Rollover 401(k) to ROTH?

[Chrissy]

The fiance is 40, and is changing jobs in 2 weeks.  He's talking about converting his $18,000 401(k) to a ROTH like it's a no-brainer.  About two years ago, he switched jobs and converted that 401(k) to a ROTH (small amount, as it's now worth ~$11,000).  We didn't know each other then, and he doesn't remember why he decided to do it.  So, what's the advantage?  It's not like this is his only opportunity to contribute to his ROTH this year; he's just under the cutoff, and our combined income will still be under once we're married.

Won't following through on this plan mean paying income tax?  Perhaps more than necessary?  I'm thinking a better idea is to roll it into a tIRA, which I'm under the impression would be sans income tax, then, backdoor ROTH it once he retires, paying very limited income tax. 

While frugal and financially educated, the fiance is bored to tears by finances, and would greatly prefer that I take over this responsibility for our family.  He takes immediate action on whatever advice I give him on this stuff.  So, am I on the right track?  What would you do? 

[rpr]

The fiance is 40, and is changing jobs in 2 weeks.  He's talking about converting his $18,000 401(k) to a ROTH like it's a no-brainer.  About two years ago, he switched jobs and converted that 401(k) to a ROTH (small amount, as it's now worth ~$11,000).  We didn't know each other then, and he doesn't remember why he decided to do it.  So, what's the advantage?  It's not like this is his only opportunity to contribute to his ROTH this year; he's just under the cutoff, and our combined income will still be under once we're married.

Won't following through on this plan mean paying income tax?  Perhaps more than necessary?  I'm thinking a better idea is to roll it into a tIRA, which I'm under the impression would be sans income tax, then, backdoor ROTH it once he retires, paying very limited income tax. 

While frugal and financially educated, the fiance is bored to tears by finances, and would greatly prefer that I take over this responsibility for our family.  He takes immediate action on whatever advice I give him on this stuff.  So, am I on the right track?  What would you do? 

I too would do as you suggest and rollover into a Traditional IRA. There is no sense in paying taxes now.

[MDM]

Assuming that it is a traditional 401k, not a Roth 401k, then your idea to roll it into a tIRA appears best.

Appears he would do well to trust you. :)

[Chrissy]

Assuming that it is a traditional 401k, not a Roth 401k, then your idea to roll it into a tIRA appears best.

Appears he would do well to trust you. :)

It IS a traditional 401k, and thanks for the vote of confidence!

[the_gastropod]

Just adding my vote. You've got it.

[Scandium]

Consider rolling it into his new 401k. If you do an IRA you'll have tax issues doing a back door roth, which it sounds like you'll have to do at some point.

[skyrefuge]

For reference, the general rule is that you want to contribute to a Roth rather than tax-deferred Traditional (or convert an existing tax-deferred Traditional to Roth) at a time when your marginal tax rate is lower than what you expect your average tax rate to be at the time you take distributions.

Since you're at an early-retirement forum, for most people, they expect their marginal tax rate while working to be higher than their average tax rate when they're retired. If your fiance fits in that category, that's why it makes sense to both contribute to a Traditional IRA/401(k), and to keep that accumulated money as a Traditional IRA/401(k). Defer those taxes until you'll be at a lower tax rate.

If he was taking a year off between jobs, then it might sense to convert from Traditional to Roth, because his marginal tax rate would be quite low for that tax year. But otherwise, keep those taxes deferred!

[Chrissy]

For reference, the general rule is that you want to contribute to a Roth rather than tax-deferred Traditional (or convert an existing tax-deferred Traditional to Roth) at a time when your marginal tax rate is lower than what you expect your average tax rate to be at the time you take distributions.

Since you're at an early-retirement forum, for most people, they expect their marginal tax rate while working to be higher than their average tax rate when they're retired. If your fiance fits in that category, that's why it makes sense to both contribute to a Traditional IRA/401(k), and to keep that accumulated money as a Traditional IRA/401(k). Defer those taxes until you'll be at a lower tax rate.

If he was taking a year off between jobs, then it might sense to convert from Traditional to Roth, because his marginal tax rate would be quite low for that tax year. But otherwise, keep those taxes deferred!

You know, when rolled over the first 401k to a ROTH, he DID take a year off in-between.  That must be why he chose the ROTH.  I knew there had to be a reason, thank you!

[Chrissy]

Consider rolling it into his new 401k. If you do an IRA you'll have tax issues doing a back door roth, which it sounds like you'll have to do at some point.

Tax issues if we roll it into a tIRA and then back door?  How so?  I mean, I know we have to pay the taxes on it one way or another, but can you explain why rolling it into his new 401k is a tax advantage?

