Author Topic: Question about moving rollover IRAs into 401k/TSP in order to backdoor Roth  (Read 1911 times)

PathtoFIRE

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In order to do backdoor Roths for DW and I, I need to get rid of the rollover IRAs that we each have. Ok, my question is simple, are there any downsides that I haven't considered?

Here is some additional information on our situation. We are well beyond the income limits for Roth IRAs and tIRAs. We both currently max out our employer tax-deferred accounts (401K for me, TSP for her). This year, we are on track to put about $80k additional into taxable accounts, so I thought why not get at least part of that in the form of Roth IRAs each year. The megabackdoor Roth using my 401k is not possible as in-service withdrawals are very limited and based on my plan documents, I do not believe I can make after-tax contributions anyway (I need to confirm this with Fidelity which holds my 401k). My plan does allow contributions from a rollover IRA, and I believe the TSP does too, but I've focused my research to date on my 401k, so correct me if I'm wrong. Her rolloverIRA has about $60k, all tax-deferred, and mine has about $48k, also all tax-deferred. Right now, both are with Fidelity, so I have relatively good indexing options. The TSP is obviously a great place for indexing, although I am not as comfortable understanding the limitations of withdrawing from that as compared to 401ks/rolloverIRAs (SEPP, Roth pipeline, etc.). My 401k does not have amazing options, but it does have a few good and varied options (FXAIX, VEXAX, VTSNX, DFSVX). We do not have a HDHP or HSA, and that's off the table for now, but will run the number again during open enrollment for next year. We are also using 529s for college savings separate from all of this. So in summary, DW and I have 2 rolloverIRAs, 1 401k, 1 TSP, and then taxable accounts, plus 529s for each kid. One more thing to note, next year I plan on taking advantage of a deferred compensation plan that will allow me to "save" $20k pre-tax, with a 25% employer contribution that vests over 4 years. The investment choices in this are awful, I have a little money in it already from dabbling before, and basically all the choices are Pacific Life annuity type things, of which I have it all in the PSF Equity Index with an ER of 0.28%. So this will also allow me to divert some of that taxable savings next year, although into an imperfect account. Finally, my timeline is to reach ER within the next 6 years.

The only advantage that I can see to going to this trouble is converting about $11k of our planned taxable investments into Roths, which will give us some increased tax diversity for the decumulation phase as well as a little extra tax-advantaged space. I think this is a great advantage, I only wish I could do more.

The 2 disadvantages I see are that (1) I will loose a little flexibility in what I can invest the rolloverIRA money in, since I will go from the great and varied choices at either Fidelity (where they are now) or Vanguard to the many fewer choices in the TSP and my 401k, and (2) the TSP is still a bit of a mystery, and while we will have many other accounts available to do Roth pipelines, significant taxable accounts, etc, I still feel like we are losing a bit of control with how we can use the money in early retirement. I don't feel that these outweigh the advantage, what do you all think? And have I missed anything to also consider?

Thanks for your help

Cherry Lane

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After reading your post, I think you are not clear on what a backdoor Roth entails.  So let me clarify a few things.

1.  Once you've made your 401k/TSP contributions up to the annual limits ($17,500 each), you cannot contribute any more.  You can't put rollover IRA money into a TSP. 

2a.  I understand you exceed the income limits for a Roth IRA contribution.  That's why you need to take the "back door" approach.  You also exceed the income limits for a deductible traditional IRA (T-IRA).  But here's the thing:  there are no income limits on after-tax contributions to a T-IRA.  You are eligible to contribute the annual max ($5500 x 2) to a T-IRA, you just can't take a tax-deduction for doing so.

2b.  There also are no limits on how much of a T-IRA you can convert into a Roth IRA each year.  So here's what you do:  make your contribution to a T-IRA.  Then, convert it to a Roth (whatever mutual fund/brokerage you are using can tell you how to do this).  When you convert from T-IRA to Roth IRA, you owe taxes on any contributions and gains that have not already been taxed.  But since you put after-tax money into the T-IRA, you don't owe anything on conversion (except on whatever gains you have between contribution and conversion).  Done!  Now you have $11000 (or whatever amount up to that you choose) in a Roth IRA, through the "back door".  You can invest this however you see fit.

There's no need to mess with any of your other investment vehicles to accomplish this.