Author Topic: Rollover IRAs into 401k in order to do backdoor Roth?  (Read 6856 times)

ZiziPB

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Rollover IRAs into 401k in order to do backdoor Roth?
« on: May 22, 2014, 09:24:28 AM »
This is the reason why I am considering the sale of my Apple stock.

What would be the factors to consider whether to rollover my IRAs into my 401k? I currently have 2 IRAs with a total of about $280K in them - one at Fidelity and one at Schwab. My 401k is administered by Fidelity with a mix of investment options, but the one attractive option is that we get Vanguard Target Funds at 0.08 ER versus 0.18 retail. There are no on-going fees charged by the 401k other than the fund expense ratios, and they accept rollovers from IRAs. The investment choices in the 401k are:

Employer stock fund - ER 0.04
Proprietary Large Cap - ER 0.42
Proprietary Index Fund tracking S&P500 - ER 0.03
Proprietary SM/MED cap - ER 0.54
Proprietary Int Equity - ER 0.47
SSGA Real Asset C - ER 0.22
Vanguard Target Ret Funds (full set of dates) - ER 0.08
Hartford Total Return HLS Bond Fund HIABX - ER 0.50
Proprietary High Yield Bond - ER 0.02
Proprietary Stable Value Fund - ER 0.31
Vanguard Money Market VMRXX - ER 0.1

My IRAs contain $204K of Vanguard Target Fund at retail ER, $75K of Apple stock (purchased in 2000) and $1.5K cash. As to my asset allocation, I utilize a combo of the Vanguard Target Funds, the Stable Value Fund in my 401K, a small Total Bond Index Fund in my HSA and my small lump sum pension to fill my bond bucket, and the Vanguard Target Funds and a Fidelity Int Index Funds in my taxable account to fill the international bucket in my AA. I like the idea of simplifying and consolidating my portfolio. Other than the Schwab IRA, all my other portfolio accounts are at Fidelity. I would like to utilize backdoor Roth (make to much for reg Roth or deductible traditional IRA). I am planning to retire in about 4 years with a total portfolio of about $1.2M.  The Roth contributions would amount to about $27.5K, so it's just a drop in the bucket.

Would you consider the rollover in my situation? Anything else to consider that I am not thinking of?


Grande

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #1 on: May 22, 2014, 12:43:59 PM »
Not exactly trying to talk you out of it but looking at metrics of valuation Apple is not considered expensive. And that's the opinion of many. Apple makes money hand over fist.  Its cash flow is enormous and that's important. And oh yeah, it is the most desired brand in the world. Furthermore it's now throwing off dividends and signals are they will be raising dividends meaningfully and steadily in the future. I would figure out what that stock is yielding you and really think about that a a stream of income if you retire in 4 years. If you own $75K in Apple you have about 125 shares at today's price. That will give you $1600/year in income and $1600 may rise 8-10%/year for years to come. Holding a few solid dividend paying stocks can help you build nice streams of income for retirement.

 I know Vanguard gets a lot of fanfare around here for low cost but holding stock is even cheaper than that. Also consider that the sale of stock will be a taxable event and since you have a lot of it you'll walk away with a lot less than $75K. If you do sell consider selling off small chunks slowly to manage taxes and protect yourself against regret if the share price climbs in the future. I know that with Apple first hand. I bought at 90 and sold at 360 because I thought the share price was high. It then marched to 700.

Good luck.

beltim

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #2 on: May 22, 2014, 12:56:46 PM »
So the plan is to roll $280k from 2 different IRAs into your 401k for about 4 years, to save a max of 0.18-0.08 = 0.10% for each of the next four years?  Then in four years, you'll start transferring money from that 401k to a traditional IRA, then to a Roth IRA?

I suspect you could get the same savings from simply moving your target date Vanguard funds into other Vanguard funds without transferring your IRA accounts into your 401k.

Without those savings, I'm wondering if it's worth the effort simply to put 27.5k into Roth IRAs over the next 4 years.

msilenus

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #3 on: May 22, 2014, 01:34:00 PM »
I'd do it.  Your fund options seem fine.  Your cost basis in Apple doesn't matter because it's in an IRA, so there's no intrinsic buy-and-hold advantage beyond commissions.  The only potential concern I see is that unless your 401k has a brokerage option, you couldn't replicate your extremely-overweight-in-AAPL asset allocation after doing it.  I would view that as solving a problem rather than creating one, though.

So it looks to me like you'd be trading away basically nothing for the ability to make backdoor Roth contributions.  If those contributions are attractive to you (and they should be, unless you can't afford to make them) then it seems like a win.

