Keep old 401k or roll into IRA?

[Travis]

My wife left her employer back in May when we moved and had a small 401k with them.  So far there doesn't seem to be a problem with the 401k just staying with them.  It's in an S&P500 index fund, but I can't remember the company name (I'll edit with the ticker later).  She also has a Roth IRA with VTSAX in it.  I was thinking of folding the 401k into her IRA.  Is there any reason why we shouldn't?

Edit: State Street Equity 500 index. ER .18%

[MDM]

My wife left her employer back in May when we moved and had a small 401k with them.  So far there doesn't seem to be a problem with the 401k just staying with them.  It's in an S&P500 index fund, but I can't remember the company name (I'll edit with the ticker later).  She also has a Roth IRA with VTSAX in it.  I was thinking of folding the 401k into her IRA.  Is there any reason why we shouldn't?

Not clear whether she means to fold the 401k into a traditional or Roth IRA.  If the latter, tax would be owed.  If the former, how likely is she to need the Backdoor Roth process?

[Travis]

We have only Roth IRAs at this point.  I'll open a Traditional eventually to do conversions from TSP to my Roth IRA.  If there's taxes to be owed doing the rollover (which appears to be essentially a Roth conversion) we'll hold off until after retirement. We don't meet the income caps to do the Backdoor Roth.

[35andFI]

We don't meet the income caps to do the Backdoor Roth.

I’m not sure what was meant by this part.
The income caps are for Roth contributions, not a backdoor Roth.
You can roll funds from a traditional IRA to a Roth IRA regardless of your income.

AFAIK, the main reason to keep funds in an old 401k is if you plan on doing a backdoor Roth since you don’t want existing funds in a traditional IRA.

If you don’t plan on doing a backdoor Roth conversion, I see no reason why it would be preferable to keep funds in an old 401k over rolling it into a traditional IRA.

[Travis]

We don't meet the income caps to do the Backdoor Roth.

I’m not sure what was meant by this part.
The income caps are for Roth contributions, not a backdoor Roth.
You can roll funds from a traditional IRA to a Roth IRA regardless of your income.

AFAIK, the main reason to keep funds in an old 401k is if you plan on doing a backdoor Roth since you don’t want existing funds in a traditional IRA.

If you don’t plan on doing a backdoor Roth conversion, I see no reason why it would be preferable to keep funds in an old 401k over rolling it into a traditional IRA.

I was confused. I've only ever seen the Backdoor Roth mentioned by people who are high earners.  So if I'm understanding the process correctly, I need to roll over her 401k to a Traditional IRA, convert that to her existing Roth IRA, fill out a form at tax time, and the conversion gets added to our earned income for the year?

[MDM]

So if I'm understanding the process correctly, I need to roll over her 401k to a Traditional IRA, convert that to her existing Roth IRA, fill out a form at tax time, and the conversion gets added to our earned income for the year?

Why do you think you need to do all that?

[Travis]

So if I'm understanding the process correctly, I need to roll over her 401k to a Traditional IRA, convert that to her existing Roth IRA, fill out a form at tax time, and the conversion gets added to our earned income for the year?

Why do you think you need to do all that?

Those aren't the steps listed in the sticky on top of this section? What did I miss?

[MDM]

So if I'm understanding the process correctly, I need to roll over her 401k to a Traditional IRA, convert that to her existing Roth IRA, fill out a form at tax time, and the conversion gets added to our earned income for the year?

Why do you think you need to do all that?

Those aren't the steps listed in the sticky on top of this section? What did I miss?

There may be no need to do all that, regardless of what you want to do, i.e., your overall goal(s).  Let's back up:
1. What strategy do you want to implement?
2. What tactics do you plan for implementing the strategy?

[Travis]

So if I'm understanding the process correctly, I need to roll over her 401k to a Traditional IRA, convert that to her existing Roth IRA, fill out a form at tax time, and the conversion gets added to our earned income for the year?

Why do you think you need to do all that?

Those aren't the steps listed in the sticky on top of this section? What did I miss?

There may be no need to do all that, regardless of what you want to do, i.e., your overall goal(s).  Let's back up:
1. What strategy do you want to implement?
2. What tactics do you plan for implementing the strategy?

I'm about four years from FIRE with the following strategy:
-TSP, two Roth IRAs, brokerage (worth $1.1MM today of a $1.5MM goal) and
-Military pension that by itself will cover 80-90% of our expenses.  I'll know next summer if they're going to let me stay in long enough to receive the pension.
-I earn a taxable income of roughly $90k.

My wife received a 401k from her last job which she left in May that currently has a balance of $17k invested in an S&P500 fund with an ER of .14%.  Her Roth IRA is invested in VTSAX.  If it's financially advantageous to do so, I would like to combine that 401k with her Roth IRA and to simplify our portfolio.

