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ROTH conversion restrictions
Old 09-11-2016, 04:57 PM   #1
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ROTH conversion restrictions

Well, I am about to change employers very soon. My spouse and I have been unable to contribute to a ROTH for the last two years due to combined income restrictions. We have never done a ROTH conversion. My roll-over is at Vanguard and both current and new employer 401K plans are also there. Can anyone please advise me on my options?

-Both of us work and have 401k (me)/403B-
I have a sizable roll-over IRA from a previous employer (spouse does not)

1- Can my spouse open a traditional IRA, contribute after tax dollars, and then convert it to ROTH without IRS risk or penalties? If so, are there yearly contribution limitations?

2- I dont think I can do #1 above for myself without having to pay taxes on my pre-tax roll-over IRA dollars? I don't want to pay these taxes and the Vanguard conversion calculator results did not give me confidence here.....

3- Will my flexibility for ROTH conversions increase if I roll-into-my-401K all of my pre-tax IRA dollars?

4- BTW- I will have a fair amount of post tax cash once the company is bought because all my unvested stock will be immediately taxed & converted to cash according to my companies poison pill I have always loved maxing our annual ROTH contributions. Conversions always seemed confusing due to fine print restrictions.....

Thanks if you comment!

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Old 09-11-2016, 05:52 PM   #2
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We were in a similar situation several years ago. We had been unable to contribute directly to our Roth IRAs after the first year due to high incomes, so we had been contributing after tax money to our traditional IRAs. I had also rolled several pre-tax 401Ks into my IRA, while my DH only had post-tax money in his.

We converted his entire IRA to Roth and paid taxes on the gains at that time. Since then, he's contributed $6500 in post-tax money to his traditional IRA every year and immediately converted that to the Roth account, so there's no additional tax due. My money stays in my traditional IRA since there's no good way for me to convert it.

If you have a way of getting your pre-tax money out of your IRA and back into a 401K, then that would open up the conversion option for you as well. You'd still have to pay taxes on any growth your post-tax contributions have experienced, but that's a lot less than paying it on all the 401K money you've saved.

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Old 09-11-2016, 06:06 PM   #3
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When you look at a T-IRA you have before tax contributions, after tax contribution and earnings (or gains). The before tax contributions and the earnings both create extra taxes to occur in the roth conversion. Just something to keep in mind.

Your wife should be able to do a back door roth unless the closed that door ... or will in the near future.

You can always convert your TIRA to Roth... it is just a matter of taxes that need to be paid.

I would expect that your payout for non-vested option would add to your income in the year of the event. This may make roth conversions more expensive if you increase in tax bracket.
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Old 09-11-2016, 06:12 PM   #4
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Simple rule is don't do any backdoor Roth conversions in the same year you rollover your traditional 401k into a tIRA. You stay out of trouble that way.

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Old 09-11-2016, 06:12 PM   #5
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Thanks Cathy. Sounds like we're not alone here. From your experience it appears that even though we file taxes jointly my spouse can do yearly conversions to ROTH even though I have a roll-over. We will do this going forward.

Additionally, I will try and move my roll-over into the company 401k.

Unless others here say othewise.......

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Old 09-11-2016, 08:58 PM   #6
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I don't believe you can convert some of your 401(k) to Roth while still working at a company (could be company specific, I could be wrong). But you can certainly convert a Traditional IRA partially or entirely to a Roth IRA. So taking your rollover and putting it in a 401(k) limits your options. It's more flexible if you roll it over into a Traditional IRA.

The backdoor Roth is probably not an IRS priority. The IRS has a "step doctrine" where if you have an intermediate step that constructively allows you to contribute to a Roth IRA, they can accuse you of doing so when you're not allowed. Most people don't care. The most cautious advice I've seen is to wait one statement cycle, so your non-deductible Traditional IRA shows up on a statement. Then convert to a Roth IRA. But really there's no value in this for an IRS auditor - if they say it's not allowed, you get your money back and no taxes are gained by the IRS. So it just doesn't seem like a priority for the IRS either way.

One point confuses me. A married couple that can't contribute to a Roth IRA has an income over $194k, and is in the 28% tax bracket or higher. If your bracket is high enough, and you plan to retire early, you might want to start converting after quitting one or both jobs.
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Old 09-12-2016, 11:00 AM   #7
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Thanks everyone for your advice. I am still a bit confused about one question I had:

1- I dont want to convert my existing Roll Over (Pre tax Traditional IRA) to ROTH due to taxes. But, I believe having this Roll Over in a Traditional IRA prevents me from doing a backdoor ROTH with other after tax dollars. So, my question is: is it a good idea to roll my Pre tax Traditional IRA (401k Roll Over) into my current 401k, thus allowing me to later fund a new Traditional IRA with after tax dollars that I can convert to backdoor ROTH?
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Old 09-12-2016, 11:13 AM   #8
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Yes, assuming that your 401k has some decent investment options and decent expense ratios. Then you would be able to do back door Roths.

However, in your OP you state that you plan to change employers soon, so consider that too.
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Old 09-12-2016, 12:51 PM   #9
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Thanks pb4uski!

This weekend I read the my 401k rules and discovered I should be allowed to roll in my existing T-IRA. I need to call Vanguard and see if this is for sure allowed.

Also, the new employer uses Vanguard and their choices look good for me. Thanks for the heads up, though.

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