All investments in 401K. Should we open a Roth/backdoor?

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Dek17
Posts: 21
Joined: Wed Jan 18, 2017 3:40 pm

All investments in 401K. Should we open a Roth/backdoor?

Post by Dek17 »

Hello all. Looking for some sound advice.

We (him to be 64, her to be 62 by year end) have approximately $1.3M (of which $39K is already tax free) in our 401Ks. DH plans to retire this September from Megacorp. Our current tax rate is 22% and will revert to 24% just after he reaches SS FRA in 2024. Until then, we’ll collect a pension of $45K and pull from our 401K to meet our annual expense of $65K, putting us in the 12% tax bracket.

His work gives him the option to open a roth and roll over from his 401 to a Roth IRA. Should be begin a rollover before he leaves the job so one is established? Note: He’ll be leaving this September but will keep his money at the company until we decide the next move.

If a Roth IRA is established at ex-employer, we can then roll over the Roth along with his 401K to an outside company. This will give us 7-8 years to move $350-$500K of the 401K into the new Roth (between September 2021 and 2029) before collecting RMDs. The goal is to lessen the tax burden at age 72 when our income will be over $100K with RMDs. Luckily, we live in a state free of state tax during retirement.

When I mentioned wanting to open a Roth or do a backdoor Roth, two different CPA’s, said it wasn’t worth it because it’s 6 of one, half dozen of the other.

Thoughts and best time to start moving 401 cash to Roth IRA or do a backdoor? Thanks for any input and suggestions.
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: All investments in 401K. Should we open a Roth/backdoor?

Post by FiveK »

If your current tax rate is 22%, unless you have very large itemized deductions you likely have no need to use the Backdoor Roth process. If you have enough excess income that you reach step #6 in the Investment Order suggestions, using the Mega Backdoor Roth IRA process (if the employer allows) makes sense.

It might make sense for at least the higher earner to delay SS benefits until age 70. See Open Social Security: Free, Open-Source Social Security Calculator to evaluate your particular situation.

Roth IRAs are usually opened at brokerages such as Fidelity, Schwab, Vanguard, etc., not employers. Do you have a special case?

See the "Roth IRA conversion" wiki article, particularly the Using a spreadsheet section if you are so inclined, for a couple of tools you may find helpful. Optimal Retirement Planner is another tool that may be useful.

If neither of you has a Roth IRA now, opening ones with minor contributions (e.g., $100) would start a "five year clock" running. See the table form that shows all your Roth withdrawals would be tax and penalty free after the oldest Roth IRA (per person) is at least five tax years old and the person is >59.5.

Doing Roth conversions while working is usually not advisable due to the high marginal tax rate (compared with after retirement) usually incurred.
Topic Author
Dek17
Posts: 21
Joined: Wed Jan 18, 2017 3:40 pm

Re: All investments in 401K. Should we open a Roth/backdoor?

Post by Dek17 »

Thanks FiveK. I will review all the links you posted. I wasn't aware that Roth IRA's are only available via institutions...that's how much I know :?. Much appreciated.
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