High-fee 401(k) vs Backdoor roth

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Topic Author
finetuning
Posts: 53
Joined: Sat Feb 20, 2016 4:46 pm

High-fee 401(k) vs Backdoor roth

Post by finetuning »

My wife recently left her job to take care of our children. She may go back in a few years, who knows. She has a 401(k) balance of about $105K which unfortunately has some high fees. It looks like she is paying ~$67 per quarter for an "Asset Based Charge" and ~$46 per month for "Registered Investment Advisor Fee". So this totals about 820 per year, or about 80 bps. The funds themselves are low-cost index.

The problem with rolling this over is that then it will subject her to the pro rata rule for her annual backdoor Roth IRA contribution.

My question to the forum is which of these would you do:

1. Keep the funds in the employer 401(k) paying 0.80% per year in dumb fees and be able to contribute to a Roth via backdoor method.

or

2. Roll over the 401(k) to a traditional IRA and stop contributing to Roth.
absolute zero
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Joined: Thu Dec 29, 2016 3:59 pm

Re: High-fee 401(k) vs Backdoor roth

Post by absolute zero »

Essentially you are asking if it’s worth paying $820 worth of fees in order to make a $6k backdoor Roth contribution. That’s a tough hurdle to overcome. I don’t know the answer but my gut says to rollover to TIRA to save the fees.

If you can’t contribute to backdoor Roth, where would that $6k go? Taxable account? If so, what would be your income in retirement when you withdraw from that taxable account? If you expect to be in 0% bracket for LTCG, then I imagine it’s a no brainer to skip the Roth. If you expect to be in 15% or 20% bracket, then I suppose there’s a chance that the backdoor Roth contributions can save enough in taxes to overcome the initial $820 hurdle.
absolute zero
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Re: High-fee 401(k) vs Backdoor roth

Post by absolute zero »

Are you making other retirement contributions eg in your 401k? If so, are they Roth or Traditional contributions? Another potential option that could make sense (or not!) is to rollover funds and convert them over the course of 2 or 3 years to Roth. You could keep making backdoor contributions this way. But it wouldn’t make sense if you’re currently in a high tax bracket, or if you’re in a moderate tax bracket but already have plenty of Roth funds.
bling
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Re: High-fee 401(k) vs Backdoor roth

Post by bling »

huh? if your wife left her job, where's her income coming from now that is enough to warrant contributing anything to an IRA, let alone a backdoor Roth?
MrJedi
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Re: High-fee 401(k) vs Backdoor roth

Post by MrJedi »

bling wrote: Wed Jan 19, 2022 9:29 am huh? if your wife left her job, where's her income coming from now that is enough to warrant contributing anything to an IRA, let alone a backdoor Roth?
Spouse income
earflop
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Joined: Fri Sep 20, 2019 5:34 pm

Re: High-fee 401(k) vs Backdoor roth

Post by earflop »

finetuning wrote: Tue Jan 18, 2022 9:23 pm My wife recently left her job to take care of our children. She may go back in a few years, who knows.
Does your wife have any interest in a side hustle that could allow her to open up a Solo 401(k)? Could then roll her balance into that.
bling
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Re: High-fee 401(k) vs Backdoor roth

Post by bling »

earflop wrote: Wed Jan 19, 2022 9:54 am
finetuning wrote: Tue Jan 18, 2022 9:23 pm My wife recently left her job to take care of our children. She may go back in a few years, who knows.
Does your wife have any interest in a side hustle that could allow her to open up a Solo 401(k)? Could then roll her balance into that.
hmmm, is there a minimum required income for that to work? seems like it would be too easy of a workaround if someone could just sell a couple items on ebay.
earflop
Posts: 93
Joined: Fri Sep 20, 2019 5:34 pm