Grande

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #4 on: May 22, 2014, 01:45:29 PM »
Like msilenus said figuring cost basis and tax consequences doesn't matter when selling your Apple stock as it's in an IRA. So disregard what I wrote. I overlooked the fact it was in an IRA

Undecided

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #5 on: May 22, 2014, 01:46:57 PM »
So the plan is to roll $280k from 2 different IRAs into your 401k for about 4 years, to save a max of 0.18-0.08 = 0.10% for each of the next four years?  Then in four years, you'll start transferring money from that 401k to a traditional IRA, then to a Roth IRA?

I suspect you could get the same savings from simply moving your target date Vanguard funds into other Vanguard funds without transferring your IRA accounts into your 401k.

Without those savings, I'm wondering if it's worth the effort simply to put 27.5k into Roth IRAs over the next 4 years.

Perhaps I misunderstood, but I thought the point was to get the traditional IRA balance to $0 because it's presumably pre-tax contributions, such that he would face relatively large tax consequences arising from the proration rules when he converts new post-tax traditional IRA contributions to Roth IRA in each of the next few years. Absent rolling the existing IRAs into the 401(k), nearly the entire amount of each conversion over the next four years would be taxable. 

beltim

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #6 on: May 22, 2014, 02:13:21 PM »
So the plan is to roll $280k from 2 different IRAs into your 401k for about 4 years, to save a max of 0.18-0.08 = 0.10% for each of the next four years?  Then in four years, you'll start transferring money from that 401k to a traditional IRA, then to a Roth IRA?

I suspect you could get the same savings from simply moving your target date Vanguard funds into other Vanguard funds without transferring your IRA accounts into your 401k.

Without those savings, I'm wondering if it's worth the effort simply to put 27.5k into Roth IRAs over the next 4 years.

Perhaps I misunderstood, but I thought the point was to get the traditional IRA balance to $0 because it's presumably pre-tax contributions, such that he would face relatively large tax consequences arising from the proration rules when he converts new post-tax traditional IRA contributions to Roth IRA in each of the next few years. Absent rolling the existing IRAs into the 401(k), nearly the entire amount of each conversion over the next four years would be taxable.

That's how I understood the point as well.  My point was that the savings may not be substantial, and are definitely lower.  The maximum possible yearly savings as a percentage of the OP's portfolio due to investing in a Roth is about 0.014% (.023 * .15 *.04 = 0.00014, and this assumes all gains are short-term and that the cost basis is 0).  We already know the OP isn't willing to save more than 0.1% annually by using lower cost Vanguard funds instead of the Target Date funds.

Plus, under the circumstances described, it's likely that any taxable account would have untaxed long-term capital gains and untaxed qualified dividends, so there's no difference between a taxable and Roth IRA account except for short-term capital gains.

Undecided

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #7 on: May 22, 2014, 03:06:13 PM »
So the plan is to roll $280k from 2 different IRAs into your 401k for about 4 years, to save a max of 0.18-0.08 = 0.10% for each of the next four years?  Then in four years, you'll start transferring money from that 401k to a traditional IRA, then to a Roth IRA?

I suspect you could get the same savings from simply moving your target date Vanguard funds into other Vanguard funds without transferring your IRA accounts into your 401k.

Without those savings, I'm wondering if it's worth the effort simply to put 27.5k into Roth IRAs over the next 4 years.

Perhaps I misunderstood, but I thought the point was to get the traditional IRA balance to $0 because it's presumably pre-tax contributions, such that he would face relatively large tax consequences arising from the proration rules when he converts new post-tax traditional IRA contributions to Roth IRA in each of the next few years. Absent rolling the existing IRAs into the 401(k), nearly the entire amount of each conversion over the next four years would be taxable.

That's how I understood the point as well.  My point was that the savings may not be substantial, and are definitely lower.  The maximum possible yearly savings as a percentage of the OP's portfolio due to investing in a Roth is about 0.014% (.023 * .15 *.04 = 0.00014, and this assumes all gains are short-term and that the cost basis is 0).  We already know the OP isn't willing to save more than 0.1% annually by using lower cost Vanguard funds instead of the Target Date funds.

Plus, under the circumstances described, it's likely that any taxable account would have untaxed long-term capital gains and untaxed qualified dividends, so there's no difference between a taxable and Roth IRA account except for short-term capital gains.

Sorry, I see what you mean. Maybe he's got kids who will inherit when they're in a high tax bracket and he wants to leave them the Roth. :-)

msilenus

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #8 on: May 22, 2014, 03:49:22 PM »
If you think you might want to withdraw enough to be subject to income tax in retirement --ever-- a healthy Roth is a phenomenal asset to have.  Whatever draws you divert to the Roth would otherwise have been hit at your marginal rate.