[MDM]

I'm about four years from FIRE with the following strategy:
-TSP, two Roth IRAs, brokerage (worth $1.1MM today of a $1.5MM goal) and
-Military pension that by itself will cover 80-90% of our expenses.  I'll know next summer if they're going to let me stay in long enough to receive the pension.
-I earn a taxable income of roughly $90k.

My wife received a 401k from her last job which she left in May that currently has a balance of $17k invested in an S&P500 fund with an ER of .14%.  Her Roth IRA is invested in VTSAX.  If it's financially advantageous to do so, I would like to combine that 401k with her Roth IRA and to simplify our portfolio.

Depending on the definition of "taxable income of...$90K" some amount of that $17K will be taxed at 22% if converted to Roth now, vs. a likely 12% later if she leaves it in the 401k or rolls it over to a traditional IRA now, and converts it to a Roth IRA (either directly from the 401k or after rolling to a tIRA) after you both retire.  I'm assuming any pension will be at least a few $K less than $90K.

The backdoor Roth process is irrelevant to your situation.

[Travis]

I'm about four years from FIRE with the following strategy:
-TSP, two Roth IRAs, brokerage (worth $1.1MM today of a $1.5MM goal) and
-Military pension that by itself will cover 80-90% of our expenses.  I'll know next summer if they're going to let me stay in long enough to receive the pension.
-I earn a taxable income of roughly $90k.

My wife received a 401k from her last job which she left in May that currently has a balance of $17k invested in an S&P500 fund with an ER of .14%.  Her Roth IRA is invested in VTSAX.  If it's financially advantageous to do so, I would like to combine that 401k with her Roth IRA and to simplify our portfolio.

Depending on the definition of "taxable income of...$90K" some amount of that $17K will be taxed at 22% if converted to Roth now, vs. a likely 12% later if she leaves it in the 401k or rolls it over to a traditional IRA now, and converts it to a Roth IRA (either directly from the 401k or after rolling to a tIRA) after you both retire.  I'm assuming any pension will be at least a few $K less than $90K.

The backdoor Roth process is irrelevant to your situation.

Thank you for the help on this. I should clarify the "taxable income" is before deductions and credits.  My "income" come tax time ends up being around $60k.  I don't know if this changes your advice.

If I get the pension it'll be worth $45k-$60k/year.  My goal is $60k in expenses.  I'm not really sure what my retirement taxes will look like since they'll depend on selling stock to meet expenses or gradually converting my TSP to avoid RMDs.  I'll definitely be sending you a case study in a couple years to sort that one out.

[35andFI]

To answer your initial question, you should roll the traditional 401k funds into a traditional IRA.

This puts it under your control, and will likely decrease expenses as well.

Whether or not you want to convert that to a Roth IRA in the future is a second question, I believe.

[MDM]

I'm about four years from FIRE with the following strategy:
-TSP, two Roth IRAs, brokerage (worth $1.1MM today of a $1.5MM goal) and
-Military pension that by itself will cover 80-90% of our expenses.  I'll know next summer if they're going to let me stay in long enough to receive the pension.
-I earn a taxable income of roughly $90k.

My wife received a 401k from her last job which she left in May that currently has a balance of $17k invested in an S&P500 fund with an ER of .14%.  Her Roth IRA is invested in VTSAX.  If it's financially advantageous to do so, I would like to combine that 401k with her Roth IRA and to simplify our portfolio.

Depending on the definition of "taxable income of...$90K" some amount of that $17K will be taxed at 22% if converted to Roth now, vs. a likely 12% later if she leaves it in the 401k or rolls it over to a traditional IRA now, and converts it to a Roth IRA (either directly from the 401k or after rolling to a tIRA) after you both retire.  I'm assuming any pension will be at least a few $K less than $90K.

The backdoor Roth process is irrelevant to your situation.

Thank you for the help on this. I should clarify the "taxable income" is before deductions and credits.  My "income" come tax time ends up being around $60k.  I don't know if this changes your advice.

If I get the pension it'll be worth $45k-$60k/year.  My goal is $60k in expenses.  I'm not really sure what my retirement taxes will look like since they'll depend on selling stock to meet expenses or gradually converting my TSP to avoid RMDs.  I'll definitely be sending you a case study in a couple years to sort that one out.

If you would pay 12% to convert whether now or later, and you have cash on hand to pay the $2040 due on a $17K conversion, converting now will be slightly better.  Why? Because whatever taxable interest, etc., the $2040 would have generated in your taxable accounts will now be tax free in the Roth account.

See when one uses taxable funds to pay the tax on a conversion (and the rest of that wiki article).

You could use the case study spreadsheet (downloading into Excel works best) or your commercial tax software of choice to do "what if...?" calculations for your current and expected future situations.  Who knows what future tax law will be, but it would give you some idea.