Multiple 401ks from residency

[American]

Hi all,

I just finished residency and have multiple 401k accounts from previous employers:

Internship- about 6k in 401k

Residency- about 25k in 401k

My issue is that my current small private practice employer 401k options are subpar. I lobbied to get index funds added and succeeded, but they are no where near the low cost levels of the vanguard funds my 2 others 401ks are invested in. I will only be working for this employer for about another 2 years until my wife finishes residency and don't want to roll my previous 401ks into this subpar fund.

Please let me know what you think about the following:

1- Should I rollover my internship 401k (vanguard institutional index) into my Vangaurd Roth IRA and pay the taxes this year?

2- Should I leave my Residency 401k  (vanguard institutional index, bond and international) alone and just let it cruise along or pay the taxes and convert to Roth IRA? Obviously larger tax bill here.

3- I get 4% match with my current employer and don't want to leave this money on the table so I'm going to max out the 18k I can contribute to the mediocre index funds I have available for the next two years. What would be the the best option for this money after my 2 years have concluded with this employer? Want to avoid apying taxes on this as our joint income at this time will like be 600k+.

4- When my employment concludes in 2 years with this current private practice I will likely be starting my own practice. Should I simply just hold on to all the above mentioned 401ks until then and not convert anything? Is there even an option of rolling over these into and individual 401k that I create myself as a sole proprietor/PLLC? I don't want to roll them into a traditional IRA as this obviously would mess up backdoor Roth IRA for the future.

5- I have some 1099 income from moonlighting for 2017 can I open and individual 401k and rollover the internship and residency 401ks?  I have no issue keeping them where there are, it's just annoying to have multiple accounts.

The reason this is a bit pressing is our taxable income will be at it's lowest this year for the foreseeable future. Around 200k joint for 2017 and will be 400k for 2018, then likely 600+ in 2 years.

Thanks!

[RetiredERdoc]

Probably would make sense to convert up to the 28% bracket. Then roll over the mediocre 401k into a solo 401k.

[jfoxcpacfp]

We call these "orphan" accounts and the best home for them is a SOLO-k or to convert into a Roth. You basically solved step 1 of your problem by the time you got around to #5. You'll also find the SOLO-k useful when you leave your current job in 2 years to start your private practice. iow, you'll roll your 401k out to the SOLO in 2 years.

Step 2 is how much to convert to a Roth IRA. In general, you want to do this when your income is at a low point or when the market is at a low point (bear or correction). However, without a good tax projection, a crystal ball, or knowing if you can even afford to pay the tax, it's difficult to advise on the amount. You may have another opportunity when you start your practice. Your wife will have 1/2 year of residency income and you may have low income for the 1st 6 months of startup, especially if your specialty (?) requires the purchase of equipment, allowing you to take advantage of depreciation rules.

A CPA can help with a tax projection or you can just figure out the extra tax on the conversion and decide how much to move to a Roth. Of course, you'll definitely need a CPA when you start a practice.

[Hank]

Convert somewhat more than necessary to Roth.  You then have until October 15th the following year to re-characterize some or all of your Roth conversion.

Roth re-characterizations are one of the areas in tax law where you get to take a mulligan after the fact.  It's nice to be able to back out part of your Roth conversion to top out a given tax bracket or catch a credit or avoid a phase-out right to the penny.

Johanna, do you have any thoughts on over-converting and using Roth recharacterizations as a tax planning strategy?

[jfoxcpacfp]

Hank wrote:

 

Johanna, do you have any thoughts on over-converting and using Roth recharacterizations as a tax planning strategy?

Click to expand...

I think you just gave me the idea for a blog post! Yes, I had mentioned that in another recent thread (can't remember which) that over-converting is one of the best tax planning strategies available because of the mulligan option (you have the opportunity to undo the conversion, for you non-golfers).

To reconvert the same investments after reversing the recharacterization, need to be aware that you have to wait until the later of:

• The year following the conversion, or


• 30 days

For most, it will be a 30-day wait as they will be recharacterizing in the year following the original conversion. More to come in a future post