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Early 401k rollover - Diversification
Old 02-06-2012, 02:21 AM   #1
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Early 401k rollover - Diversification

Hi,
Anyone ever use the early diversification transfer of your employer's 401k to an external rollover account (IRA) ?
Just became entitled (age 55) to move 25% of my stock option 401K to a rollover account - where I can diversify my investments beyond employers 7 choices. Pros & Cons ? Taxes / NUA impact ? Thanks. - Mike G.
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Old 02-06-2012, 05:35 AM   #2
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This is an in-service distribution. Not enough detail. Is there much company stock, and is the cost basis for that stock low?
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Old 02-06-2012, 12:42 PM   #3
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A nice option to have if you've been wanting to get out of those 401k funds and into your favorites outside the plan.

The one thing that comes immediately to mind is that doing the conversion to an IRA will block you chance to do a "backdoor" Roth contribution, if your income is currently too high to make a normal Roth contribution. If you don't have any IRA's currently, you can make after-tax contributions to a TIRA and then quickly do a Roth conversion, effectively identical to a normal Roth contribution. However, if you have a TIRA with pre-tax dollars in it, any Roth conversion will be assumed to be from all IRA's proportionately. You'll end up having to pay some taxes on the portion that was assumed to come from the pre-tax IRA balances.

That may or may not be applicable to you. It was the only thing I regretted about converting my 401k to and IRA after I retired, since DW still works and keeps us above the Roth contribution limit.
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Backdoor Roth ?
Old 02-06-2012, 07:50 PM   #4
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Backdoor Roth ?

Hi,
Wondering what is a "backdoor" ROTH IRA ? Assuming you can fund a Roth IRA from early 401k Rollover, the monies are not tax paid in the 401kK - can you you put pre-taxed dollars into a Roth ? -Mike G.
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Old 02-06-2012, 08:28 PM   #5
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You cannot put pretax money into a Roth. A backdrop is a way to contribute to a Roth even if your income exceeds the limits. Your question is about an early rollover when NUA is possibly involved, and to answer that some detail is needed.
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Old 02-06-2012, 10:13 PM   #6
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The backdoor Roth contribution is a work-around for when you are not allowed to make a normal Roth contribution because your income exceeds the Roth limit. Instead, you contribute post-tax dollars to a traditional IRA. Then you convert that to a Roth. Because the IRA had only post-tax dollars you don't owe any taxes for the conversion, barring any small incidental gains. So it is just like a normal Roth contribution. Only needed if you can't do a normal Roth contribution.

So, as above, the reason you don't want to create a traditional IRA with pre-tax/401k rollover funds too early is that it interferes with that "backdoor" process. All Roth conversions are assumed to draw proportionately from all IRA's you may have. If you have a large traditional IRA with pre-tax money in it, then only a little bit of your little post-tax IRA converted and a large amount of your pre-tax IRA is converted and you owe a bunch of taxes. Not equivilent to a Roth contribution in that case.

That's the only regret I have about converting my 401k to an IRA. However, if you will be able to contribute to a Roth IRA normally until you retire, than this should not be a concern for you.
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