401k-IRA-ROTH Roll Over questions

[shanendoah]

Right now, between C and I, we have retirement savings with 4 different companies: Principal, ADP Retirement, Vanguard, & Fidelity. I would really like to get us down to just Vanguard & Fidelity. (Vanguard is my choice. Fidelity is where my 403(b) for my current job is.)

Q1. Does it make sense to move money from a traditional IRA into a ROTH IRA if I am not planning on taking a distribution?
I ask this because I see people talk about this as a way of doing a backdoor ROTH, if you're over the income limit. But since I would have to pay taxes on the money moving from the traditional IRA to the ROTH, I really don't know if this makes sense or not.

Q1a. If the answer to Q1 is yes, then can I move $5,250 from a traditional IRA to a ROTH, even if the contribution limit is $5k?
I am assuming that the taxes on this would be greater than $250, so I wouldn't hit my contribution limit.

Q2. If C has $20k in an old 401(k), should it all be rolled over into a traditional IRA? Or since we're looking at opening a ROTH for him for this year, would it make sense to try and roll $5k of it into a ROTH for 2019?

[Tiny]

I don't have answers to your questions.         I think  the "back door Roth" thing seems to assume that ALL the money in the IRA being pulled from will be moved to the Roth.    

But, if you have an IRA and your income is over the Roth contribution limits - you can't easily do a back door Roth.     I rolled an old 401K to a Fidelity IRA about 10 years ago.... when I started contributing to a Roth IRA.   I'm now bumping into the income limits for Roth contributions - and the large amount of $$ in the Rollover IRA makes doing a back door Roth out of the question (I could do it but it's all or nothing and the Rollover IRA has a substantial amount in it - the tax hit is astronomical for me at this point in my income career).   

Not sure if you all are still working/income level...  instead of rolling to an IRA it might be better to roll into your current employer's plan if at all possible. 

(One of my 2020 goals is to find out if I can roll my Roll over IRA into my employers 401K - thus opening up the yearly  Roth Back Door option going forward      

[shanendoah]

Tiny - I am within the income limits for a ROTH. I don't plan to take an early distribution, so I am fine just transferring the IRA from one company to the other, but since there is all this talk about how to do backdoor ROTHs, I am trying to figure out if it would be better to move this money from the traditional to a ROTH, if a ROTH really is so much better that I'd take the tax penalty.

[justme]

As far as I know there's no limit to the amount you can convert from traditional to Roth. It's an entirely separate thing from annual contributions. But you'll be paying tax on everything you convert - and I'm not sure you can use your 401k/IRA to pay said tax unless you then also pay the penalty for early withdrawls on it too.

How close are you to the income limits of being able to contribute to a Roth IRA? If you're not close how many years until you are at the limit? It's really only at that point where you would have to worry about back door Roth. 

[Tiny]

Dec 27, 2019 14:39:27 GMT -5 shanendoah said:

Tiny - I am within the income limits for a ROTH. I don't plan to take an early distribution, so I am fine just transferring the IRA from one company to the other, but since there is all this talk about how to do backdoor ROTHs, I am trying to figure out if it would be better to move this money from the traditional to a ROTH, if a ROTH really is so much better that I'd take the tax penalty.

I'm not much help

How far are you from retirement?  Can you just start funding a Roth going forward instead of converting some of the IRA money?           Was there any helpful info at Fidelity or Vanguard about "rolling over an IRA to an IRA and a Roth"?   


ADDEd:   you want to convert an IRA to a ROTH (not do a back door roth).  They are two different effects -- even though they are basically the same thing (moving money from an IRA to a ROTH)    You can convert some of the IRA money to a ROTH - but there's weirdness with how to tax the money you are converting... if it was "contributions" or "gains" I think.   A back door Roth generally is "immediate" you make the contribution to the IRA account and then immediately convert it to the ROTH...it's all current $$ and little to no gain.        I'm not clear on it. other than it makes my tax accountant frown (deeply) when I brought up trying to back door some of my long time ago roll over IRA to a ROTH. 

ADDED SOMEMORE:   the tax weirdness is all in my head.    Tall guy explains it better in a post further down the thread.   

