Quote: (02-05-2017 05:02 PM)Armogan Wrote:
I also have another pre-tax 401k account and roth 401k in another brokerage. Would it make the most sense to do the following:
1. Convert the roth 401k from that old brokerage to my main roth ira
2. Change my current contributions from post-tax to pre-tax 401k deferrals (avoid the state tax)
3. Roll the pre-tax 401k amount from my old brokerage to my current brokerage (the one with the post-tax deferrals)? Or should I just roll this amount in my main roth ira (pay the tax to convert)
4. Roll the post-tax amount of my 401k to the roth ira to consolidate balances (essentially amount funded before I switch contribution types)
Is there a time limit from when I can roll over amounts from old brokerages (Charles Schwab)? How exactly do you make a 401k to roth conversion (including paying the tax (e.g., is it done automatically or do I have to incorporate into my return)?
1) Rollover, not convert. Convert is changing tax classification, whereas rollover is keeping the current classification and moving to a new custodian (like from a 401K to an IRA). I like to rollover because I don't want to keep track of many different accounts, it just becomes too much to manage. Also, I feel more secure moving the money out of employer sponsored plans into my own IRA (I can pick the funds, and fees are generally cheaper). However, there are certain protections you could potentially give up if you roll over your 401(k) from an employer sponsored plan to an IRA. If you leave the money in an employer plan, it is covered by ERISA and has more asset protection from creditors and judgements, whereas an IRA is governed by state law and can be subject to a creditor's claim (it is vague if rollover money still keeps it's ERISA protection). In any case, I have never let the ERISA protection issue stop me from rolling over.
2) Yes.
3) Four choices here. 1 is do nothing. 2 is roll over to your current plan (assuming your current plan accepts rollovers). 3 is roll over to your IRA. 4 is rollover to your IRA and then convert to a ROTH and pay tax on the conversion.
I would probably do 3, but 2 is ok if your current employer plan is ok (most employer plans are not great when it comes to admin fees). If you convert to Roth while living in CA, you will pay CA tax. No need to convert today, do it years later. Move to NV, TX, FL (or another no tax state) and establish residency, and in a year when you have little income, do the conversion. Minimize taxes.
**Do you ever think you will be making a lot of money? Once you hit the modified adjusted gross income levels of $117,000 or higher, you cannot contribute to a Roth IRA. At that point you can only do a non-deductible IRA contribution and convert to a Roth IRA- aka the "backdoor Roth". However if you do this and you have pre-tax IRA money in any of your IRAs, you will get tripped up by the pro-rata rules and have to pay some taxes.
Translation- if you ever think you will need to do a backdoor Roth conversion, you do not want ANY pre-tax money in any of your IRAs, otherwise it will fuck with your conversion. If you think this is the path you will eventually go on, leave your pre-tax money where it is at, or roll your pre-tax money into your current employer sponsored plan. The pro-rata rules only look at IRA assets, not assets held in employer sponsored plans.
For me personally, I do not think I will ever need to do a backdoor Roth, so I have no problem rolling pre-tax money from an employer plan into an IRA, so don't let the above spook you away from doing it. You just need to be aware that if you do it, there could be unintended tax consequences years or even decades down the line.
4) Yes, you want to get that post tax money out of there AS SOON AS POSSIBLE.
However, I do not think it will be possible for you. You most likely will have to sever employment to move the money. If that is the case, it is not the end of the world. Just leave it there, and move it when you sever employment at a later date.
Using the previous example from post above-
$1,000 in post tax money, with no growth, converted to Roth. Then years later grows to $3,000. All $3,000 is tax free money.
$1,000 in post tax account, and you stay employed and don't touch the money. Years later it grows to $3,000. You sever employment and roll the money into an IRA. Only $1,000 goes into the Roth, and the $2,000 in growth goes into the traditional IRA.
In both examples you had the same $1,000 and the same growth, but the first example is a clearly superior tax outcome.
5) There is generally no time limit. If you are no longer employed, you can move the money. I have let money sit for years and then move it. A pre-tax 401(k) conversion to a Roth IRA generally works like this-
1. open traditional IRA with broker of your choice
2. do a
DIRECT ROLLOVER to the IRA. You will have to talk to the broker / custodian of assets on their process of doing a rollover
3. This one is broker specific so you will need to ask for the technical steps beforehand, but generally you open up a Roth IRA account and do not fund it with any money. Then instruct the broker to convert your IRA account (which you just funded with the rollover from your old 401(k)) to a Roth IRA.
4. You will get a 1099-R from the plan admin /TPA / recordkeeper for the employer plan showing a total distribution when you moved the money to the IRA. This is not taxable but is still reported on your tax return (you write "rollover").
5. The broker will also issue you a 1099-R for the conversion of the IRA to a Roth IRA.
This will be taxable. If you converted a $30,000 IRA to a Roth IRA, you will have to pay taxes on this conversion when you file your taxes. At a high level simplistic view, if you have a marginal tax rate of 25%, you will have to pay an additional $7,500 in taxes when you file your tax return. This tax you pay is essentially the tax benefit you received / the tax you deferred when you made the initial contributions, and now that the funds are going from pre-tax to post tax, you have to give those taxes back. That is why it is always a good idea to do conversions in years when you have little to no income (so you pay less in taxes) and in a state with no income tax. It is foolish to do a conversion in a state with income tax or in a year when you made a lot of money.
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