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Moving 401k (traditional and roth) to new employer and backdoor roth separtely.

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  • Moving 401k (traditional and roth) to new employer and backdoor roth separtely.

    Hello folks,

    I have a question regarding the impact on a Backdoor ROTH IRA in the same year that I am switching employers and moving my existing 401k (both traditional and ROTH) into an IRA.

    So here is the situation in more detail -

    At my current employer, I max out my pre-tax traditional 401k and also contribution to an after-tax Roth 401k via in-plan conversion that my employer provides via Fidelity. So I have "x" amount in my traditional 401k and "y" amount in my Roth 401k (after-tax). Now, I am changing jobs soon so I need to rollover my existing 401k accounts to their corresponding IRA equivalents and I have now have a traditional IRA with "x" amount and ROTH IRA with "y" amount.

    I am also planning on doing a Backdoor ROTH IRA (I am above the limits for a standard ROTH IRA contribution) separately for myself and my wife (who doesn't have any income). Will my Backdoor ROTH IRA conversion have complications due to the Traditional IRA which I will now create due to the 401k rollover? Will I be affected by the pro-rate rules when I do the backdoor conversion since at this point, I will have a significantly large amount in my Traditional IRA? Does it matter if I do a backdoor ROTH IRA before/after I change employers and do the 401k rollover to the IRA later?

    I am not sure if my new employer has Fidelity or not? If they do, am I better off moving the 401k money to the 401k with the new employer and thereby create no IRA as a result of the rollover in the process?

    Looking for advise on how to move forward in this situation and take the full benefit of the Backdoor ROTH and the 401k rollovers.

    Thanks.



  • #2
    Ok, ultimately there will need to be a little more detail to hone in on this, but for the purposes of what you’ve outlined let me see if I’m following correctly:

    1) The Employer you are Leaving holds both before tax & after tax balances in the plan for you. Most importantly, I want to discern if a completely separate Roth 401(k) with a different account number holds those funds or if they are all in the same pot of money for lack of a better term..

    2) Your plans are to first move the funds to a new Traditional Ira & Roth IRA respectively for the balances in pre-tax (trad. IRA) & post-tax (Roth IRA).

    3) From that point you want to do a Backdoor conversion (please clarify if it is the full Traditional IRA balance or a portion of it?)

    The short answer is that you do not have to use the traditional IRA and you will be subject to pro-rata if what I’ve outlined accurately describes your situation.


    There are additional options, I’m glad to talk it over 1:1 if you feel it would help.
    Founder, Coastal Wealth Planners- Fiduciary Tax-Sensitive Retirement Planning & Wealth Management www.coastal-wp.com email: [email protected]

    Comment


    • #3
      Thanks for your reply.

      1. These two separate accounts with separate account numbers, funds etc. The pot of money is separate but they are funded on a regular basis via my paycheck each time.

      2. That is correct since I think that is the only option to keep those funds as I will be closing the parent 401k accounts since I am changing employers.

      3. Backdoor roth IRA is a separate activity I want to do with separate funds that I have saved over the year. This is something I was planning on doing regardless of the fact that I am changing employers. This is something I did last year as well as an independent process. Basically, I contribution a $0 balance traditional IRA and convert it to ROTH via backdoor.

      In essence, I don't want touch the two new IRAs that I will create from my 401k rollovers. I am happy keeping them as it is and not touching them.

      As a totally separate activity, I want to do the backdoor roth ira using a $0 balance traditional IRA that I have...a standard vanilla backdoor ROTH IRA which I even last year. Now, my concern is that when I fund my other traditional IRA with the intent to do a Backdoor ROTH IRA, will the newly created IRA accounts (from the 401k rollover) interfere in the sense that I now have a traditional IRA with non zero balance and hence the pro-rate rule comes into effect. Since last year, I had a $0 traditional IRA, I funded it with $6000 and then moved that money to a ROTH IRA using the backdoor channel.

      Can I still do that backdoor ROTH IRA similar to what I did last year? and will the new IRA accounts that I will create as a result of the 401k rollover trigger the pro-rate rule since now I have balance in a different traditional IRA which I don't intend to use for backdoor?

      I hope I was able to explain the situation.

      Thanks.

      Comment


      • #4
        It may seem more complicated than it really is because of the changing employment, but it’s a pretty straightforward situation of just needing to understand the backdoor Roth IRA “pro rata” rule and avoiding it.

        1) The “pro rata” rule, and any issues with making Backdoor Roth IRA contributions, can be avoided by having a $0 IRA balance by 12/31 of the year you make the Backdoor Roth IRA contribution. FYI - it’s based on your TOTAL pre-tax IRA balance across all of your accounts.

        2) Each spouse has their own “pro-rata” calculation based on their IRA balances. So, just because one spouse has an IRA balance, it doesn’t impact the other spouse‘s ability to make backdoor Roth IRA contribution.

        3) When you leave an employer, you have several options of what to do with your pre-tax / after-tax / Roth money in your 401k. The after-tax / Roth money is easy - you just move that to your Roth IRA as a direct rollover. With the pre-tax money, you can leave it where it is, move it to your new employer’s retirement plan (401k / 403b), or move it to your IRA. However, by moving your current pre-tax 401k to your IRA, you take away the benefits of making backdoor Roth IRA contributions because of the “pro rata” rule.

        Unless your investment options are really poor at your new employer or previous employer, I would plan to either a) leave the pre-tax money at your current 401k or b) move the pre-tax money to your new retirement plan. Then, move your after-tax/Roth 401k money to your new Roth IRA and make your backdoor Roth IRA contributions without any issues moving forward (because you have a $0 IRA balance).
        Andrew Musbach, CFP® | Co-Founder & Financial Advisor at MD Wealth Management, LLC | Podcast Host - The Physician's Guide to Financial Wellness

        Comment


        • #5
          • If your contributions and associated earnings are >= $5,000. There is absolutely no reason to be in a hurry to rollover a previous employer's 401k.
          • The law and IRS regulations require the the employer to allow you to remain a participant in the plan after separation.
          • You should leave the assets in the previous employer's 401k until you can rollover the pre-tax balance to your new employer's plan.
          • You can rollover the Roth 401k to a Roth IRA at the same time. There is absolutely no benefit or reason to use a separate Roth IRA.
          • FYI, if you were to do such an ill-advised rollover. Timing during the year does not matter. In any year there is a Roth conversion, Form 8606 Line 6 is the sum of all traditional SEP and SIMPLE IRA accounts on 12/31.
          • If there is a non-zero Line 6 balance it will be subject to pro rata taxation with any non-deductible basis.

          Comment


          • #6
            Thanks for the response folks! Let me try to get some early details on the 401k plan of the new employer...I think that will answer some questions. I think the traditional 401k will be tricky, the after-tax 401k does seem straightforward.

            Thanks.

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