401k plan termination, no new 401k available, keep ability to do backdoor Roth?

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Topic Author
le_sacre
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401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by le_sacre »

My small company has terminated its 401k plan (at Guideline). I have close to 3 years of maxed contributions in it, about 65% pre-tax and 35% Roth. I'm 41, single (engaged), in the 24% tax bracket, living in California.

I haven't been told a timeframe of when the funds must be disbursed, but I consider it extremely unlikely that I'll have another, new 401k available to rollover into in time.

I have a 401k from a previous employer, provided by Fidelity, that I have kept there. But it seems that I can't rollover any new funds into it since I am no longer employed there — I found at least one report here viewtopic.php?p=1873913#p1873913 of someone who was able to roll over into a former employer's 401k at TIAA-CREF, but when I called Fidelity they told me no.

In the absence of a 401k destination option, it seems the best option is to roll the pre-tax portion into a traditional IRA.

Since my income is over Roth IRA contribution limits, I'm in the habit of doing an annual backdoor contribution, and have already done so for 2021. I assume that having a significant chunk of money suddenly in my traditional IRA will complicate this...

Would my best option be to proceed with the rollover (pre-tax 401k into traditional IRA), and then convert the entire amount to Roth, paying the tax hit this year? The total amount is sizable, but luckily not huge... Or should I try to figure out an appropriate amount to convert each year? Or should I stop doing the backdoor Roth stuff since I'll have commingled deductible and non-deductible contributions, and preserve the tax-deferred space in the IRA? I have had limited access to 401k's my whole career, so the tax-deferred space in my overall portfolio is quite small relative to my taxable accounts. I'm not very savvy about taxes, so not even totally sure what questions I should be asking myself. TBH, I had no idea that this plan could just terminate and force a distribution like this. If I had, I might have elected to go 100% Roth with my contributions... which I guess would be effectively what winds up happening if I convert all to Roth now, albeit all in one tax year instead of spread out over three. If I'm understanding things correctly, which I'm not sure I am.

Any advice for me? Many thanks!
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FiveK
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by FiveK »

le_sacre wrote: Wed May 05, 2021 7:09 pm I haven't been told a timeframe of when the funds must be disbursed....
Probably would make things simpler for you if it is after 31-Dec-2021....
Since my income is over Roth IRA contribution limits, I'm in the habit of doing an annual backdoor contribution, and have already done so for 2021. I assume that having a significant chunk of money suddenly in my traditional IRA will complicate this...
You assume correctly, as filling a draft Form 8606 will confirm for you.
Would my best option be to proceed with the rollover (pre-tax 401k into traditional IRA), and then convert the entire amount to Roth, paying the tax hit this year?
Probably not.
Or should I try to figure out an appropriate amount to convert each year?
That looks better.
Or should I stop doing the backdoor Roth stuff since I'll have commingled deductible and non-deductible contributions, and preserve the tax-deferred space in the IRA? I have had limited access to 401k's my whole career, so the tax-deferred space in my overall portfolio is quite small relative to my taxable accounts.
If you aren't Covered by an Employer's Retirement Plan next year, then your tIRA contribution will be tax-deferred.

Sorry to hear of your unexpected situation. Best thing for you right now is to find out the specific details - good luck!
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Duckie
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by Duckie »

le_sacre wrote: Wed May 05, 2021 7:09 pm My small company has terminated its 401k plan (at Guideline). I have close to 3 years of maxed contributions in it, about 65% pre-tax and 35% Roth. I'm 41, single (engaged), in the 24% tax bracket, living in California.
So about $40K in pre-tax and $20K in Roth?
Since my income is over Roth IRA contribution limits, I'm in the habit of doing an annual backdoor contribution, and have already done so for 2021. I assume that having a significant chunk of money suddenly in my traditional IRA will complicate this...
Oh yeah.
Would my best option be to proceed with the rollover (pre-tax 401k into traditional IRA), and then convert the entire amount to Roth, paying the tax hit this year? The total amount is sizable, but luckily not huge... Or should I try to figure out an appropriate amount to convert each year?
I would convert it all this year but you may prefer to spread the tax-hit (federal and state) over two or three years.
Or should I stop doing the backdoor Roth stuff since I'll have commingled deductible and non-deductible contributions, and preserve the tax-deferred space in the IRA?
I would not stop future backdoor Roths.
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celia
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by celia »

If your future spouse has lower wages than you, it would be better to do Roth conversions in years you file MFJ. You can probably spread out the conversions over 2 or 3 years while still doing Backdoor Roth for both of you (assuming spouse doesn’t have a larger TIRA).

Open up your tax software and do some sample returns for MFJ.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
NancyABQ
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by NancyABQ »

Make sure to keep the rollover from the 401K in a separate "Rollover IRA". If you end up making direct Traditional IRA contributions in the future, make a separate account for that. This way you may be able to someday roll the "Rollover IRA" into a 401k in the future. Some 401k's won't accept funds from a "Contributory IRA".

