mean the "Mega Backdoor Roth IRA", that is a totally different procedure.  The Mega-Backdoor Roth is wholly dependent on the terms of your 401K plan.  You make after-tax contributions to your 401K (these are NOT Roth 401K contributions - this is important).  Then roll those over to your Roth IRA as soon as possible.  Not all plans even allow after-tax contributions, and even if they do, if they do not allow in-service rollovers, the awesomeness of the mega backdoor Roth is curtailed some.  The IRS has provided guidance that these after-tax contributions can be segregated and rolled over separately, so you're not going to run into the pro-rata rule and get hammered with taxes, except to the extent there are earnings on the after-tax contributions.

Just so I understand: it sounds like it isn't possible to slowly move partial amounts from my tIRA into the Roth IRA. Is that correct? I always thought I simply move my money from 401k to Rollover IRA (tIRA), and then whenever I'm ready, each year I move money from the tIRA to the Roth IRA in chunks equal to what I want to withdraw each year when the 5 year rule is done.
That's the Roth Conversion pipeline.  That's essentially a withdrawal-phase strategy.  You do this once you've retired to get at your money before you turn 59.5 without paying penalty.

The backdoor and mega-backdoor Roth IRA's are accumulation-phase techniques.  You do these before you've retired to get more into tax advantaged accounts than you could otherwise.

Scandium

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Re: about to convert 401k to Traditional IRA, anything I should consider?
« Reply #20 on: August 12, 2015, 07:24:37 AM »

Just so I understand: it sounds like it isn't possible to slowly move partial amounts from my tIRA into the Roth IRA. Is that correct? I always thought I simply move my money from 401k to Rollover IRA (tIRA), and then whenever I'm ready, each year I move money from the tIRA to the Roth IRA in chunks equal to what I want to withdraw each year when the 5 year rule is done.

You can, but as pointed out above you'd do this after you're retired. You will pay income tax on the conversion amount, so if this comes on top of your regular income, taxes will eat up a large chunk of it, probably 25%+. With roth pipeline after RE the majority can be done at 0%.

Do you have a 401k at work? You can roll your IRA into your 401k and then be able to do a back door Roth.