Convert Internship 401K to Roth?

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Topic Author
HereToLearn
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Convert Internship 401K to Roth?

Post by HereToLearn »

My son will be allowed to participate in his company’s 401K program this summer during his internship. Am I correct in thinking that he can transfer the 401K funds to Fidelity at the end of the summer, and then convert the Traditional IRA to Roth before year end? I realize that he will owe both federal and state taxes on the conversion.

He has an existing Roth account at Fidelity but no Traditional IRA account. Will he still be allowed to fund his 2021 Roth with $6,000 that he does not contribute to the company 401K?

The reason I am contemplating this is because he is a full-time student and his tax rate is as low as it will ever be in the coming years. He should graduate spring 2022, and then obtain a job that will land him in a higher tax bracket.

Is this allowed? Are there limits other than whatever contribution limits his company will impose?

 Is there something else I should be considering? Thanks!
mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Convert Internship 401K to Roth?

Post by mhalley »

Your plan seems fine and is allowable under current tax law. Roth IRA limits have no relation to 401k limits.To get the most bang for the buck he should pay the conversion taxes from taxable savings.
Topic Author
HereToLearn
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Re: Convert Internship 401K to Roth?

Post by HereToLearn »

mhalley wrote: Fri May 14, 2021 12:07 am Your plan seems fine and is allowable under current tax law. To get the most bang for the buck he should pay the conversion taxes from taxable savings.
Thanks for the quick response! Yes, I had planned to have him use his TA income to pay any conversion tax. I just realized there may be a little state tax arbitrage here that I hadn't considered at all until you mentioned paying conversion taxes. His work state income taxes are higher than his home state, even though he is working remotely from his lower tax home state. By funding the 401K in his work state, he will not pay state taxes there, and then when he converts in his home state, he will pay the slightly lower state taxes. (I think that is correct...)

Thanks again!
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Duckie
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Re: Convert Internship 401K to Roth?

Post by Duckie »

HereToLearn wrote: Fri May 14, 2021 12:05 am Will he still be allowed to fund his 2021 Roth with $6,000 that he does not contribute to the company 401K?
As long as his taxable earned income (after deducting the 401k contributions) is at least $6000 he can fund his personal Roth IRA.
Is there something else I should be considering?
He does not have to roll the 401k into a TIRA. He can roll it directly to his Roth IRA.
Topic Author
HereToLearn
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Joined: Sat Mar 17, 2018 5:53 pm

Re: Convert Internship 401K to Roth?

Post by HereToLearn »

Duckie wrote: Fri May 14, 2021 4:02 pm
HereToLearn wrote: Fri May 14, 2021 12:05 am Will he still be allowed to fund his 2021 Roth with $6,000 that he does not contribute to the company 401K?
As long as his taxable earned income (after deducting the 401k contributions) is at least $6000 he can fund his personal Roth IRA.

Is there something else I should be considering?
He does not have to roll the 401k into a TIRA. He can roll it directly to his Roth IRA.
THANK YOU!

He is not sure yet how much of his total pay he will be allowed to contribute to the company 401K, but he will make sure to leave $6K between the summer earnings and his very modest TA earnings, which were also W-2. I assume that he also has to make an allowance for FICA. He will need some spending money during his last year of college, so that will leave a buffer.

I did not know that was allowed. Even better news!

Thanks again.
marcopolo
Posts: 4362
Joined: Sat Dec 03, 2016 10:22 am

Re: Convert Internship 401K to Roth?

Post by marcopolo »

Duckie wrote: Fri May 14, 2021 4:02 pm
HereToLearn wrote: Fri May 14, 2021 12:05 am Will he still be allowed to fund his 2021 Roth with $6,000 that he does not contribute to the company 401K?
As long as his taxable earned income (after deducting the 401k contributions) is at least $6000 he can fund his personal Roth IRA.
Is there something else I should be considering?
He does not have to roll the 401k into a TIRA. He can roll it directly to his Roth IRA.
If the 401k has a Roth option, then you could contribute to both using the same earned income to qualify. Of course, the money for the IRA would have to come from somewhere else.

