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Old 401k/403 b to be rolled over to IRA, can I still do back door Roth?

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  • Old 401k/403 b to be rolled over to IRA, can I still do back door Roth?

    HI, every one. I have 2 old 401k and 403 b with a significant amount of money. I want to roll over those 2 accounts to an IRA so I can invest in individual shares and also use it for options. ( I hear Shawb IRA account you can use for options - will do only covered calls for the shares I own ) . I have been doing traditional IRA to backdoor Roth conversion for years. I have few questions

    1. If I convert two of my old 401k , 403 b into IRA , can I still do yearly back door roth conversion for me and my wife?
    2. Which would be a good brokerage for IRA account, I want to do individual shares, options, and long term investing. I have vanguard, fidelity, and Robin Hood. I don't like vanguard and want to close out and try to consolidate all the accounts in 2 or 1 brokerage, WIll keep robin hood though

    Help will be appreciated.


  • #2
    If your 401(k) and 403(b) are tax deferred (traditional), then the pro rata rule will apply to any conversion from traditional to Roth IRA. Since you say you have a significant amount of money in these (presumably) traditional retirement accounts, the vast majority of your back door Roth contributions would be taxable.

    Do you have an extended track record of successfully investing in individual stocks and options? Is there some reason you think you're likely to outperform professional traders who do this for a living and, on average, underperform passive indices on a risk adjusted after tax basis over five, ten, and twenty years? Heck, if you're an awesome active investor, why not quit medicine and open a hedge fund?

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    • #3
      Hank is correct. If you leave the funds in the orphan 401k/403b accounts, you won’t have to worry about the pro-rata rule. If you r/o to IRA(s), then pro-rata taxes will come into play.

      Please note that I am not “anti” pro-rata rule. All you are doing is pre-paying taxes on the amounts you (or your heirs) will eventually be required to distribute and pay taxes on. Iow, this is not an additional tax, but an application of the tax before retirement. I personally don’t think it’s such a big deal and advise clients as such.

      otoh, you might also consider strategic Roth conversions of the balances in these accounts. This article may be useful.

      In the meantime, you’ll need to measure the benefits you expect to get from your currently planned strategy against the cost of pre-paying taxes via pro-rata. Personally (and I am not your financial planner, to be clear), I believe this can devolve into a fairly complicated “projection” scenario over which you have very little control.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4
        Originally posted by Hank View Post
        If your 401(k) and 403(b) are tax deferred (traditional), then the pro rata rule will apply to any conversion from traditional to Roth IRA. Since you say you have a significant amount of money in these (presumably) traditional retirement accounts, the vast majority of your back door Roth contributions would be taxable.

        Do you have an extended track record of successfully investing in individual stocks and options? Is there some reason you think you're likely to outperform professional traders who do this for a living and, on average, underperform passive indices on a risk-adjusted after tax basis over five, ten, and twenty years? Heck, if you're an awesome active investor, why not quit medicine and open a hedge fund?
        Thanks, for the reply Hank.

        I have traditional tax-deferred previous employee 401 k from one job and 403 b from one job, I have more than 200 k in each as I traded mutual funds and timed the market over the years and I am outperforming the sp by a lot. I just want it to convert to the IRA so that I can buy individual stocks and retire in the next 5 years. Way before I turn 45.

        I do also have a traditional IRA which I just use for back door Roth conversion. My question is that if I roll over my previous employer 401 k and 403 b to an IRA would I still able to contribute to my traditional ira and do back door Roth conversion or not? I do also have a good amount of money in MY back door Roth account and would like to keep growing it though 6 k per year contribution would not make much dent in it.


        And to answer your question I just want to retire before I turn 45 and individual stock investing will help me to achieve it much sooner than 45. No intention to open a hedge fund though May start my own blog lol.

        Comment


        • #5
          •401k, 403b, tIRA do not help retirement at 45.
          All will have withdrawal penalties.
          •covered call’s is basically a yield enhancement strategy. Not geared for appreciation. Capping your gain for price.
          Whether you want to trade MF’s or stocks, it’s the appreciation that moves the needle, not the covered calls.
          •Now tell me what your blog is about.
          Retiring at 45 and living off covered call income on a $500k portfolio in an IRA?
          • It says you joined in 2016 and this is your first post. So not sure a welcome to the Forum is appropriate. Interesting first post, question, retirement strategy and investment strategy all wrapped in one.

          Comment


          • #6
            Hello,
            To be upfront and honest, your questions seem really odd for WCi forum. (almost like a joke?)

            Most of us here (myself included) are simple docs, not full time sophisticated market analysts who pick individual stocks, and trade options.

            We (especially me) are not brilliant, not gifted, not trained in complex mathematics or finance.

            Our secret weapon: we know who we are.

            Boring low cost index funds + time = success

            rapid trading + time = disaster

            I personally would:
            1. keep your pretax $ in an IRA that does not screw up pro-rata rule (keep it in 403b or solo 401k) but not in a 1. traditional ira, 2. SEP, 3. SIMPLE 4. Rollover IRA

            2. Put the $ in low cost index funds (simple AA)

            3. Read:
            1. white coat investor first book or boot camp
            2. winning the losers game
            3. the simple path to wealth

            I am 47, over 6M invested, all in boring index funds.

            It does not need to be complicated or exciting to work.

            Hight Savings rate + index funds + Time = success

            I wish we had a time machine and could show you how the future would turn out with different choices and paths, but unfortunately life does not work like that.

            Consider being boring. It works

            Here is a link to some books:

            https://www.amazon.com/White-Coat-In.../dp/0991433114


            https://www.amazon.com/Winning-Loser...a-333929963403

            https://www.amazon.com/The-Simple-Pa...simple+&sr=8-3




            Last edited by Tangler; 01-23-2021, 04:52 AM.

            Comment


            • #7
              So you want to pay taxes on 400,000 dollars to convert it to a roth to continue back door roth's so you can day trade with it so you can retire by 45...

              I can not agree with your assessment nor plan, but you're going to do whatever you want anyway so...



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