[Scandium]

Consider rolling it into his new 401k. If you do an IRA you'll have tax issues doing a back door roth, which it sounds like you'll have to do at some point.

Tax issues if we roll it into a tIRA and then back door?  How so?  I mean, I know we have to pay the taxes on it one way or another, but can you explain why rolling it into his new 401k is a tax advantage?

This came up in my own thread on whether to roll into an IRA or 401k. We'll need to do backdoor roth so found it was best to avoid having anything in an IRA (non-roth).
https://www.bogleheads.org/wiki/Back_door_Roth_IRA#Caution

If you have any other (non-Roth) IRAs, the taxable portion of any conversion you make is prorated over all your IRAs; you cannot convert just the non-deductible amount.[3] In order to benefit from the backdoor, you must either convert your other IRAs as well (which may not be a good idea, as you are usually in a high tax bracket if you need to use the backdoor), or else transfer your deductible IRA contributions to an employer plan such as a 401(k) (which may cost you if the 401(k) has poor investment options).

As the calc there shows, if you for example did a $5.5K backdoor Roth you'd owe tax on ~$1,300 of it. If you have an IRA with $18k in it. If it's in a 401k you'd owe tax on zero.

[MrMoogle]

You only need to consider a backdoor Roth after your AGI is above $183k for a couple.  I think you used the wrong term, you meant Roth conversion once retired.

Yes you should consider the backdoor Roth effects if you will be over $183k before you retire, but if you're not, a tIRA is the way to go.

I think miscommunication has taken this thread in the wrong direction :)

[Scandium]

You only need to consider a backdoor Roth after your AGI is above $183k for a couple.  I think you used the wrong term, you meant Roth conversion once retired.

Yes you should consider the backdoor Roth effects if you will be over $183k before you retire, but if you're not, a tIRA is the way to go.

I think miscommunication has taken this thread in the wrong direction :)

Yes. But OP said her husband is "just under the cutoff", so hopefully they'll get raises and be over it soon. Therefore it seems prudent to  consider this point. Unless his new 401k is horrible, that seems a safer option.

[Chrissy]

You only need to consider a backdoor Roth after your AGI is above $183k for a couple.  I think you used the wrong term, you meant Roth conversion once retired.

Yes you should consider the backdoor Roth effects if you will be over $183k before you retire, but if you're not, a tIRA is the way to go.

I think miscommunication has taken this thread in the wrong direction :)

I DID mean ROTH conversion after he's retired, but Sandium is also right that the huzz and I hope/expect to be over $183k shortly.

[skyrefuge]

the huzz and I hope/expect to be over $183k shortly.

Note that that $183k number is indexed to inflation, so as your salaries increase, the Roth cutoff will also be attempting to run away from you. Hopefully your raises exceed the rate of inflation so you'd eventually catch up to the cutoff anyway, but it won't happen as fast as if you assumed the $183k number was static.

But yes, if it seems likely that you will cross the cutoff in a low number of years, then it's worth considering rolling into his new 401(k) (or keeping it in the existing 401(k)) rather than into a traditional tax-deferred IRA. Of course the new 401(k) would have to allow roll-ins, or the old 401(k) would have to allow it to remain in-place, and you'd preferably want those 401(k)s to have good investment options at low expense ratios. Otherwise the IRA still might be a better choice.

It's a decision that involves a lot of unknowns (I haven't even mentioned the president's proposal to eliminate backdoor Roth conversions!) so I wouldn't stress too much about it either way.

[Chrissy]

He's was at $93k last year, and is bumping up to $125k for 2015 with the new job.  We're getting married in the spring, and, as a couple, we'll gross $175k.  I'm hoping to max our 401k contributions, of course, but we're also trying to save for a house...

In the interview process for this new gig, the company indicated they're already considering him for an executive position, which would put his salary at $175k minimum, and that would put our gross as a couple at $225k.  (Unbelievable!)  At that point, we'd for sure max our 401ks, but, even so, wouldn't be able to contribute much of anything to ROTHs.

[MrMoogle]

At 225k, and 18k each into 401k, your AGI will be 225k - 18k -18k = 189k.  Also 183k is when it starts to go away, it's like 193k when it's gone.  If you have options to HSA's, you can get it down under 183k.  Also if either of you have the 401k option of a Mega Backdoor Roth, then it's not worth it to worry about the regular backdoor Roth, just use the Mega.

[Chrissy]

We'll see what the options are with the new 401k when he starts in a week.  After reading this thread, his preference is to do a roll-in, but the tIRA will be Plan B... and a perfectly good one, too.  Thank you, everyone, for your input.  It's been very helpful.

I do not have access to an HSA, but the fiance will, and has used this option at his current company, too.  We will also use my transportation benefit program to the tune of $2,000/yr tax free.  Every little bit helps!