I am planning to do just that this summer. Son has undergrad research assistant position over the summer, expecting to earn about $5k. He will put every penny possible into Roth 401k at university. We will gift him $5k that he will stick in a Roth IRA, using the same earned income to qualify.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
HereToLearn
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Joined: Sat Mar 17, 2018 5:53 pm

Re: Convert Internship 401K to Roth?

Post by HereToLearn »

marcopolo wrote: Fri May 14, 2021 5:55 pm
Duckie wrote: Fri May 14, 2021 4:02 pm
HereToLearn wrote: Fri May 14, 2021 12:05 am Will he still be allowed to fund his 2021 Roth with $6,000 that he does not contribute to the company 401K?
As long as his taxable earned income (after deducting the 401k contributions) is at least $6000 he can fund his personal Roth IRA.
Is there something else I should be considering?
He does not have to roll the 401k into a TIRA. He can roll it directly to his Roth IRA.
If the 401k has a Roth option, then you could contribute to both using the same earned income to qualify. Of course, the money for the IRA would have to come from somewhere else.

I am planning to do just that this summer. Son has undergrad research assistant position over the summer, expecting to earn about $5k. He will put every penny possible into Roth 401k at university. We will gift him $5k that he will stick in a Roth IRA, using the same earned income to qualify.
That is nice that your son's university allows students to fund their Roth 401K.

My son's summer research fellowship awards were reported on 1099's and taxed at Kiddie tax rates but were not considered earnings for the purpose of funding his Roth.

I do not fully understand what you wrote above. Are you saying that if your son earns $5K as a summer research asst, he will be eligible to contribute $5K to his university's Roth 401K plan AND he can also use that same $5K to fund an external Roth? (I understand that you plan to give him the $5K, but for the purpose of this exercise, let's pretend he had an extra $5K in savings.) If I have this correct, does your son need to account for FICA in the company Roth 401K contribution? I know that one does not need to worry about it for the regular Roth, but I have not dealt with Roth 401K plans yet. Oh, never mind, no FICA owed as a university employee, but I do have the same FICA question on behalf of my son.

And jumping ahead here, if I have understood this, is the limit on the regular Roth $6K even if earned income (and possibly the Roth 401K contribution are higher)? I don't even know what type of 401K plan his company offers or what the contribution limit is, but assuming he deposits his entire earnings (less FICA?) in the company Roth 401K and borrows from me, could he fund the regular Roth up to $6K?

What will happen to the money your son has at his university once he graduates?
marcopolo
Posts: 4362
Joined: Sat Dec 03, 2016 10:22 am

Re: Convert Internship 401K to Roth?

Post by marcopolo »

HereToLearn wrote: Fri May 14, 2021 10:25 pm
marcopolo wrote: Fri May 14, 2021 5:55 pm
Duckie wrote: Fri May 14, 2021 4:02 pm
HereToLearn wrote: Fri May 14, 2021 12:05 am Will he still be allowed to fund his 2021 Roth with $6,000 that he does not contribute to the company 401K?
As long as his taxable earned income (after deducting the 401k contributions) is at least $6000 he can fund his personal Roth IRA.
Is there something else I should be considering?
He does not have to roll the 401k into a TIRA. He can roll it directly to his Roth IRA.
If the 401k has a Roth option, then you could contribute to both using the same earned income to qualify. Of course, the money for the IRA would have to come from somewhere else.

I am planning to do just that this summer. Son has undergrad research assistant position over the summer, expecting to earn about $5k. He will put every penny possible into Roth 401k at university. We will gift him $5k that he will stick in a Roth IRA, using the same earned income to qualify.
That is nice that your son's university allows students to fund their Roth 401K.

