Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

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rando971
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Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by rando971 »

Ok, I have a situation that I've been working to figure out. In my day job I'm a finance executive and so know my way around Excel... and my analysis there on this decision is... close.

Here is the situation:

1. Status and Income: My wife and I are both 44yo, we have combined income runs $780k-$800k annually (she is a specialty physician at about $550k/annually, I'm a finance executive at my company at $230k-250k annually). MFJ tax status, we live in Texas. Our taxable income is in the top (37%) federal bracket.

2. Retirement savings: My wife has a 403b and a 457f plan and we max out $19,500 to EACH of those plans. I contribute $19,500 to my 401k. We max out our HSA $7,200 annually and just beginning this year are going to stop spending it, and instead think of it as long-term retirement savings. We also save excess money ($40k-$60k/year) into our taxable general brokerage.

3. Our account balances are as follows:
Wife 403b+457f $ 855k
Wife IRA 6k (I will backdoor-roll this into her Roth IRA this year as this contribution was nondeductible)
Wife Roth IRA. 31k
Wife 457(b) 192k (this has tax implications when she leaves employment/retires)
Husband 401k 137k
Husband IRA 206k
Husband Roth IRA 22k
General Brokerage 355k (taxable account)
HSA 5k
Company stock 100k (I'm conservatively assuming this will grow by only 50% over 10 years)
Money market 50k (I keep this in cash - short term savings- vacations, vehicle purchases, etc.)

4. I am moving towards a three fund portfolio approach across the full portfolio of course. That having been said, I do tend to keep more of the general brokerage amount in cash just for unusual situations.

5. The question is, do I:
a) rollover my IRA (the Husband IRA) into my employer's 401k plan, thereby freeing up my IRA to allow annual $6k non-deductible contributions and backdoor rollovers into my own Roth IRA? The upside is obvious, that being that I can do the backdoor Roth annually for myself also. Some downsides of this approach is that 1) my employer 401k plan has about 1% higher fees on average than a low cost vanguard or similar fund, and 2) I can never go back, and maybe I will wish I had more dollars in a nontaxable account in 20-25 years when I retire.
OR....
b) do I instead convert the whole IRA (the Husband IRA) to a Roth IRA and pay 37% tax on the whole balance, but now have the full amount in a nontaxable account that I can do backdoor Roth conversions into but also that I know will be nontaxable forever, without RMDs, etc.?
OR....
c) do I instead keep my IRA (the Husband IRA) as-is and just forego being able to do annual backdoor Roth conversions, but pay lower fees on the investment side than I would if I rolled it into my 401k?

6. A couple of other facts.... we will have our house paid off early, in 4 years from now, and the monthly cash we have been throwing at that for years ($5900/month, or about $71k/year) we can additionally save into our general brokerage account beyond what we are saving now... so that will be something like $100k per year we'll be putting in that account... even if we started to increase our charitable giving even more, maybe we'd still be putting $60-70k per year away in the brokerage account in addition to all the retirement stuff. So we should have a healthy source of already-taxed dollars (except capital gains here and there) in an account we can pull from to avoid triggering too high of a tax bracket during retirement.

7. It's difficult right now to know if our tax rate will be as high in retirement as it is now, and I realize that's part of the analysis. My personal feeling is that tax policy will probably drive higher tax rates for high income folks over the next 20-30 years, and so though based on today's bracket our rate during retirement might be 5% lower, by the time we actually get there, there may only be a 2-3% gap from where things are now.

Thank you all for your thoughts. It's just that the idea of paying 37% on $206k is painful, when I could just roll it into my employer 401k and see it continue to grow, and still make contributions to our general brokerage account as we do now. But I also take seriously the advice I hear from many directions saying that if I can get more dollars in a Roth long-term, I should consider it.
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retired@50
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by retired@50 »

I'd suggest you roll the IRA into your current 401k plan, if you can get the fees reduced. See link below about campaigning for a better plan.
I've added the underlined portion, after being swayed by the logic presented below. :happy

I'm not sure how long the two of you have been earning $780 - $800k per year, but based on the chart shown below, your tax-deferred account balances aren't unusually large for your age and income level. It would take several million more in tax-deferred balances to keep you in the same tax bracket when taking RMDs in the future. In fact, it might require nearly 8 figures in tax-deferred account balances to achieve this feat.