ZiziPB

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #9 on: May 23, 2014, 05:08:25 AM »
Thank you all for the interesting points made.  The reason I want to do this is to be able to make Roth contributions of a portion of taxable savings, not save the fees on the Vanguard funds.  The large traditional IRAs would make the conversion virtually impossible due to the proportionality rule.  I also expect to pay taxes in retirement (single person with no dependents), so it would be nice to shelter some of my investments from that burden.  I currently save $80K+ a year on after tax basis (after maxing out any tax deferred vehicles available to me), so it would be great to redirect a portion of that to a Roth account.

Quote
The maximum possible yearly savings as a percentage of the OP's portfolio due to investing in a Roth is about 0.014% (.023 * .15 *.04 = 0.00014, and this assumes all gains are short-term and that the cost basis is 0)

I'm not sure that I understand your calculation here.  Is this the savings I would realize from lower fees or no taxes on Roth?

beltim

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #10 on: May 23, 2014, 09:38:24 AM »
Quote
The maximum possible yearly savings as a percentage of the OP's portfolio due to investing in a Roth is about 0.014% (.023 * .15 *.04 = 0.00014, and this assumes all gains are short-term and that the cost basis is 0)

I'm not sure that I understand your calculation here.  Is this the savings I would realize from lower fees or no taxes on Roth?

No taxes on the Roth.  The .023 is the fraction of your portfolio represented by your Roth, the .15 is the tax rate, and the .04 is your safe withdrawal rate.  Again, this assumes your cost basis is 0 to make the calculation easier, and shows the max possible you could pay in a taxable account.

ZiziPB

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #11 on: May 23, 2014, 09:49:42 AM »
Thank you, this certainly puts things into perspective.  I realized that the Roth component of my portfolio obtained through backdoor Roth would be very small, but this really shows that it is just a drop in a bucket.  I might as well continue investing that money through my taxable account.

And BTW, I know that I can lower the expense ratio in my IRA by switching to lower ER funds, I just haven't gotten around to doing that yet ;-)

beltim

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #12 on: May 23, 2014, 09:53:59 AM »
Thank you, this certainly puts things into perspective.  I realized that the Roth component of my portfolio obtained through backdoor Roth would be very small, but this really shows that it is just a drop in a bucket.  I might as well continue investing that money through my taxable account.

And BTW, I know that I can lower the expense ratio in my IRA by switching to lower ER funds, I just haven't gotten around to doing that yet ;-)

And that's my real point.  You'll see a much bigger difference by switching the funds in your IRA than by doing all of these other maneuvers. 

msilenus

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #13 on: May 23, 2014, 11:29:24 AM »
I wasn't following beltim's numbers before, but now I am.  I'd still do it as a sort of hedge against changes in the tax code.

The plan would be to build up the Roth, and then draw out of other sources, letting it grow.  To whatever extent I earned money in retirement, I'd use those earnings to get more into the Roth while continuing to live off the ~50k budget, which I don't think will trigger much (any?) income tax liability anyway.

The longer it goes without being touched, and with the SWR drag applying to the rest of my assets, and with more money trickling in, the larger share of NW it becomes, and the greater hedge against tax policy change it becomes.  Figure 5% returns and about a thousand in contributions every year, and you get to about a $100k balance after 20 years.  If that's the year in which there's a successful populist movement for reform to address freeloaders not paying any income tax (some folks tried to make the 47% into a populist issue fairly recently) then it could make a material impact on how your life plays out.  The later any such reform happens, the bigger the impact.

I look at OP's notion, see that hedge falling out of it, and don't see any cost for it.  So I say go for it.

ZiziPB

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #14 on: May 23, 2014, 01:22:12 PM »
Quote
I'd still do it as a sort of hedge against changes in the tax code.

But don't you think that the tax code could also be changed to require tax on future Roth distributions?  There is absolutely nothing preventing that from happening.

msilenus

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #15 on: May 23, 2014, 02:27:22 PM »
I disagree.  No one has a crystal ball, but some things are more politically realistic than others.  I don't think Roths will remain unchanged for 30 years.  RMDs, account balance caps, and even sunsetting the program by forbidding new money entering the accounts are politically realistic ways the program could be reformed over the years.  You can see an appetite for some of that in some circles, even today.

Just confiscating the money, or ending the tax advantages retroactively for past contributions, are simply not going to be politically realistic.  Senators and Representatives would look at such a proposal and seriously worry about being re-elected, even if the program desperately needed some changes.  If presented with such an option, even if they thought it met the needs of the day, their minds would immediately turn to grandfathering to cover their asses.  Furthermore, there is no appetite for any of this in any serious policy circle today.  There is no sign of it on any horizon.