My son's summer research fellowship awards were reported on 1099's and taxed at Kiddie tax rates but were not considered earnings for the purpose of funding his Roth.

I do not fully understand what you wrote above. Are you saying that if your son earns $5K as a summer research asst, he will be eligible to contribute $5K to his university's Roth 401K plan AND he can also use that same $5K to fund an external Roth? (I understand that you plan to give him the $5K, but for the purpose of this exercise, let's pretend he had an extra $5K in savings.) If I have this correct, does your son need to account for FICA in the company Roth 401K contribution? I know that one does not need to worry about it for the regular Roth, but I have not dealt with Roth 401K plans yet. Oh, never mind, no FICA owed as a university employee, but I do have the same FICA question on behalf of my son.

And jumping ahead here, if I have understood this, is the limit on the regular Roth $6K even if earned income (and possibly the Roth 401K contribution are higher)? I don't even know what type of 401K plan his company offers or what the contribution limit is, but assuming he deposits his entire earnings (less FICA?) in the company Roth 401K and borrows from me, could he fund the regular Roth up to $6K?

What will happen to the money your son has at his university once he graduates?
A lot of questions buried in there. I will try to answer them all the best i can.
Please feel free to ask again if I missed anything.

1) The amount that you can contribute to to a Roth IRA is the smaller of $6k (ignoring catch-up provisions) and 100% of your earned income. For a W2 employee, the earned income amount is determined by the amount in Box 1 of the reported W2. There may be some portions of salary that get excluded from Box 1, so only the amount in Box 1 can be used to qualify for Roth IRA contributions.

2) 401k plans can offer a pre-tax option and optionally, a Roth 401k option. In either case, the maximum amount that can be contributed is 100% of earned income (up to $19,500, again ignoring catch-up provisions). The specific plan may further limit contributions to a lower percentage of income, and other payroll deductions (insurance, payroll taxes, etc.) can also lower the amount available to contribute to either type of 401k.

3) For someone with low income, the Roth 401k option makes more sense because they will not benefit much from the tax deduction anyway. Another really nice thing about contributing to a Roth 401k is that those contributions do NOT reduce the earned income amount as reported in Box 1 of the W2. So, you can essentially "double dip" the contributions to Roth accounts. This is NOT the case for pre-tax 401k contributions. Those contributions reduce the amount reported in Box 1, thus reducing how much can be used to qualify for IRA contributions.

4) When son graduates, or leaves other employment, most plans allow you to rollover the IRA to either another company's 401k or into a Roth IRA

So, yes. If your son earns more than $6k, he can put in as much as the company will allow into the Roth 401k (assuming they offer one), and still contribute the full $6k to a Roth IRA. The money for that can come form you or from his other savings, etc.

It will get him off to a good start on the road to savings.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
HereToLearn
Posts: 792
Joined: Sat Mar 17, 2018 5:53 pm

Re: Convert Internship 401K to Roth?

Post by HereToLearn »

marcopolo wrote: Fri May 14, 2021 11:06 pm
HereToLearn wrote: Fri May 14, 2021 10:25 pm
marcopolo wrote: Fri May 14, 2021 5:55 pm
Duckie wrote: Fri May 14, 2021 4:02 pm
HereToLearn wrote: Fri May 14, 2021 12:05 am Will he still be allowed to fund his 2021 Roth with $6,000 that he does not contribute to the company 401K?
As long as his taxable earned income (after deducting the 401k contributions) is at least $6000 he can fund his personal Roth IRA.
Is there something else I should be considering?
He does not have to roll the 401k into a TIRA. He can roll it directly to his Roth IRA.
If the 401k has a Roth option, then you could contribute to both using the same earned income to qualify. Of course, the money for the IRA would have to come from somewhere else.

I am planning to do just that this summer. Son has undergrad research assistant position over the summer, expecting to earn about $5k. He will put every penny possible into Roth 401k at university. We will gift him $5k that he will stick in a Roth IRA, using the same earned income to qualify.
That is nice that your son's university allows students to fund their Roth 401K.