Re: High-fee 401(k) vs Backdoor roth

Post by earflop »

bling wrote: Wed Jan 19, 2022 10:00 am
earflop wrote: Wed Jan 19, 2022 9:54 am
finetuning wrote: Tue Jan 18, 2022 9:23 pm My wife recently left her job to take care of our children. She may go back in a few years, who knows.
Does your wife have any interest in a side hustle that could allow her to open up a Solo 401(k)? Could then roll her balance into that.
hmmm, is there a minimum required income for that to work? seems like it would be too easy of a workaround if someone could just sell a couple items on ebay.
Search this forum, the topic comes up somewhat frequently. As long as you don't mind paying self employment taxes, it's a valid option.
scophreak
Posts: 502
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Re: High-fee 401(k) vs Backdoor roth

Post by scophreak »

bling wrote: Wed Jan 19, 2022 9:29 am huh? if your wife left her job, where's her income coming from now that is enough to warrant contributing anything to an IRA, let alone a backdoor Roth?
Spousal IRAs
If you file a joint return, you may be able to contribute to an IRA even if you didn’t have taxable compensation as long as your spouse did. Each spouse can make a contribution up to the current limit; however, the total of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the Kay Bailey Hutchison Spousal IRA Limit in Publication 590-A.

If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.

https://www.irs.gov/retirement-plans/pl ... ion-limits
wolf359
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Re: High-fee 401(k) vs Backdoor roth

Post by wolf359 »

absolute zero wrote: Tue Jan 18, 2022 10:06 pm Are you making other retirement contributions eg in your 401k? If so, are they Roth or Traditional contributions? Another potential option that could make sense (or not!) is to rollover funds and convert them over the course of 2 or 3 years to Roth. You could keep making backdoor contributions this way. But it wouldn’t make sense if you’re currently in a high tax bracket, or if you’re in a moderate tax bracket but already have plenty of Roth funds.
The high fees are guaranteed, so I'd roll over the 401k to an IRA and stop the bleeding right away.

The existence of the IRA only blocks the Roth conversion, not her ability to contribute additional funds. So she could continue to contribute to a traditional IRA, and wait to conduct the Roth conversion after she moves the rollover IRA back into another 401k. (If she goes back to work in a few years, she wouldn't have lost the contributions, although she may pay taxes on the gains in the account.)

And if she starts a side hustle and creates a solo 401k, she can move the rollover IRA into that. This would reduce the amount of time that the rollover IRA is blocking the Roth conversion.

But I believe the high fees trump the backdoor Roth. I'd do a rollover immediately.
an_asker
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Re: High-fee 401(k) vs Backdoor roth

Post by an_asker »

finetuning wrote: Tue Jan 18, 2022 9:23 pm My wife recently left her job to take care of our children. She may go back in a few years, who knows. She has a 401(k) balance of about $105K which unfortunately has some high fees. It looks like she is paying ~$67 per quarter for an "Asset Based Charge" and ~$46 per month for "Registered Investment Advisor Fee". So this totals about 820 per year, or about 80 bps. The funds themselves are low-cost index.

The problem with rolling this over is that then it will subject her to the pro rata rule for her annual backdoor Roth IRA contribution.

My question to the forum is which of these would you do:

1. Keep the funds in the employer 401(k) paying 0.80% per year in dumb fees and be able to contribute to a Roth via backdoor method.

or

2. Roll over the 401(k) to a traditional IRA and stop contributing to Roth.
How about a third option:

What tax bracket are you guys in right now? If you will get to the next higher bracket(s) after she returns to work - plus tax rates are slated to increase in a few years anyway - would it make any sense if you were to convert the entire balance to a Roth IRA right now at your current tax bracket (assuming you will not jump to a much higher bracket when that $105k is factored in)?
wetgear
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Re: High-fee 401(k) vs Backdoor roth

Post by wetgear »

finetuning wrote: Tue Jan 18, 2022 9:23 pm ~$46 per month for "Registered Investment Advisor Fee".
Seems like you could get rid of ~ 40% of the fees by dropping the advisor.
User avatar
retiredjg
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Re: High-fee 401(k) vs Backdoor roth

Post by retiredjg »

I like Roth, but I would not pay that much in unnecessary fees a year in order to put $6k into Roth IRA. I'd put the $6k into a taxable account..not quite as good as Roth, but almost.
Topic Author
finetuning
Posts: 53
Joined: Sat Feb 20, 2016 4:46 pm

Re: High-fee 401(k) vs Backdoor roth

Post by finetuning »

Thank you all for the thoughtful replies. I have responded below, and everything seems to be leaning toward ditch the bad 401(k). This was my gut feel as well. I think the side hustle for a individual 401(k) is the best idea, thanks for the tip there!
absolute zero wrote: Tue Jan 18, 2022 9:57 pm Essentially you are asking if it’s worth paying $820 worth of fees in order to make a $6k backdoor Roth contribution. That’s a tough hurdle to overcome. I don’t know the answer but my gut says to rollover to TIRA to save the fees.