In contrast: there is plenty of political will for making more people pay income taxes, even today.  Any time you hear the talk like "broadening the base," or "flat tax," or "47%," et cetera, someone is longing to do something that a Roth account would hedge against: reducing or eliminating the share of the population that pays no income tax.  Ie: the number of yous out there.  Many a GOP hopeful has run on these principles.  Consider Herman Cain, and his 9-9-9 schtick, which had him out at the front of the GOP primary for something like a month before the spotlight moved on.  Moreover, Democrats love to compromise.  If a GOP Presidential hopeful runs by turning people like us into the Welfare Queens of the political moment, and wins, the conversation will stop being about whether or not "base broadening" will happen and start being about what the price is.

It's not guaranteed to happen, but it's likely enough to try to get some protection against, especially if the cost is low.
« Last Edit: May 23, 2014, 02:29:02 PM by msilenus »

Mustache Police

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #16 on: May 23, 2014, 06:38:00 PM »
Just keep in mind that the big advantage of a Roth is not simply the amount of gains saved yearly.

The big savings comes when you pull the money out and pay no income tax on it.  If you hold aggressive assets in Your Roth  portfolio, you should expect to double your principal each 10 years.

And the beauty of the back door off is that you're  paying exactly nothing to get this benefit. You're already putting after-tax money into your IRA, The backdoor maneuver simply ensures that you will never pay taxes on it again. There is no downside other than the hassle of doing the rollover into the Roth from the traditional IRA (which is quite easy. )

Finally there are no required minimum distributions on Roths so this is money that Can compound and grow upon itself indefinitely. Even after your death there are huge advantages to your heirs  in terms of Roth versus traditional IRA.

So in summary you get huge tax benefits, with literally no downside. Even if the laws change the worst case scenario is that your roth money becomes like a regular IRA again. And given the size of this program such a change would seem very politically unlikely.

And in terms of the comparison to taxable accounts, not paying 15 to 20% on your gains will have a significant impact on the power of your money coming out of the account in the future.
MP

Quote
The maximum possible yearly savings as a percentage of the OP's portfolio due to investing in a Roth is about 0.014% (.023 * .15 *.04 = 0.00014, and this assumes all gains are short-term and that the cost basis is 0)

I'm not sure that I understand your calculation here.  Is this the savings I would realize from lower fees or no taxes on Roth?

No taxes on the Roth.  The .023 is the fraction of your portfolio represented by your Roth, the .15 is the tax rate, and the .04 is your safe withdrawal rate.  Again, this assumes your cost basis is 0 to make the calculation easier, and shows the max possible you could pay in a taxable account.
« Last Edit: May 23, 2014, 06:45:55 PM by Mustache Police »

butchmonkey

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #17 on: May 23, 2014, 11:04:16 PM »
I'm not sure that including the percentage of the total portfolio that the Roth would represent in your calculation is helpful.

I do understand that the point being made here is that even big changes in small slices of your portfolio will not have an outsized effect.

But the real question is what to do with the $5500/year that will go into the stock market?

If you can easily put it in a place where it will acrew no taxes on dividends and interest, and will be able to be taken out tax-free, with no minimum distributions why wouldn't you do this?


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beltim

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #18 on: May 23, 2014, 11:56:09 PM »
Just keep in mind that the big advantage of a Roth is not simply the amount of gains saved yearly.

The big savings comes when you pull the money out and pay no income tax on it.  If you hold aggressive assets in Your Roth  portfolio, you should expect to double your principal each 10 years.

My calculation wasn't talking about taxable gains reducing reinvestments, it was just a way to show the max difference. 

beltim

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #19 on: May 23, 2014, 11:57:03 PM »
I'm not sure that including the percentage of the total portfolio that the Roth would represent in your calculation is helpful.

I do understand that the point being made here is that even big changes in small slices of your portfolio will not have an outsized effect.

But the real question is what to do with the $5500/year that will go into the stock market?

If you can easily put it in a place where it will acrew no taxes on dividends and interest, and will be able to be taken out tax-free, with no minimum distributions why wouldn't you do this?


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The point is the OP isn't doing something that would save more than 6 times as much money.  That's what they should focus on first.

butchmonkey

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Re: Rollover IRAs into 401k in order to do backdoor Roth?
« Reply #20 on: May 24, 2014, 11:10:57 AM »

I'm not sure that including the percentage of the total portfolio that the Roth would represent in your calculation is helpful.

I do understand that the point being made here is that even big changes in small slices of your portfolio will not have an outsized effect.

But the real question is what to do with the $5500/year that will go into the stock market?

If you can easily put it in a place where it will acrew no taxes on dividends and interest, and will be able to be taken out tax-free, with no minimum distributions why wouldn't you do this?


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The point is the OP isn't doing something that would save more than 6 times as much money.  That's what they should focus on first.

Not sure where the 6x figure comes from, but why not do every simple thing possible to maximize returns relative to risk?

You can invest in low cost funds and invest in a backdoor roth simultaneously.


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