At Schwab, these are different account types, one called "Rollover IRA" and the other called "Contributory IRA". I am not sure if other brokerages do this.

It may never matter for you, but if it does matter you will be glad you kept them separate.
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Nate79
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by Nate79 »

If you expect to have another 401k in the very near future then I would roll this to a Rollover IRA and once you have a new 401k I would roll it into that one. I would forgo the backdoor Roth until rolling this to a new 401k assuming you have a new 401k in a reasonable amount of time.
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retiredjg
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by retiredjg »

le_sacre wrote: Wed May 05, 2021 7:09 pm I haven't been told a timeframe of when the funds must be disbursed, but I consider it extremely unlikely that I'll have another, new 401k available to rollover into in time.
Are you sure that the funds have to be disbursed?

Do you have any side income that would allow you to open a Solo 401k? Even if you did not contribute to it, you could roll this old plan into it and solve your problem.
epargnant
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by epargnant »

NancyABQ wrote: Wed May 05, 2021 9:33 pm Make sure to keep the rollover from the 401K in a separate "Rollover IRA". If you end up making direct Traditional IRA contributions in the future, make a separate account for that. This way you may be able to someday roll the "Rollover IRA" into a 401k in the future. Some 401k's won't accept funds from a "Contributory IRA".

At Schwab, these are different account types, one called "Rollover IRA" and the other called "Contributory IRA". I am not sure if other brokerages do this.

It may never matter for you, but if it does matter you will be glad you kept them separate.
I have a Vanguard account that says “Rollover IRA” because I first opened it for a rollover. However I have since contributed to it... so not sure the terminology helps at Vanguard.
NancyABQ
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by NancyABQ »

epargnant wrote: Thu May 06, 2021 11:46 am
NancyABQ wrote: Wed May 05, 2021 9:33 pm Make sure to keep the rollover from the 401K in a separate "Rollover IRA". If you end up making direct Traditional IRA contributions in the future, make a separate account for that. This way you may be able to someday roll the "Rollover IRA" into a 401k in the future. Some 401k's won't accept funds from a "Contributory IRA".

At Schwab, these are different account types, one called "Rollover IRA" and the other called "Contributory IRA". I am not sure if other brokerages do this.

It may never matter for you, but if it does matter you will be glad you kept them separate.
I have a Vanguard account that says “Rollover IRA” because I first opened it for a rollover. However I have since contributed to it... so not sure the terminology helps at Vanguard.
I think it's the same at Schwab -- I don't think anything stops me from "tainting" my Rollover IRA with direct contributions. It's more of a way for you to keep them straight. Not sure, though.
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retiredjg
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by retiredjg »

epargnant wrote: Thu May 06, 2021 11:46 am I have a Vanguard account that says “Rollover IRA” because I first opened it for a rollover. However I have since contributed to it... so not sure the terminology helps at Vanguard.
What I have read here is that the IRA is technically no longer a rollover IRA if you make contributions to it. However, the name does not actually change. I don't believe this has anything to do with where the IRA is held.
HomeStretch
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by HomeStretch »

Have you received a formal plan communication about the termination?

The 401k plan must provide written notice to all participants if the plan is terminated including a rollover notice which will specify a deadline by which the plan assets must be distributed to participants (if it is a full termination). For a full termination, there won’t be an option to leave your account in the plan past the deadline.

Usually you must move your account within a period that is not longer than a year. If you can hold off on rolling over your account to Traditional/Roth IRAs until after 12/31/21, it will not impact (i.e., result in pro-rated taxes) on a 2021 conversion in connection with a backdoor Roth.
Topic Author
le_sacre
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by le_sacre »

Thanks so much for the replies, all! I really love this community.

I received an email notice from the provider (Guideline) of the plan termination, without any accompanying documentation. It looks like there will be an "entire plan review", after which the distributions will be processed, but there's no indication of how long that will take.

So I gather that I may have more time than I originally thought, so I will wait and see for now... Hopefully by the time I must take action, I'll have a better rollover option available. I don't have any side income (apart from dividends in my taxable), so I don't think a solo 401k will work.

I feel like startup employees ought to be made more aware of the possibility of this scenario. It really took me by surprise. I suppose I am in for another rude shock if/when my previous employer eventually goes out of business...

Is this an argument for delaying backdoor Roth conversions until the end of the tax year, so you don't risk having unexpected pre-tax rollovers running you into the pro-rata rule? I have always done it at the start, to maximize time-in-market.
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FiveK
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Re: 401k plan termination, no new 401k available, keep ability to do backdoor Roth?

Post by FiveK »

le_sacre wrote: Thu May 06, 2021 5:17 pm Is this an argument for delaying backdoor Roth conversions until the end of the tax year, so you don't risk having unexpected pre-tax rollovers running you into the pro-rata rule? I have always done it at the start, to maximize time-in-market.
Yes, it's an argument. Present situation notwithstanding, cessation of a 401k plan is an uncommon occurrence, so "maximize time-in-market" is usually the better argument.
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