[shanendoah]

Tiny - Thank you for the information you have provided.
We are going to start a ROTH for my spouse this year, as he has only $20k in retirement savings in his name. I'm in better shape, and so not focusing on me on the moment for that. However, since I do want to consolidate our retirement savings down to 2 companies from 4, and therefore will be moving the IRA I have one way or the other, I thought it couldn't hurt to see if I would be better off moving it to a ROTH instead of another traditional IRA. (And I have no idea how they would track contributions vs earnings, since I haven't contributed anything to it since it got converted from a 401(k) to an IRA 14 years ago.)

[shanendoah]

justme - We're about $60k from the ROTH income limit. I'm not actually looking to do a backdoor ROTH contributions. The reason I brought it up was the fact that some people do do the backdoor ROTHs, it makes me wonder why a ROTH would be so much better, and so, should I look at converting my traditional IRA to a ROTH if I'm going to be moving it anyway.

[tallguy]

As noted, if you want to simplify accounts you can roll over traditional IRA to traditional IRA and Roth to Roth regardless of amount.  Rollovers and conversions are not subject to contribution limits.  If you want to convert T-IRA to Roth, it will be taxable to the extent that you convert.  There are no weird tax implications unless some of the money in the T-IRA was from non-deductible contributions, in which case the pro-rata rule comes into play.  Whether the money is contributions or gains is immaterial if all of the money was pre-tax.  Any amount converted is reported as income for tax purposes.

If it were me, I would simplify first by combining old or multiple accounts into fewer accounts just for simplicity's sake.  The decision to convert to Roth or not is dependent on other factors.  My goal was to get my IRA balances down to $300,000 by the time RMD's hit.  That is still many years away, and I will probably not make it depending on what the market does going forward, but I just converted $135,000 a couple of weeks ago.  I set myself up for an otherwise unnecessary $30,000 tax bill, but I am persuaded it will be better for me in the long run.  Your decisions will be based on your situation and your goals. 
    

[Tiny]

Dec 27, 2019 15:16:45 GMT -5 shanendoah said:

justme - We're about $60k from the ROTH income limit. I'm not actually looking to do a backdoor ROTH contributions. The reason I brought it up was the fact that some people do do the backdoor ROTHs, it makes me wonder why a ROTH would be so much better, and so, should I look at converting my traditional IRA to a ROTH if I'm going to be moving it anyway.

If someone's doing a true "back door roth" - it means they are high income earners and are most likely fully taking advantage of all the ways to defer taxes. A ROTH is very attractive because the money grows tax free and ALL the money comes out of it "tax free" AND it's got some nice long term things... no RMDs and a nice way to give your generational wealth to your kids/grand kids. The SECURE ACT may have changed some of that...

Over all the feeling I'm getting is that if you expect alot of taxable income in retirement, say a pension AND SS (and your pension will be taxable income) AND having a substantial IRA balance, then having more money in a ROTH at retirement will be a bit better (less taxable income). I'm in the "taxable pension + SS + substantial 401K balance" boat. I wish I had contributed to a ROTH back in the day when it was first available. I'm in a financial position where the pretax-yness of the 401K is my friend - even though I have access to a 401K ROTH.

I think for the younger folks who have a lot of years of saving AND income increases ahead of them) the advice to contribute to a 401k up to the employer match and then contribute to a ROTH (to the max) and then switch back to pre tax 401K contributions if they can still save is not bad advice.



Another way to look at it might be to look at your income amounts - and see what tax brackets your income falls into. Say you will earn 45K and are single and can save $6,000 -- it might be better to put 5K pretax into an IRA (the amount that would be taxed at 22%) and then put 1000 post tax into a ROTH - rather than putting the full 6K into a ROTH.

TAX BRACKET for 2020

Tax Rate Single Married (Filing Jointly) Head of Household
10% $0 to $9,875 $0 to $19,750 $0 to $14,100
12% $9,876 to $40,125 $19,751 to $80,250 $14,101 to $53,700
22% $40,126 to $85, 525 $80,251 to $171,050 $53,701 to $85,500
24% $85,526 to $163,300 $171,051 to $326,600 $85,501 to $163,300
32% $163,301 to $207,350 $326,601 to $414,700 $163,301 to $207,350
35% $207,351 to $518,400 $414,701 to $622,050 $207,351 to $518,400
37% $518,401 and higher $622,051 and higher $518,401 and higher

[justme]

Dec 27, 2019 15:16:45 GMT -5 shanendoah said:

justme - We're about $60k from the ROTH income limit. I'm not actually looking to do a backdoor ROTH contributions. The reason I brought it up was the fact that some people do do the backdoor ROTHs, it makes me wonder why a ROTH would be so much better, and so, should I look at converting my traditional IRA to a ROTH if I'm going to be moving it anyway.

