401k to IRA rollover and backdoor Roth same year?

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atl2005
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401k to IRA rollover and backdoor Roth same year?

Post by atl2005 »

My wife's old company is being bought out and we have to do something with her existing 401k plan. It's currently in a nationwide account but we need to roll it to an IRA.

Her old employer's financial advisor says he can roll it into an IRA at American Funds for us, but can it be rolled into an IRA at any other institution such as Vanguard ?

Also does this rollover cause an issue with the backdoor Roth IRA we have already done for her this year ?
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retiredjg
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by retiredjg »

It would be best if you can delay this rollover until January. If she rolls to IRA and the money is still in IRA at the end of this year, it will cause her backdoor Roth from earlier this year to be pro-rated. Not the end of the world, but definitely not convenient and best avoided if possible.

The other possibility is to roll it (directly or indirectly) into Her New 401k (if there is one).

Her Old advisor has suggested rolling into a place IRA where he can make money. Don't do it and don't use American Funds which have a front end load. If it must go to IRA, even temporarily, pick Fidelity, Vanguard or Schwab and invest in broad market index funds.
Topic Author
atl2005
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by atl2005 »

retiredjg wrote: Tue Oct 19, 2021 2:06 pm It would be best if you can delay this rollover until January. If she rolls to IRA and the money is still in IRA at the end of this year, it will cause her backdoor Roth from earlier this year to be pro-rated. Not the end of the world, but definitely not convenient and best avoided if possible.

The other possibility is to roll it (directly or indirectly) into Her New 401k (if there is one).

Her Old advisor has suggested rolling into a place IRA where he can make money. Don't do it and don't use American Funds which have a front end load. If it must go to IRA, even temporarily, pick Fidelity, Vanguard or Schwab and invest in broad market index funds.
Yeah my best option might be to contact her current employers 401k which is through American Funds also unfortunately and let them help me roll it into her current 401k plan. I don't want to cause an issue with the backdoor Roth and we have already completed it for this year.
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retiredjg
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by retiredjg »

American Funds are good funds although their expense ratios are somewhat high by Bogleheads standards. The problem with American Funds in an IRA is that they have a front end load, usually close to 6%.

Guess who gets part of that 6%?

Unless her new 401k is poor, I would roll the old 401k into the new 401k to avoid pro-rating. If the new plan is poor, try to delay till January and roll to IRA and stop doing backdoor for her (which does not affect your backdoor).

If you cannot delay, roll into the new 401k if they will allow her to roll it back out after the first of the year to go into IRA (this is allowed by law, not sure if the plan how to allow it). Then stop doing backdoor for her.
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ResearchMed
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by ResearchMed »

Is it possible that the load is waived for those within the 401k plan?

I've noticed that in our 403b plan, when it was at Vanguard and again now that it is back at TIAA, there are "load funds" that do NOT have a load when purchased within our plan. (I'm assuming the "fine print" is correct, because I haven't bought any of those funds.)

Also, at Schwab, there are quite a few funds that, in the smaller print on the page about the fund, have the load waived when purchased through Schwab.

So I don't know how often the loads are actually charged these days.
Is it still (frequently?) a real problem?

RM
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atl2005
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by atl2005 »

Pro rating a backdoor Roth sounds like a tax nightmare for me since I don't know what that really means. I'm going to have her contact her old advisor from work and see if we can start the paperwork to roll this old 401 into her new 401k plan. I don't want to cause an issue going forward with the Roth conversion either so this is probably my best option. I looked at several of the American funds and the balanced fund fits what we are needing around 65/35 stock to bond and has a solid track record.

We will call and see how to begin this process and hopefully it's not too painful. Thanks for the advice
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retiredjg
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by retiredjg »

Rolling one 401k into another is everyday stuff and should not cause any problems. That said, start now. It is not a fast process and sometimes delays do happen....and the end of the year is a lot closer than it seems (only about 10 weeks).
exodusNH
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by exodusNH »

retiredjg wrote: Tue Oct 19, 2021 3:08 pm American Funds are good funds although their expense ratios are somewhat high by Bogleheads standards. The problem with American Funds in an IRA is that they have a front end load, usually close to 6%.