My son's summer research fellowship awards were reported on 1099's and taxed at Kiddie tax rates but were not considered earnings for the purpose of funding his Roth.

I do not fully understand what you wrote above. Are you saying that if your son earns $5K as a summer research asst, he will be eligible to contribute $5K to his university's Roth 401K plan AND he can also use that same $5K to fund an external Roth? (I understand that you plan to give him the $5K, but for the purpose of this exercise, let's pretend he had an extra $5K in savings.) If I have this correct, does your son need to account for FICA in the company Roth 401K contribution? I know that one does not need to worry about it for the regular Roth, but I have not dealt with Roth 401K plans yet. Oh, never mind, no FICA owed as a university employee, but I do have the same FICA question on behalf of my son.

And jumping ahead here, if I have understood this, is the limit on the regular Roth $6K even if earned income (and possibly the Roth 401K contribution are higher)? I don't even know what type of 401K plan his company offers or what the contribution limit is, but assuming he deposits his entire earnings (less FICA?) in the company Roth 401K and borrows from me, could he fund the regular Roth up to $6K?

What will happen to the money your son has at his university once he graduates?
A lot of questions buried in there. I will try to answer them all the best i can.
Please feel free to ask again if I missed anything.

1) The amount that you can contribute to to a Roth IRA is the smaller of $6k (ignoring catch-up provisions) and 100% of your earned income. For a W2 employee, the earned income amount is determined by the amount in Box 1 of the reported W2. There may be some portions of salary that get excluded from Box 1, so only the amount in Box 1 can be used to qualify for Roth IRA contributions.

2) 401k plans can offer a pre-tax option and optionally, a Roth 401k option. In either case, the maximum amount that can be contributed is 100% of earned income (up to $19,500, again ignoring catch-up provisions). The specific plan may further limit contributions to a lower percentage of income, and other payroll deductions (insurance, payroll taxes, etc.) can also lower the amount available to contribute to either type of 401k.

3) For someone with low income, the Roth 401k option makes more sense because they will not benefit much from the tax deduction anyway. Another really nice thing about contributing to a Roth 401k is that those contributions do NOT reduce the earned income amount as reported in Box 1 of the W2. So, you can essentially "double dip" the contributions to Roth accounts. This is NOT the case for pre-tax 401k contributions. Those contributions reduce the amount reported in Box 1, thus reducing how much can be used to qualify for IRA contributions.

So, yes. If your son earns more than $6k, he can put in as much as the company will allow into the Roth 401k (assuming they offer one), and still contribute the full $6k to a Roth IRA. The money for that can come form you or from his other savings, etc.

It will get him off to a good start on the road to savings.
Thank you! You answered every question I had or any I could even think of! Now here's hoping that his company offers a Roth 401K.

I am still amazed that one can contribute to the Roth 401K and still use the same earned income to contribute to a Roth; that is amazing news that I will be sure to share with my friends with college-aged students and recent grads.

And yes, it will get him going with his savings as he has lagged because of having summer research awards instead of W-2 earnings.

Thanks again!
Monsterflockster
Posts: 737
Joined: Thu Nov 21, 2019 12:03 am

Re: Convert Internship 401K to Roth?

Post by Monsterflockster »

HereToLearn wrote: Fri May 14, 2021 11:13 pm
marcopolo wrote: Fri May 14, 2021 11:06 pm
HereToLearn wrote: Fri May 14, 2021 10:25 pm
marcopolo wrote: Fri May 14, 2021 5:55 pm
Duckie wrote: Fri May 14, 2021 4:02 pm
As long as his taxable earned income (after deducting the 401k contributions) is at least $6000 he can fund his personal Roth IRA.


He does not have to roll the 401k into a TIRA. He can roll it directly to his Roth IRA.
If the 401k has a Roth option, then you could contribute to both using the same earned income to qualify. Of course, the money for the IRA would have to come from somewhere else.