Image

ETA: See also, this wiki page on How to Campaign for a Better 401k plan.
https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

Regards,
Last edited by retired@50 on Mon Aug 02, 2021 8:31 am, edited 3 times in total.
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babystep
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by babystep »

rando971 wrote: Sun Aug 01, 2021 4:58 pm Ok, I have a situation that I've been working to figure out. In my day job I'm a finance executive and so know my way around Excel... and my analysis there on this decision is... close.


5. The question is, do I:
a) rollover my IRA (the Husband IRA) into my employer's 401k plan, thereby freeing up my IRA to allow annual $6k non-deductible contributions and backdoor rollovers into my own Roth IRA? The upside is obvious, that being that I can do the backdoor Roth annually for myself also. Some downsides of this approach is that 1) my employer 401k plan has about 1% higher fees on average than a low cost vanguard or similar fund, and 2) I can never go back, and maybe I will wish I had more dollars in a nontaxable account in 20-25 years when I retire.
I agree above to rollover IRA into 401k.

Why the fees are so high? Who is 401k provider and what funds are causing so much fees. You are finance executive at your company so could ask your HR/whoever to make a change of 401k provider or the funds etc. for the benefit of everyone at your company.
chassis
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by chassis »

@rando971

I view 401k plans as being more restrictive than an IRA. My experience is that IRAs have better investment choices, and better trading/management tools. The only attractions of rolling into a 401k in my view are to take advantage of an investment choice (a mutual fund) that wasn't available in the IRA, or the ability in your current employer's 401k to use the rule of 55. Does your current employer's 401k allow for the rule of 55, and do you plan to retire at age 55, and do you reasonably expect to remain with this employer until age 55? If yes to all three of those questions, consider rolling into the 401k. If no to any one of those questions, I would stay in the IRA.

I am not a fan of Roth conversions. This is hashed out ad nauseum on this site. At your tax bracket I can't see a benefit to you. Run your own numbers and be 100% sure that a Roth conversion will benefit you. I don't think it will, in fact it will hurt you to some degree. "Hurt" means your net worth will be lower at your end of plan (at time of your demise) than if you had not done Roth conversions.

Arguments will come supporting Roth conversions as beneficial to your heirs. I see this too as rubbish. The benefit to heirs, if any, is too small and too far into the future to be relevant.

In your scenario I would extinguish all debt, no matter how "cheap", and maximize tax advantaged investment vehicles. Then, with the money you will indeed have left over, invest very aggressively in equities.
Rex66
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by Rex66 »

Roll to 401k
Arboecars
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by Arboecars »

The larger question is why your non tax deferred savings are so low.
epoche
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by epoche »

rando971 wrote: Sun Aug 01, 2021 4:58 pm
5. The question is, do I:
a) rollover my IRA (the Husband IRA) into my employer's 401k plan, thereby freeing up my IRA to allow annual $6k non-deductible contributions and backdoor rollovers into my own Roth IRA? The upside is obvious, that being that I can do the backdoor Roth annually for myself also. Some downsides of this approach is that 1) my employer 401k plan has about 1% higher fees on average than a low cost vanguard or similar fund, and 2) I can never go back, and maybe I will wish I had more dollars in a nontaxable account in 20-25 years when I retire.
OR....
b) do I instead convert the whole IRA (the Husband IRA) to a Roth IRA and pay 37% tax on the whole balance, but now have the full amount in a nontaxable account that I can do backdoor Roth conversions into but also that I know will be nontaxable forever, without RMDs, etc.?
OR....
c) do I instead keep my IRA (the Husband IRA) as-is and just forego being able to do annual backdoor Roth conversions, but pay lower fees on the investment side than I would if I rolled it into my 401k?

Thank you all for your thoughts. It's just that the idea of paying 37% on $206k is painful, when I could just roll it into my employer 401k and see it continue to grow, and still make contributions to our general brokerage account as we do now. But I also take seriously the advice I hear from many directions saying that if I can get more dollars in a Roth long-term, I should consider it.
If you rollover $206K from IRA to 401k at +1% expense ratio in order to free up IRA for back-door Roth, you are effectively paying $2060 now and every year going forward for the privilege of avoiding capital gains tax on the returns on $6000 per year in 20+ years. Under current policy, it appears you're giving up more than you gain.

Paying a high tax rate now to do a full conversion seems odd. Even if tax policy changes, there are ways to respond if you keep the option of performing your Roth conversions at a more opportune time in the future.

If you think there would be such an opportunity, you can make non-deductible contributions to your tIRA with the intention of doing a full Roth conversion in the future. But this makes the accounting more complicated and means you'll pay ordinary income rates on any gain on the non-deductible contributions.