Guess who gets part of that 6%?

Unless her new 401k is poor, I would roll the old 401k into the new 401k to avoid pro-rating. If the new plan is poor, try to delay till January and roll to IRA and stop doing backdoor for her (which does not affect your backdoor).

If you cannot delay, roll into the new 401k if they will allow her to roll it back out after the first of the year to go into IRA (this is allowed by law, not sure if the plan how to allow it). Then stop doing backdoor for her.
At least in my case, the American Funds in my 401k are of a share classes that has no load or 12b-1 fees. They're not available to retail investors.
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ResearchMed
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by ResearchMed »

exodusNH wrote: Tue Oct 19, 2021 4:06 pm
retiredjg wrote: Tue Oct 19, 2021 3:08 pm American Funds are good funds although their expense ratios are somewhat high by Bogleheads standards. The problem with American Funds in an IRA is that they have a front end load, usually close to 6%.

Guess who gets part of that 6%?

Unless her new 401k is poor, I would roll the old 401k into the new 401k to avoid pro-rating. If the new plan is poor, try to delay till January and roll to IRA and stop doing backdoor for her (which does not affect your backdoor).

If you cannot delay, roll into the new 401k if they will allow her to roll it back out after the first of the year to go into IRA (this is allowed by law, not sure if the plan how to allow it). Then stop doing backdoor for her.
At least in my case, the American Funds in my 401k are of a share classes that has no load or 12b-1 fees. They're not available to retail investors.
I think these days, with all the lawsuits about how Employer plans aren't being careful enough in selecting retirement plan choices, if a plan required load funds or didn't have much else, etc... that would be a tempting class action suit.

RM
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Eagle33
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by Eagle33 »

ResearchMed wrote: Tue Oct 19, 2021 4:20 pm I think these days, with all the lawsuits about how Employer plans aren't being careful enough in selecting retirement plan choices, if a plan required load funds or didn't have much else, etc... that would be a tempting class action suit.

RM
Agreed, but one should verify not assume their 401k has no load.
an_asker
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by an_asker »

retiredjg wrote: Tue Oct 19, 2021 3:55 pm Rolling one 401k into another is everyday stuff and should not cause any problems. That said, start now. It is not a fast process and sometimes delays do happen....and the end of the year is a lot closer than it seems (only about 10 weeks).
But if rolling from one 401k to another, the question of the year end deadline to avoid the issue of prorating is moot, isn't it?
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retiredjg
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by retiredjg »

an_asker wrote: Wed Oct 20, 2021 11:56 am
retiredjg wrote: Tue Oct 19, 2021 3:55 pm Rolling one 401k into another is everyday stuff and should not cause any problems. That said, start now. It is not a fast process and sometimes delays do happen....and the end of the year is a lot closer than it seems (only about 10 weeks).
But if rolling from one 401k to another, the question of the year end deadline to avoid the issue of prorating is moot, isn't it?
You are correct, thank you. My mind apparently slipped back into an IRA ---> 401k scenario while answering.

[Nevertheless, I do like to complete financial projects within a calendar year rather than spread them out over 2 tax years. Just easier.]
an_asker
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by an_asker »

retiredjg wrote: Wed Oct 20, 2021 12:10 pm [...]
[Nevertheless, I do like to complete financial projects within a calendar year rather than spread them out over 2 tax years. Just easier.]
Always good for sanity lol :sharebeer
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retiredjg
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Re: 401k to IRA rollover and backdoor Roth same year?

Post by retiredjg »

an_asker wrote: Wed Oct 20, 2021 12:56 pm
retiredjg wrote: Wed Oct 20, 2021 12:10 pm [...]
[Nevertheless, I do like to complete financial projects within a calendar year rather than spread them out over 2 tax years. Just easier.]
Always good for sanity lol :sharebeer
I think it makes taxes easier!
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