If you can’t contribute to backdoor Roth, where would that $6k go? Taxable account? If so, what would be your income in retirement when you withdraw from that taxable account? If you expect to be in 0% bracket for LTCG, then I imagine it’s a no brainer to skip the Roth. If you expect to be in 15% or 20% bracket, then I suppose there’s a chance that the backdoor Roth contributions can save enough in taxes to overcome the initial $820 hurdle.
Yep, taxable. Hard to predict LTCG, but I think using 0% as an assumption is fair for my situation and agree that makes it a no brainer.
absolute zero wrote: Tue Jan 18, 2022 10:06 pm Are you making other retirement contributions eg in your 401k? If so, are they Roth or Traditional contributions? Another potential option that could make sense (or not!) is to rollover funds and convert them over the course of 2 or 3 years to Roth. You could keep making backdoor contributions this way. But it wouldn’t make sense if you’re currently in a high tax bracket, or if you’re in a moderate tax bracket but already have plenty of Roth funds.
Not sure if I'm tracking with this, but yes, I'm making contributions in my 401(k) as well and they are traditional (but that shouldn't matter as pro rata rule is based on per person).

Are you saying roll over the full $105K "wife 401(k)" and slowly convert to Roth and then resume doing the back doors? Not a bad idea, but I do think I'm in the highest tax bracket I'll be in right now, so I think I'd rather avoid the tax consequences of this.
bling wrote: Wed Jan 19, 2022 9:29 am huh? if your wife left her job, where's her income coming from now that is enough to warrant contributing anything to an IRA, let alone a backdoor Roth?
"Husband" income :D
earflop wrote: Wed Jan 19, 2022 9:54 am
finetuning wrote: Tue Jan 18, 2022 9:23 pm My wife recently left her job to take care of our children. She may go back in a few years, who knows.
Does your wife have any interest in a side hustle that could allow her to open up a Solo 401(k)? Could then roll her balance into that.
Well... no she doesn't... but for saving this kind of cash, I wonder if we can come up with a side hustle for a bit for her. Doesn't need to last long for this idea to profit! :sharebeer
scophreak wrote: Wed Jan 19, 2022 10:15 am
If you file a joint return, you may be able to contribute to an IRA even if you didn’t have taxable compensation as long as your spouse did. Each spouse can make a contribution up to the current limit; however, the total of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the Kay Bailey Hutchison Spousal IRA Limit in Publication 590-A.

If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.

https://www.irs.gov/retirement-plans/pl ... ion-limits
Can you check me on this? I think this doesn't work because our income will be over $208K.

Looking at table for "Not covered by an employer, but spouse is", MFJ, seems to show that over $208K a spousal IRA won't be deductible.
wolf359 wrote: Wed Jan 19, 2022 10:36 am
absolute zero wrote: Tue Jan 18, 2022 10:06 pm Are you making other retirement contributions eg in your 401k? If so, are they Roth or Traditional contributions? Another potential option that could make sense (or not!) is to rollover funds and convert them over the course of 2 or 3 years to Roth. You could keep making backdoor contributions this way. But it wouldn’t make sense if you’re currently in a high tax bracket, or if you’re in a moderate tax bracket but already have plenty of Roth funds.
The high fees are guaranteed, so I'd roll over the 401k to an IRA and stop the bleeding right away.

The existence of the IRA only blocks the Roth conversion, not her ability to contribute additional funds. So she could continue to contribute to a traditional IRA, and wait to conduct the Roth conversion after she moves the rollover IRA back into another 401k. (If she goes back to work in a few years, she wouldn't have lost the contributions, although she may pay taxes on the gains in the account.)

