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  • 401K rollover after company terminates 401K

    Hello,

    My company has terminated the 401K benefit and I have to move the money into another account. I am trying to decide between traditional IRA and Roth IRA. My husband and I make too much money to directly contribute to Roth IRA and I know that if open a traditional IRA that I will not be eligible to make backdoor contributions. However, my husband does have a Roth IRA already so we can make backdoor contributions to his.

    The 401K has about $24,000 in it and if I roll it over to Roth IRA I will have to pay taxes on it. If my company plans to reinstate the 401K in the future, can I just roll it over into Traditional IRA for the time being (not have to pay taxes on it) and then roll it back over in 401K when I am able to? At that point, I will be eligible to make a backdoor Roth contribution.

    Thanks!

  • #2
    Depends upon the structure of a future 401K.  Most 401K's will allow a person to roll tax deferred assets into an employers 401K plan.  Why is it that you believe your employer will re-establish a 401K in the future?  Given the size of the account, I would pay the taxes on the 401K amount and put it into a ROTH IRA.  You sure you want to be with an employer that doesn't offer a retirement plan?

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    • #3


      The 401K has about $24,000 in it and if I roll it over to Roth IRA I will have to pay taxes on it. If my company plans to reinstate the 401K in the future, can I just roll it over into Traditional IRA for the time being (not have to pay taxes on it) and then roll it back over in 401K when I am able to? At that point, I will be eligible to make a backdoor Roth contribution.
      Click to expand...


      ajm184 is correct that, if the reinstated plan so allows (which most do), you can roll the IRA back into it. If you believe the suspension of the 401k is temporary, and you do not want to pay taxes on the Roth conversion, you can:

      • r/o to an IRA and

      • contribute to a separate nondeductible IRA for the year or 2 that you don't have 401k access.


      When the 401k is reinstated:

      • roll your pre-tax IRA back in and

      • then do the 2nd step in the backdoor Roth conversion. You will pay taxes on the growth only and you won't miss a year of backdoor Roth space.


      otoh, if you want that Roth space, tax planning can help you decide whether to convert all at once or over a couple of years - convert enough not to cross over into a higher tax bracket. If you live in a state like Kentucky, where most retirement income is not taxed, you will also avoid state income taxes.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4




        Hello,

        My company has terminated the 401K benefit and I have to move the money into another account. I am trying to decide between traditional IRA and Roth IRA. My husband and I make too much money to directly contribute to Roth IRA and I know that if open a traditional IRA that I will not be eligible to make backdoor contributions. However, my husband does have a Roth IRA already so we can make backdoor contributions to his.

        The 401K has about $24,000 in it and if I roll it over to Roth IRA I will have to pay taxes on it. If my company plans to reinstate the 401K in the future, can I just roll it over into Traditional IRA for the time being (not have to pay taxes on it) and then roll it back over in 401K when I am able to? At that point, I will be eligible to make a backdoor Roth contribution.

        Thanks!
        Click to expand...


        My question would be, why they are terminating a 401k plan.  This is quite unusual for a group practice, but it does happen, and sometimes for the wrong reason. Also, the cost of the plan might be too high, and this can also contribute to the decision. Quite often the TPA for the plan might not be using an appropriate design so that the cost to owners is high (which happens if the plan is with a low quality provider), so the owners sometimes make the wrong decision to terminate a plan before considering all of the options.
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

        Comment


        • #5
          Thank you so much for your help.

           

          As far as I know, the plan is being terminated to cut costs and I've been told that they will reinstate it once the budget allows. I have spoken to CEO and been compensated in another way. I made it clear that the 401K is an important benefit for me and I am hopeful that it will be temporary.

          Comment


          • #6




            Thank you so much for your help.

             

            As far as I know, the plan is being terminated to cut costs and I’ve been told that they will reinstate it once the budget allows. I have spoken to CEO and been compensated in another way. I made it clear that the 401K is an important benefit for me and I am hopeful that it will be temporary.
            Click to expand...


            I don't buy this explanation.  How big is the group?  How many doctors vs. staff?  If anything, if they don't have the money for matching, then there is no expectation that they will have the money in the future.  There is something else going on that you are not being told.  For one thing, there are many ways to cut the cost of a 401k plan:

            http://whitecoatinvestor.com/how-to-reduce-your-practice-retirement-plan-cost

            So the first thing would be to find ways to lower the cost of the plan by 1) reducing fees and expenses and 2) looking at plan design to make sure it is optimal, and of course 3) having an independent review of this plan to make sure that the plan fiduciaries made the right decision as well as to consider alternatives.  It costs money to close a plan, and it costs money to start up a plan.  It is much more efficient to do the above than to close a plan, so 'cutting cost' is not an explanation I would accept without looking at the actual details of why closing a 401k plan will help cut costs. It is possible to stop profit sharing for example, and I simply don't buy it that a match can bankrupt this practice.  If you are compensated in other ways, can't this be part of a retirement plan arrangement instead?  Something does not smell right about this.
            Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

            Comment

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