Small ROTH - let it sit forever?

[August26th]

I just finally contributed the max ROTH contribution of 6k in 2019 for both me and my spouse. We have one account each, and this is the first ever ROTH that we’ve done (dumb but true.)

And now.... I’ve got a really awesome job transfer/raise and I will be very much beyond the limit of being able to contribute for the foreseeable future, and most likely for the rest of my career. This is a great problem to have but I can’t wrap my head around a few things...

1. I already have another IRA sitting there from previous 401k rollovers, so I cannot do a conversion. Correct?
2. If my MAGI will never be low enough again to contribute to a ROTH, does that 6K account just sit there and grow indefinitely? And I just do nothing?

For some reason ROTHs, conversions, ladders, etc. are something my mind just cannot quite grasp. I assume at this point if I’m maxing out my 401K, have no debt other than mortgage, and can’t do a HSA, that I just put all extra funds in a taxable account?

Thanks in advance.

[ixtap]

Does your current 401k allow incoming rollovers?

Does your current 401k allow for after tax contributions?

[dandarc]

Can you roll your traditional IRA into the 401K at the new work? Does your spouse have any tIRA money sitting out there?

If you can roll any tIRA money into the 401K for yourself, then you can do a backdoor Roth IRA. Just have to get that money out of "IRA" and into a qualified plan first.

IRA's are individual - you could find yourself in a situation where you can contribute and spouse cannot or vice-versa.

Given the higher income, you probably want to favor traditional retirement accounts now - would maxing out your traditional 401K at the new job get you under the Roth IRA income limit? Does your health insurance allow for HSA? If not, are you using FSA's to the extent that makes sense for your family?

If you're willing, provide the specific and the board will likely come up with a lot of ideas for you.

[Telecaster]

I don't see any reason to convert the Roth. 

[ChpBstrd]

Yes, you should let the Roths sit forever. They are easy to leave alone, and require no annual tax work. When you someday need them for conversions/ladders, they will be ready to go.

You should roll your old 401(k) into a new rollover IRA at your online brokerage. This way you get access to better investments for those funds, such as VTSAX or VTI. Your new job will force you to use their 401k provider and its selection of shitty funds. I do not recommend rolling the old 401(k) into the new one for this reason. Also, a rollover traditional IRA at an online brokerage firm is low maintenance, requiring no annual tax work.

Congrats on the raise! Now max out your 401(k)s and plow the rest into taxable accounts.

[August26th]

I am not changing companies so it’s the same 401K with Fidelity that I’ve had for the past 6 years. My t-IRA was consolidated into Vanguard and is a variation of the 3-fund portfolio. So, there is no “old” 401K at play here.

The Roths just have the 6k from 2019 plus gains. I can let those sit indefinitely... just seems so small and paltry.

I also have a taxable account at Vanguard that I can funnel all extra stuff into. Just sorting out what is best.

I investigated HSA but can’t figure out if/how it’s beneficial for my family. We are healthy with minimal to zero healthcare expenses for now.

SO: Can I roll my t-IRA at Vanguard into my current employer’s Fidelity 401K (if policy allows) and THEN back door Roth? Is that even advisable?

Many thanks.

[dandarc]

Healthy with minimal to zero health care expenses is typically the best time to get a high-deductible plan and fund an HSA. If you knew with a high degree of certainty that you'd be paying that high deductible every year, that might give you pause (still do the math - might find you come out ahead with the tax savings anyway), but a high deductible plan usually means a lower premium. Then some employers will straight-up give you money for the HSA. Then if you fund the HSA through payroll you save both income tax and FICA.

You need to review your plan documents or ask HR about the possibility of rolling the tIRA money into the 401K - some plans allow it, others don't. So ask.

[ChpBstrd]

SO: Can I roll my t-IRA at Vanguard into my current employer’s Fidelity 401K (if policy allows) and THEN back door Roth? Is that even advisable?

401k plans are happy to “consolidate” your other accounts if that means migrating your money to them. So yes for the first part of the question. However I do not advise this because you will then be trapped in a plan with high cost funds and other restrictions.

Additionally and most importantly, most 401k administrators do not allow in-service distributions. In a nutshell this means they won’t let you transfer any money out of your account until your employment terminates. So money can go in but not out. So probably a Roth conversion would be impossible unless you can get the funds into your own IRA that is not associated with your employer.

[dandarc]

SO: Can I roll my t-IRA at Vanguard into my current employer’s Fidelity 401K (if policy allows) and THEN back door Roth? Is that even advisable?

401k plans are happy to “consolidate” your other accounts if that means migrating your money to them. So yes for the first part of the question. However I do not advise this because you will then be trapped in a plan with high cost funds and other restrictions.

Additionally and most importantly, most 401k administrators do not allow in-service distributions. In a nutshell this means they won’t let you transfer any money out of your account until your employment terminates. So money can go in but not out. So probably a Roth conversion would be impossible unless you can get the funds into your own IRA that is not associated with your employer.