Or you can just contribute to your taxable brokerage and plan to pay capital gains tax at the future rate.

You could also expand your tax-deferred space a bit with I-bonds or EE-bonds. The small purchase limits would still fully subsume the funds you'd otherwise use for the backdoor Roth contributions. But that depends on on whether they'd fit with your overall allocation plan.

If you thought it likely you could influence the 401k policies to lower the fees, that would tilt toward doing the rollover into the 401k.
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Watty
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by Watty »

rando971 wrote: Sun Aug 01, 2021 4:58 pm Thank you all for your thoughts.
A couple of sort of random thoughts;

1) I might have missed it but I did not see any mention about you doing a mega back door Roth. Have you looked into doing that?

https://www.bogleheads.org/wiki/Mega-backdoor_Roth

2)
rando971 wrote: It's difficult right now to know if our tax rate will be as high in retirement as it is now, and I realize that's part of the analysis.
When looking at your likely retirement tax bracket first look at what your income needs will be. By then you will likely have a paid off house and any kids will be through college and off on their own so your income needs may be a lot lower. Under the current laws with a standard deduction an over 65 couple can have about $200K in taxable income and still be in the federal 22% tax bracket. People do spend that much but with a paid off house that would be a pretty high end lifestyle, which might not be your lifestyle.

If everything goes well and you are well off and in a high retirement tax bracket then you also need to consider what tax bracket your heirs will likely be in.

They might be in a much lower tax bracket or if you have any plans to leave money to a charity then the IRA could be left to a charity and they may pay no taxes on it.

3) People often focus on their current marginal tax rate and their likely marginal tax rate when they are retired, but often they miss something very important which is what happens to the money that they would have used to pay for the Roth conversion.

For example if you have about $75K in a taxable account to pay for the Roth conversion but decide not do do the Roth conversion then that $75K could be invested in something like a total stock market index fund for decades before it is taxed again. Under the current tax law that would likely be taxed at the 15% long term capital gains rate in retirement or if it goes to your estate it would get a stepped up cost basis and your heirs would pay not capital gains tax.
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FiveK
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by FiveK »

epoche wrote: Sun Aug 01, 2021 10:47 pm If you rollover $206K from IRA to 401k at +1% expense ratio in order to free up IRA for back-door Roth, you are effectively paying $2060 now and every year going forward for the privilege of avoiding capital gains tax on the returns on $6000 per year in 20+ years. Under current policy, it appears you're giving up more than you gain.

Paying a high tax rate now to do a full conversion seems odd. Even if tax policy changes, there are ways to respond if you keep the option of performing your Roth conversions at a more opportune time in the future.
+1

As things stand, foregoing what is for you a drop in the bucket ($6K/yr Roth) seems reasonable, given the high price you would have to pay for the privilege.

If you think you will be subject to the same (or higher) marginal rate in retirement as you are now, however, doing the conversion makes sense.
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by lazynovice »

It sounds like you are in an organization that needs to re-evaluate its 401(k). Given your salary and the mention of employee stock participation, it is large enough that the plan should not have fees 1% higher than… well anything. 1% is a lot these days and unless the company is small, it should not carry enormous fees.

I would not recommend paying the top tax bracket of taxes on a Roth conversion. With no mention of pensions, you are unlikely to be in the top bracket in retirement. The use of the 457f may create more risk than the just the average power couple with just two 401(k)s but I would not pay that amount of taxes right now. A lot can happen:

Your 401(k) could improve
You could change jobs to somewhere with a better 401(k)
One or both of you could have a low earning year (no bonus, wife has business write offs in future partnership, etc)

I’d forego the back door Roth and work to improve the 401(k).
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by phantom0308 »

Backdoor Roth isn’t worth 1% in fees IMO. Total stock market yields 2ish percent, so you’re losing less than 1% per year in a taxable account. The value of earnings not being taxed is dependent on factors that are difficult to predict like future tax rates, whether you’ll actually ever use the money, and potential for TLH.
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celia
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by celia »

Have you even read your 401K plan documents or inquired if they even accept IRA rollovers? That’s the first step .

How about splitting the IRA balance in half, then send half of it to your 401K, and convert half to your Roth IRA?
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.
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by lakpr »

In another thread, using some plain vanilla assumptions, I calculated that the opportunity cost of not being able to contribute to Roth IRA (through backdoor) can be taken to be approximately $1000 per year. { look at my calculations as to how I arrived at that opportunity cost, in my previous post here }

1% additional fees on $206k traditional IRA amount, if rolled into the 401k plan, is $2060 per year.