I am planning to do just that this summer. Son has undergrad research assistant position over the summer, expecting to earn about $5k. He will put every penny possible into Roth 401k at university. We will gift him $5k that he will stick in a Roth IRA, using the same earned income to qualify.
That is nice that your son's university allows students to fund their Roth 401K.

My son's summer research fellowship awards were reported on 1099's and taxed at Kiddie tax rates but were not considered earnings for the purpose of funding his Roth.

I do not fully understand what you wrote above. Are you saying that if your son earns $5K as a summer research asst, he will be eligible to contribute $5K to his university's Roth 401K plan AND he can also use that same $5K to fund an external Roth? (I understand that you plan to give him the $5K, but for the purpose of this exercise, let's pretend he had an extra $5K in savings.) If I have this correct, does your son need to account for FICA in the company Roth 401K contribution? I know that one does not need to worry about it for the regular Roth, but I have not dealt with Roth 401K plans yet. Oh, never mind, no FICA owed as a university employee, but I do have the same FICA question on behalf of my son.

And jumping ahead here, if I have understood this, is the limit on the regular Roth $6K even if earned income (and possibly the Roth 401K contribution are higher)? I don't even know what type of 401K plan his company offers or what the contribution limit is, but assuming he deposits his entire earnings (less FICA?) in the company Roth 401K and borrows from me, could he fund the regular Roth up to $6K?

What will happen to the money your son has at his university once he graduates?
A lot of questions buried in there. I will try to answer them all the best i can.
Please feel free to ask again if I missed anything.

1) The amount that you can contribute to to a Roth IRA is the smaller of $6k (ignoring catch-up provisions) and 100% of your earned income. For a W2 employee, the earned income amount is determined by the amount in Box 1 of the reported W2. There may be some portions of salary that get excluded from Box 1, so only the amount in Box 1 can be used to qualify for Roth IRA contributions.

2) 401k plans can offer a pre-tax option and optionally, a Roth 401k option. In either case, the maximum amount that can be contributed is 100% of earned income (up to $19,500, again ignoring catch-up provisions). The specific plan may further limit contributions to a lower percentage of income, and other payroll deductions (insurance, payroll taxes, etc.) can also lower the amount available to contribute to either type of 401k.

3) For someone with low income, the Roth 401k option makes more sense because they will not benefit much from the tax deduction anyway. Another really nice thing about contributing to a Roth 401k is that those contributions do NOT reduce the earned income amount as reported in Box 1 of the W2. So, you can essentially "double dip" the contributions to Roth accounts. This is NOT the case for pre-tax 401k contributions. Those contributions reduce the amount reported in Box 1, thus reducing how much can be used to qualify for IRA contributions.

So, yes. If your son earns more than $6k, he can put in as much as the company will allow into the Roth 401k (assuming they offer one), and still contribute the full $6k to a Roth IRA. The money for that can come form you or from his other savings, etc.

It will get him off to a good start on the road to savings.
Thank you! You answered every question I had or any I could even think of! Now here's hoping that his company offers a Roth 401K.

I am still amazed that one can contribute to the Roth 401K and still use the same earned income to contribute to a Roth; that is amazing news that I will be sure to share with my friends with college-aged students and recent grads.

And yes, it will get him going with his savings as he has lagged because of having summer research awards instead of W-2 earnings.

Thanks again!
So you’re saying if someone earns $6000 (in Box 1) they can contribute all $6000 to a Roth 401k and $6000 in a Roth IRA?

I guess the next question is... where does the 6k difference come from?
marcopolo
Posts: 4362
Joined: Sat Dec 03, 2016 10:22 am

Re: Convert Internship 401K to Roth?