And if she starts a side hustle and creates a solo 401k, she can move the rollover IRA into that. This would reduce the amount of time that the rollover IRA is blocking the Roth conversion.

But I believe the high fees trump the backdoor Roth. I'd do a rollover immediately.
Love it. 100% agree.
an_asker wrote: Wed Jan 19, 2022 10:57 am
finetuning wrote: Tue Jan 18, 2022 9:23 pm My wife recently left her job to take care of our children. She may go back in a few years, who knows. She has a 401(k) balance of about $105K which unfortunately has some high fees. It looks like she is paying ~$67 per quarter for an "Asset Based Charge" and ~$46 per month for "Registered Investment Advisor Fee". So this totals about 820 per year, or about 80 bps. The funds themselves are low-cost index.

The problem with rolling this over is that then it will subject her to the pro rata rule for her annual backdoor Roth IRA contribution.

My question to the forum is which of these would you do:

1. Keep the funds in the employer 401(k) paying 0.80% per year in dumb fees and be able to contribute to a Roth via backdoor method.

or

2. Roll over the 401(k) to a traditional IRA and stop contributing to Roth.
How about a third option:

What tax bracket are you guys in right now? If you will get to the next higher bracket(s) after she returns to work - plus tax rates are slated to increase in a few years anyway - would it make any sense if you were to convert the entire balance to a Roth IRA right now at your current tax bracket (assuming you will not jump to a much higher bracket when that $105k is factored in)?
This is a good idea too, but if she does go back, I'll scale back significantly so I don't expect we'll be in a higher bracket. If tax rates go up then that could be a risk, but I feel good deducting everything I can today and being in a lower bracket in the future.

wetgear wrote: Wed Jan 19, 2022 11:13 am
finetuning wrote: Tue Jan 18, 2022 9:23 pm ~$46 per month for "Registered Investment Advisor Fee".
Seems like you could get rid of ~ 40% of the fees by dropping the advisor.
I wish... unfortunately it isn't an option. Don't get me started on this crappy 401(k) :annoyed
scophreak
Posts: 502
Joined: Tue Jan 12, 2016 12:17 pm

Re: High-fee 401(k) vs Backdoor roth

Post by scophreak »

finetuning wrote: Wed Jan 19, 2022 7:07 pm
scophreak wrote: Wed Jan 19, 2022 10:15 am If you file a joint return, you may be able to contribute to an IRA even if you didn’t have taxable compensation as long as your spouse did. Each spouse can make a contribution up to the current limit; however, the total of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the Kay Bailey Hutchison Spousal IRA Limit in Publication 590-A.

If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.

https://www.irs.gov/retirement-plans/pl ... ion-limits
Can you check me on this? I think this doesn't work because our income will be over $208K.

Looking at table for "Not covered by an employer, but spouse is", MFJ, seems to show that over $208K a spousal IRA won't be deductible.
According to my understanding, for tax year 2022 spousal contribution under these circumstances is fully deductible for MAGI <$204,000, partially deductible for $204,000<MAGI<$214,000 and not deductible for MAGI>$214,000.
Navillus1968
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Location: FL Tampa Bay

Re: High-fee 401(k) vs Backdoor roth

Post by Navillus1968 »

bling wrote: Wed Jan 19, 2022 10:00 am
earflop wrote: Wed Jan 19, 2022 9:54 am
finetuning wrote: Tue Jan 18, 2022 9:23 pm My wife recently left her job to take care of our children. She may go back in a few years, who knows.
Does your wife have any interest in a side hustle that could allow her to open up a Solo 401(k)? Could then roll her balance into that.
hmmm, is there a minimum required income for that to work? seems like it would be too easy of a workaround if someone could just sell a couple items on ebay.
There are limits to Solo 401k contributions as an employee & separately as your own employer, both based “net earnings from self-employment” with other factors. However, you don't really care about contributions- once DW's side hustle is established & the Solo 401k is open with $1, you can rollover her IRA regardless of how much her Estsy/eBay/Lawn mowing side hustle is bringing in.

https://obliviousinvestor.com/solo-401k ... alculator/
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