So my conclusion is that it is NOT worth it to roll the traditional IRA to 401k. Forego backdoor Roth and invest in taxable.
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by Jack FFR1846 »

I would NOT roll the tIRA to your 401k with high fees. Why?

At 1%, you're looking at what? 20 years until you retire? That's (very roughly) 20% in fees. Withdrawing from your IRA (RMD) may be reduced, but you'd still have to pay income tax to withdraw from the 401k. I don't see the benefit there. The lower your tax in retirement, the worse you are if you roll over.

With your income, you have way more than enough capacity to save more than you'll ever spend. I get that people don't want to pay taxes. Unless both you and your wife plan to retire very early (say in 5 years) and take zero income besides from retirement savings, to stay at 0 or near 0 tax rates, you're not going to end up with a tax free withdrawal.

I'm in a similar boat, but even bigger with well over a million dollars in tIRAs. My 401k is with Fidelity, where I can invest in the S&P 500 at 0.015% and no other fees and I have not made the move to roll my tIRAs over. I'll pay taxes when I withdraw. (shrug)
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by afan »

At current interest rates I would not be in a hurry to pay off the mortgage. If you have a high rate, refinance at a low fixed rate.
I would invest the money you have been throwing at the mortgage in a taxable account

Do not pay 1% to get into the 401k. Nowhere near worth it.

Roth also is not worth it. Maybe if you retire before RMDs start you will have some low income years to convert then.
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retiredjg
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by retiredjg »

Welcome to the forum. :happy
a) rollover my IRA (the Husband IRA) into my employer's 401k plan, thereby freeing up my IRA to allow annual $6k non-deductible contributions and backdoor rollovers into my own Roth IRA? The upside is obvious, that being that I can do the backdoor Roth annually for myself also. Some downsides of this approach is that 1) my employer 401k plan has about 1% higher fees on average than a low cost vanguard or similar fund, and 2) I can never go back, and maybe I will wish I had more dollars in a nontaxable account in 20-25 years when I retire.
I would not pay an extra $2,060 each year (assuming no growth) in order to get $6k into Roth instead of into a taxable account. Money going into taxable is taxed the same as money going into Roth. The only difference is how the gains are taxed. Getting some tax free gains would not be worth the extra $2k a year to me.

OR....
b) do I instead convert the whole IRA (the Husband IRA) to a Roth IRA and pay 37% tax on the whole balance, but now have the full amount in a nontaxable account that I can do backdoor Roth conversions into but also that I know will be nontaxable forever, without RMDs, etc.?
No.

OR....
c) do I instead keep my IRA (the Husband IRA) as-is and just forego being able to do annual backdoor Roth conversions, but pay lower fees on the investment side than I would if I rolled it into my 401k?
Yes. Save the money in a taxable account instead. Almost as good.

6. A couple of other facts.... we will have our house paid off early, in 4 years from now, and the monthly cash we have been throwing at that for years ($5900/month, or about $71k/year) we can additionally save into our general brokerage account beyond what we are saving now... so that will be something like $100k per year we'll be putting in that account... even if we started to increase our charitable giving even more, maybe we'd still be putting $60-70k per year away in the brokerage account in addition to all the retirement stuff. So we should have a healthy source of already-taxed dollars (except capital gains here and there) in an account we can pull from to avoid triggering too high of a tax bracket during retirement.
Nice, but not relevant to this decision in my opinion.
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rando971
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Re: Complex analysis- High income.. convert IRA to Roth, or Rollover to Employer 401k?

Post by rando971 »

Wow-- you all have provided quite a service to me here, I hope I can repay it!

I really appreciated the link to the opportunity cost analysis around missing a backdoor Roth opportunity.

For those that asked, I do have the ability to make after-tax contributions (and theoretically utilize a mega backdoor Roth approach), but by doing so I would through our safe harbor 401k plan out of compliance due to the fact I'm an HCE, thereby creating big problems for the company and forcing them to make distributions to all employees to fix the ADP test.

With regards to those who expressed concern on the heavy fees on the funds in our 401k plan, I agree completely. I'm working to fix this but it's a long term problem as there are some relationships involved as well between the founder and the 401k company; we'll get it sorted out eventually.

Thank you again, so much.
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