roth ira ?s- ANY HELP appreciated

[treswolf]

First time Post! I am a novice  but finally trying to take charge of our financial issues. This site and forum are fantastic. thanks to all who offer insight/advice/etc.  Evaluating current retirement situation. Getting set to do back door roth. Here is my plan:

1. Moving SEP-IRA (vanguard) from when I owned my own practice into my current 401K (t.rowe price retirement fund)

2. Not sure that the T. Rowe Price MF is the best- We have a Vanguard 500 Index Admiral Fund available that I may move the funds into in the 401K.

3. I have an old Roth IRA with Franklin Templeton ( Expense Ratio of 1.96%) that I was planning on moving over into Vanguard. I am not sure if this is the correct move. Can that be used then as the Roth account for the Back Door?

Any advice or guidance would be greatly appreciated.

[mitochondria]

My humble opinion,

 

1. I would keep the SEP-IRA in Vanguard. I don't see the advantage of moving it into a 401K.  I wonder if you could actually do a backdoor Roth on the SEP-IRA if it is not to large and you can comfortably pay the taxes on it.

2. I would move the 401K T.Rowe Price MF to a 401K Vanguard 500 Index Admiral MF. At a minimum, your annual expenses will be much lower.

3. The Franklin Templeton Roth IRA can simply be moved to another Vanguard Roth IRA with no need to do a Back Door Roth IRA unless I'm missing something here.  There should be no tax consequence for this exchange. I would call the Vanguard customer service. They will help you through this process.

[DMFA]

treswolf wrote:

First time Post! I am a novice  but finally trying to take charge of our financial issues. This site and forum are fantastic. thanks to all who offer insight/advice/etc.  Evaluating current retirement situation. Getting set to do back door roth. Here is my plan:

1. Moving SEP-IRA (vanguard) from when I owned my own practice into my current 401K (t.rowe price retirement fund)

2. Not sure that the T. Rowe Price MF is the best- We have a Vanguard 500 Index Admiral Fund available that I may move the funds into in the 401K.

3. I have an old Roth IRA with Franklin Templeton ( Expense Ratio of 1.96%) that I was planning on moving over into Vanguard. I am not sure if this is the correct move. Can that be used then as the Roth account for the Back Door?

Any advice or guidance would be greatly appreciated.

Click to expand...

SEP-IRAs prevent tax-free execution of the backdoor Roth because it mixes pre-tax and post-tax contributions in the set of all your pre-tax IRAs (Trad, SEP, SIMPLE) due to the pro rata rule.  If you want to do a backdoor Roth, you need to eliminate the SEP-IRA.  Do you still have self-employment income?  Is your current 401(k) an independent 401(k) or with an employer?  They may or may not accept incoming rollovers - make sure to check.

If you have VFIAX as an option in your 401(k), it's a great choice for your domestic large cap allocation.  What TRP fund are you currently using?

You can hold whatever funds you want in an IRA.  You're not limited to the custodian's funds, though they're usually the free ones.  However, your trade fee is probably a good price for getting out of a massive, massive ER of 1.96% to one of 0.05% (saving $191 per $10,000 invested).

Roth is already Roth.  Any Roth IRA can be used as the receptacle for conversions, and it's far far easier if the Trad IRA you're using as your temporarily holding space is at the same institution.  You can do custodian-to-custodian transfers of Roth IRAs for no tax; however, there might be fees, especially if one custodian doesn't allow in-kind transfers of particular holdings (you might have to liquidate some).  Vanguard's conversion process is very easy and takes only a few minutes; IDK about FT.

mitochondria wrote:

1. I would keep the SEP-IRA in Vanguard. I don’t see the advantage of moving it into a 401K.  I wonder if you could actually do a backdoor Roth on the SEP-IRA if it is not to large and you can comfortably pay the taxes on it.

 

Click to expand...

You're not using the term "backdoor Roth" properly.  This refers to a non-deductible Trad IRA contribution and converting it to Roth which shouldn't be taxed.  You're talking about a plain old Roth conversion, which is taxed, which *might* be a decent idea if you want more Roth space and don't mind paying the tax (at income level).  The advantage of rolling SEP-IRA to 401(k) vis-à-vis backdoor Roth is to eliminate any balance in pre-tax (Trad, SEP, SIMPLE) IRAs to prevent any already-taxed non-deductible contributions for the backdoor Roth being taxed again on the conversion.  Technically speaking, you need Form 8606 Line 6 (value of pre-tax IRAs on 31 Dec of conversion year) to be zero in order to make Line 10 (the non-taxable portion) equal 1.000.

[mitochondria]

DMFA,

Thank you for clarifying.  Always learning...

[jfoxcpacfp]

treswolf wrote:

1. Moving SEP-IRA (vanguard) from when I owned my own practice into my current 401K (t.rowe price retirement fund)

Click to expand...

Agree. This will avoid being taxed on converting the SEP to a Roth. See my next response re: fund families.

2. Not sure that the T. Rowe Price MF is the best- We have a Vanguard 500 Index Admiral Fund available that I may move the funds into in the 401K.

Click to expand...

Your goal is to invest in a balanced portfolio, not a fund "family". A fund "family" (such as TRP) consists of a variety of mutual funds from which to choose. Recommend you read the latest version of Simple Wealth, Inevitable Wealth (ignore the reference to 1% aum fees) to understand the optimal way to allocate and manage your portfolio.

treswolf wrote:

3. I have an old Roth IRA with Franklin Templeton ( Expense Ratio of 1.96%) that I was planning on moving over into Vanguard. I am not sure if this is the correct move. Can that be used then as the Roth account for the Back Door?

Click to expand...

Terribly high ER. Vanguard s/b fine. I would open up a separate Roth account to receive your annual back-door Roth conversions and not mingle funds with untainted Roth contributions. Probably will never make a difference, but the rules for distributions from regular Roth accounts are different than those from "back-door" Roth accounts.