Most people that do the back door are doing it because it's the only way to increase their ability to save in retirement accounts. Their income is too high to contribute directly to a Roth. And while they can contribute to a traditional IRA they make too much to be able to contribute to it tax-free. And since it's not tax-free they've already paid the taxes on the money so can convert it to a Roth for $0 (assuming they don't have the tax issue of also having an traditional IRA accounts). Which all gives them another $5500 in a tax-free growth account that they would not have access to otherwise. Why put $5500 in a taxable account if you could put $5500 in a tax-free account? 

Assuming you don't hit the limits where you only option to contribute to an IRA is a taxed traditional account, then it's just the normal decision of whether you want to contribute to Roth or traditional. 

[tcu2003]

Dec 27, 2019 16:17:59 GMT -5 justme said:

Dec 27, 2019 15:16:45 GMT -5 shanendoah said:

justme - We're about $60k from the ROTH income limit. I'm not actually looking to do a backdoor ROTH contributions. The reason I brought it up was the fact that some people do do the backdoor ROTHs, it makes me wonder why a ROTH would be so much better, and so, should I look at converting my traditional IRA to a ROTH if I'm going to be moving it anyway.

Most people that do the back door are doing it because it's the only way to increase their ability to save in retirement accounts. Their income is too high to contribute directly to a Roth. And while they can contribute to a traditional IRA they make too much to be able to contribute to it tax-free. And since it's not tax-free they've already paid the taxes on the money so can convert it to a Roth for $0 (assuming they don't have the tax issue of also having an traditional IRA accounts). Which all gives them another $5500 in a tax-free growth account that they would not have access to otherwise. Why put $5500 in a taxable account if you could put $5500 in a tax-free account? 

This is us. We are over the Roth limits and max our 401k accounts. We also have no money in regular IRAs, so it’s relatively simple for us to contribute to traditional IRAs, and then immediately convert to Roth IRAs.

[teen persuasion]

Whether or not to Roth convert comes down to marginal tax rate, now vs later (tax rate at withdrawal time in retirement). If you were in an unusually low income year (out of work, etc), then it could be a great opportunity to convert at a lower than usual tax rate. If you are at the peak of your earning years, and at a high tax rate, it's probably a bad time to Roth convert.

Early retirees may plan to do Roth conversions in low tax years after work income has ended, but before starting pensions/SS/RMDs (which fill up the lowest tax bracket levels first).


It doesn't sound like you have any need to convert now. If you won't be bumping up against Roth contribution income limits now or in the foreseeable future, you can roll the 401k to a tIRA safely. If you might hit that income limit, though, leave it in the 401k to keep your backdoor Roth option open. Having $20k in a tIRA messes up a future backdoor Roth.

We'd left DH's 401k in a previous employer plan for years, but after yet another migration to a different service provider was revealed we were ready to roll it to a Vanguard tIRA under our control. We missed the blackout deadline and had to wait a few months for it to settle at the new provider, when we discovered his formerly 100% vested totals were suddenly not 100% vested. Some data was lost/garbled in the transition. The service provider was no help - they only had the bad data, told him to contact the employer. Um, they went out of business years back, that's why they were all 100% vested, and why it was his FORMER employer! He ultimately contacted a parent firm (still running the 401k), and was lucky to reach a former coworker, who knew the details about them all being fully vested at closure, so it got straightened out. It could have been a mess - we were lucky to catch the error right away and hit on the right coworker by chance. So leaving things at a former employer's 401k for a long time might be risky, too. But it's hard to consolidate too much while still working - we've got 3 IRAs at Vanguard (a Roth for each and his rollover), a SIMPLE IRA for me at WF (blech), DH's current 403b and a former 401k (not fully vested, he could go back...).