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general Noob questions regarding rollover stuff

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  • general Noob questions regarding rollover stuff

    Over the years I've had a very disorganized financial plan that has basically been "earn money....try to limit spending of that money...get out of debt...invest most of what's leftover." Overall, this has worked out pretty well for me, but I really haven't focused much on tax avoidance optimization. My only real moves in that regard have been 1. work overseas a good bit in order to take advantage of the Foreign Earned Income credit, 2. Maximize employer sponsored 401k accounts when I've been employed in the U.S. and 3. Move to NH when I returned to the U.S. a few years ago in order to avoid a state income tax. (To be clear, my motivations for living overseas and in NH were primarily NOT tax related, but the tax advantages have been okay with me).

    In the past, I've made too much income to do a direct Roth account and never really explored that option any further. Hadn't heard of the backdoor thing until spending time here at WCI, but still never really looked to deeply into that. Now however, I'm a bit more curious about Roth accounts.

    Until about a year ago, I was employed and still have my employer sponsored 401k account. My income since leaving my employed position has been quite a bit lower than it previously was. I'm now looking at possibly taking a new employed position that will likely start in September or so. I don't know how much my pay will be as of yet, but I'm assuming that 2021 will most likely be my lowest income tax year going forward, and thus have the lowest tax rates if I were to rollover funds from the 401k into a Roth (maybe I'm off base with this assumption.)

    Anyway, here's my questions.
    1. I know that my yearly contribution to a Roth are capped at $7k (I'm >50), but does this cap apply to funds being rolled over from my employer sponsored 401k, or can I roll over the entire amount in the 401k into a new Roth account?
    2. My understanding is that prior contributions to the 401k (which were all pretax) will be taxed if I roll them into a new Roth, but what about profits (investment returns, dividends earned) in the 401k? Are they taxed as well?
    3. Assuming the answer to question #1 above is that I can roll over the entire 401k into a new Roth, can I then also make a regular yearly contribution of $7k on top of that?

    Thanks for any answers/insight/advice from those of you who are more financially savvy than I.

  • #2
    1. No, it doesn’t. You can r/o as much as you have available in any one year, but I would recommend a tax projection first. Also, never take $$ out of the Roth to pay the taxes on the r/o.
    2. Yes, they are taxed as well, either now or at some time in the future. The whole of all pre-tax contributions (except for HSA contributions) is taxable at your top marginal bracket, iow.
    3. Yes, this is just another version of your Q1.
    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Originally posted by jfoxcpacfp View Post
      1. No, it doesn’t. You can r/o as much as you have available in any one year, but I would recommend a tax projection first. Also, never take $$ out of the Roth to pay the taxes on the r/o.
      2. Yes, they are taxed as well, either now or at some time in the future. The whole of all pre-tax contributions (except for HSA contributions) is taxable at your top marginal bracket, iow.
      3. Yes, this is just another version of your Q1.
      Thanks. That helps.

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