Plans vary. Not actually an employee, but recently was on the email list for the new 401K there. Not a great plan, but (for a $50 fee each time . . . like I said, not a great 401K), allows 2 in-service withdrawals for rollovers ever year. So read the documents.

Actually just reviewed the document and saw something that is possibly relevant to me. Apparently if the IRS reclassifies me to an employee with this client, I can't participate in the 401K. Not that I'm going to complain and try to make that happen - actually better to be 1099 than W-2 even at the same pay rate and with benefits for me right now, but something to be aware of. Thanks for encouraging me to check!

[PhysicianOnFIRE]

I just finally contributed the max ROTH contribution of 6k in 2019 for both me and my spouse. We have one account each, and this is the first ever ROTH that we’ve done (dumb but true.)

And now.... I’ve got a really awesome job transfer/raise and I will be very much beyond the limit of being able to contribute for the foreseeable future, and most likely for the rest of my career. This is a great problem to have but I can’t wrap my head around a few things...

1. I already have another IRA sitting there from previous 401k rollovers, so I cannot do a conversion. Correct?
2. If my MAGI will never be low enough again to contribute to a ROTH, does that 6K account just sit there and grow indefinitely? And I just do nothing?

For some reason ROTHs, conversions, ladders, etc. are something my mind just cannot quite grasp. I assume at this point if I’m maxing out my 401K, have no debt other than mortgage, and can’t do a HSA, that I just put all extra funds in a taxable account?

Thanks in advance.

No one makes too much to make annual Roth contributions. It just becomes a two-step process when you're in or above the IRS income phase-out range.
See
Step by step instructions for the Backdoor Roth.

[August26th]

OP here, and revisiting this after many months. I have changed the title for relevancy.

Same issue - high income and will likely not qualify for the regular Roth route again. I am trying to get smart and advance my FIRE goals but still have a brain block concerning some of this.

@PhysicianOnFIRE - thanks for the great post and it was helpful. I still have questions!

I have fully funded my 401k and do not have a HSA at this time. I have no other debt outside of my mortgage.

-I learned that I AM allowed to roll my existing rollover IRA with Vanguard into my company 401k plan with Fidelity. That 401k is currently in FXAIX with a .015% expense ratio. I could/should maybe change some things up with the allocation, but that is not the main concern for now. Feel free to advise me, though!
-If I DO roll over my IRA with Vanguard into my Fidelity 401k, then presumably this frees me up to do a ROTH conversion, because I will no longer have an IRA. Correct or no?
-Since I already have a ROTH IRA from 2019 contributions, I would contribute 6K to a “brand new” t-IRA with Vanguard, and then immediately convert it to my existing ROTH. Correct or no?
-Is this a good idea? I am probably 8-10 years from being able to retire. I am 47 now but have younger kids who are in 5th and 6th grade. College will be funded for them.  I can do a full case study but I don’t really know if that’s relevant to my specific ROTH questions at this time. I am mostly just STILLLLLLL trying to wrap my head around the ROTH piece, as I do want to have some tax free income later on in life.

Thanks!

[phildonnia]

1. I already have another IRA sitting there from previous 401k rollovers, so I cannot do a conversion. Correct?

If you already have a deductible IRA, then you can't do a fully tax-free conversion.  You still can contribute to a non-deductible IRA, and you can still do conversions to a Roth.  You just can't do a true "back-door" Roth without paying taxes on the existing IRA.

One thing you might look into is whether you can "roll-in" your existing IRA to the 401(k) plan.  Once it's in a 401(k), it will be out of the way, and you'll be able to make back-door contributions again.

2. If my MAGI will never be low enough again to contribute to a ROTH, does that 6K account just sit there and grow indefinitely? And I just do nothing?

I assume that your problem is that you just don't like bits of small change lying around and sending you monthly statements?  You do need to leave it there for five years before doing anything, or you'll get a penalty.  After that, you'll be penalized and taxed for any earnings you take out.  So probably, yeah, just let it sit.

For some reason ROTHs, conversions, ladders, etc. are something my mind just cannot quite grasp.

I don't know if it will help, but I found this dang Wikipedia article more enlightening than any IRS publication or Motley Fool article:

https://en.wikipedia.org/wiki/Comparison_of_401(k)_and_IRA_accounts

I assume at this point if I’m maxing out my 401K, have no debt other than mortgage, and can’t do a HSA, that I just put all extra funds in a taxable account?

As you say, good problems to have.  Yes, that's pretty much it.  A financial advisor should be able to help you set up something that gives you some control over when you pay taxes.

[terran]

Yes, if you roll the rollover IRA over to your 401(k) then you can do a backdoor Roth conversion (contribute to non-deductible traditional IRA and rollover to Roth IRA) tax free, other than tax on whatever small gains you might have in the traditional IRA before rolling over to Roth. Here's a good tutorial on the backdoor Roth including how to fill out the necessary tax forms: https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

To be clear, nothing is/was ever stopping you from doing a Roth conversion, getting your rollover IRA (which was previously deducted) into your 401(k) just means that any future rollovers/conversions from an IRA you didn't take a deduction on to Roth IRA are tax-free other than any gains between contribution and conversion.