Post by marcopolo »

Monsterflockster wrote: Fri May 14, 2021 11:20 pm
HereToLearn wrote: Fri May 14, 2021 11:13 pm
marcopolo wrote: Fri May 14, 2021 11:06 pm
HereToLearn wrote: Fri May 14, 2021 10:25 pm
marcopolo wrote: Fri May 14, 2021 5:55 pm

If the 401k has a Roth option, then you could contribute to both using the same earned income to qualify. Of course, the money for the IRA would have to come from somewhere else.

I am planning to do just that this summer. Son has undergrad research assistant position over the summer, expecting to earn about $5k. He will put every penny possible into Roth 401k at university. We will gift him $5k that he will stick in a Roth IRA, using the same earned income to qualify.
That is nice that your son's university allows students to fund their Roth 401K.

My son's summer research fellowship awards were reported on 1099's and taxed at Kiddie tax rates but were not considered earnings for the purpose of funding his Roth.

I do not fully understand what you wrote above. Are you saying that if your son earns $5K as a summer research asst, he will be eligible to contribute $5K to his university's Roth 401K plan AND he can also use that same $5K to fund an external Roth? (I understand that you plan to give him the $5K, but for the purpose of this exercise, let's pretend he had an extra $5K in savings.) If I have this correct, does your son need to account for FICA in the company Roth 401K contribution? I know that one does not need to worry about it for the regular Roth, but I have not dealt with Roth 401K plans yet. Oh, never mind, no FICA owed as a university employee, but I do have the same FICA question on behalf of my son.

And jumping ahead here, if I have understood this, is the limit on the regular Roth $6K even if earned income (and possibly the Roth 401K contribution are higher)? I don't even know what type of 401K plan his company offers or what the contribution limit is, but assuming he deposits his entire earnings (less FICA?) in the company Roth 401K and borrows from me, could he fund the regular Roth up to $6K?

What will happen to the money your son has at his university once he graduates?
A lot of questions buried in there. I will try to answer them all the best i can.
Please feel free to ask again if I missed anything.

1) The amount that you can contribute to to a Roth IRA is the smaller of $6k (ignoring catch-up provisions) and 100% of your earned income. For a W2 employee, the earned income amount is determined by the amount in Box 1 of the reported W2. There may be some portions of salary that get excluded from Box 1, so only the amount in Box 1 can be used to qualify for Roth IRA contributions.

2) 401k plans can offer a pre-tax option and optionally, a Roth 401k option. In either case, the maximum amount that can be contributed is 100% of earned income (up to $19,500, again ignoring catch-up provisions). The specific plan may further limit contributions to a lower percentage of income, and other payroll deductions (insurance, payroll taxes, etc.) can also lower the amount available to contribute to either type of 401k.

3) For someone with low income, the Roth 401k option makes more sense because they will not benefit much from the tax deduction anyway. Another really nice thing about contributing to a Roth 401k is that those contributions do NOT reduce the earned income amount as reported in Box 1 of the W2. So, you can essentially "double dip" the contributions to Roth accounts. This is NOT the case for pre-tax 401k contributions. Those contributions reduce the amount reported in Box 1, thus reducing how much can be used to qualify for IRA contributions.

So, yes. If your son earns more than $6k, he can put in as much as the company will allow into the Roth 401k (assuming they offer one), and still contribute the full $6k to a Roth IRA. The money for that can come form you or from his other savings, etc.

It will get him off to a good start on the road to savings.
Thank you! You answered every question I had or any I could even think of! Now here's hoping that his company offers a Roth 401K.

I am still amazed that one can contribute to the Roth 401K and still use the same earned income to contribute to a Roth; that is amazing news that I will be sure to share with my friends with college-aged students and recent grads.

And yes, it will get him going with his savings as he has lagged because of having summer research awards instead of W-2 earnings.

Thanks again!
So you’re saying if someone earns $6000 (in Box 1) they can contribute all $6000 to a Roth 401k and $6000 in a Roth IRA?

I guess the next question is... where does the 6k difference come from?
Yes. We gifted it to our son.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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