Backdoor Roth and Roth conversions - no current Roth or IRA

[Gumby]

Is this the statement you are referencing in the article?

" To do a conversion from a traditional 401(k) to a Roth IRA, however, is a two-step process. First, you roll the money over to an IRA, then you convert it to a Roth IRA."

Yes.

 

[SecondCor521]

Is this the statement you are referencing in the article?

" To do a conversion from a traditional 401(k) to a Roth IRA, however, is a two-step process. First, you roll the money over to an IRA, then you convert it to a Roth IRA."

That is no longer necessary. Cite: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf, row 6 column 1.

It is possible to roll over from a 401(k) to a Roth IRA. Any amounts rolled over though are generally taxable. Also, this is rarely done, so the sending or receiving account custodians might screw it up.

What is much more common is to retire, roll over the 401(k) to a traditional IRA without incurring any income tax, then do partial rollovers from traditional IRA to Roth IRA - aka Roth conversions.

There are some minor pros and cons to shifting from a 401(k) to a traditional IRA. You can only use the Rule of 55 with a 401(k), not a traditional IRA. But a traditional IRA can be at your chosen custodian, and you generally have more investment options and often lower investment fees.

 

[SecondCor521]

PS - you can use 72(t) distributions from a tIRA to tide you over between 57 and 60.

You can, but note that 72(t)s must go until 59.5 or five years have passed, whichever is longer. Starting at 57 would require continuing until 62.

 

[G-Man]

That is no longer necessary. Cite: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf, row 6 column 1.

It is possible to roll over from a 401(k) to a Roth IRA. Any amounts rolled over though are generally taxable. Also, this is rarely done, so the sending or receiving account custodians might screw it up.

What is much more common is to retire, roll over the 401(k) to a traditional IRA without incurring any income tax, then do partial rollovers from traditional IRA to Roth IRA - aka Roth conversions.

There are some minor pros and cons to shifting from a 401(k) to a traditional IRA. You can only use the Rule of 55 with a 401(k), not a traditional IRA. But a traditional IRA can be at your chosen custodian, and you generally have more investment options and often lower investment fees.

I think this would be the plan.

1. Retire at age 57. Leave all the 401K dollars in the current plan.
2. Use the "Rule of 55" using 401K dollars to bridge the income gap between 57-60.
3. Starting at age 60, I would start moving over small chucks of 401k dollars each year to a TIRA and then do rollover to the Roth IRA (Roth conversions).

Do I have a limit of the amount I can rollover to the TIRA and amount for Roth conversions each year?

Can the rollover to TIRA and Roth conversions until age 94?

I assume for the Roth conversions, I need to paid the income tax for that year?

Maybe I have this all wrong and need to educate myself on Roth conversions on 401K funds after age 60.

PS. I think the answer to some of my questions in this article.
https://www.kiplinger.com/article/r...imit or,contributions to your traditional IRA.

Found this in the article..
"Instead of making one big conversion, consider rolling over a portion of the money from a traditional IRA to a Roth every year, with a close eye on the top of your tax bracket and income limits for the Medicare high-income surcharge and Social Security taxes."

 

[TheWizard]

...Can the rollover to TIRA and Roth conversions until age 94?

Yes, but it may not be cost effective to do larger Roth conversions after RMDs begin, currently age 72.

But married couples sometimes look at where the eventual surviving spouse will be financially and taxwise. If surviving spouse would be in 32% marginal bracket, then maybe good idea to continue doing moderate Roth conversions in 22-24% bracket...

 

[latexman]

Ok. My company started offering a Roth 401K years ago and allow in-plan roth conversions.

Is this a way for me to create a ROTH IRA that will open the door for Roth conversions when I retire?

Roth 401k funds can be rolled over directly to a Roth IRA. So, open a Roth IRA now with $1 to start the 5 year clock, and contribute to your Roth 401k. Then roll the Roth 401k into the Roth IRA when you retire.

 

[G-Man]

Roth 401k funds can be rolled over directly to a Roth IRA. So, open a Roth IRA now with $1 to start the 5 year clock, and contribute to your Roth 401k. Then roll the Roth 401k into the Roth IRA when you retire.

If I rollover dollars from my traditional 401K (pre-tax dollars) to a Roth 401K (post-tax dollars) in my current plan, would that trigger a taxable event where I would need to paid the taxes for that year? That would possibly put me in a higher tax bracket, and I need to come up with the dollars to paid for the taxes.

Maybe I'm not understanding this clearly.

 

[G-Man]

Another good article on this topic..

https://www.fool.com/retirement/plans/roth-ira/401k-to-roth-ira-conversion/

 

[SecondCor521]

I think this would be the plan.

1. Retire at age 57. Leave all the 401K dollars in the current plan.
2. Use the "Rule of 55" using 401K dollars to bridge the income gap between 57-60.
3. Starting at age 60, I would start moving over small chucks of 401k dollars each year to a TIRA and then do rollover to the Roth IRA (Roth conversions).

[A] Do I have a limit of the amount I can rollover to the TIRA and amount for Roth conversions each year?

Can the rollover to TIRA and Roth conversions until age 94?

[C] I assume for the Roth conversions, I need to paid the income tax for that year?

[Letters added for reference.]

In step 3, there would be no reason to do partial rollovers from your 401(k) to you traditional IRA that I can see. Just roll the whole thing to a traditional IRA, then do partial Roth conversions after that.

A. Your 401(k) plan may have limits - get the plan documents and read them, or ask your plan administrator. There is no limit to the amount of Roth conversions you can do - as long as you have money in the traditional IRA and are willing to pay the associated income taxes.

B. Yes. No age limits, although RMDs and SS may make it wise to get most of your conversions done before then. It's a planning exercise.

C. Yes.

Roth 401k funds can be rolled over directly to a Roth IRA. So, open a Roth IRA now with $1 to start the 5 year clock, and contribute to your Roth 401k. Then roll the Roth 401k into the Roth IRA when you retire.

The $1 would technically be a contribution, which G-Man may or may not be eligible to make based on his income and filing status. Although the penalties on an excess contribution of $1 might round to zero.

I think one can open a Roth IRA with $0 and start the 5 year clock. But that would depend on the custodian allowing it.

If I rollover dollars from my traditional 401K (pre-tax dollars) to a Roth 401K (post-tax dollars) in my current plan, would that trigger a taxable event where I would need to paid the taxes for that year?

If the plan allows you to do it at all, almost certainly yes on the taxes due.

 

[Gumby]

[Letters added for reference.]

In step 3, there would be no reason to do partial rollovers from your 401(k) to you traditional IRA that I can see. Just roll the whole thing to a traditional IRA, then do partial Roth conversions after that.

A. Your 401(k) plan may have limits - get the plan documents and read them, or ask your plan administrator. There is no limit to the amount of Roth conversions you can do - as long as you have money in the traditional IRA and are willing to pay the associated income taxes.

....

I agree. If you are going to rollover a 401k to a tIRA, just do it all at once. In fact, your 401k plan may require it. So I also agree that it is crucial to read your 401k plan documents regarding partial distribution. Just because the IRS says you can draw under the Rule of 55 without tax penalty, doesn't mean your plan must allow it.

 

[N02L84ER]

You indicate you have only 401k retirement savings, no IRAs - either deductible or non-deductible. So, you could start your Roth IRA this year through a back-door contribution, if you have any additional money you wish to save for retirement. You simply make a non-deductible IRA contribution this year and as soon as the money is in the account you rollover (convert) the non-deductible IRA money into a Roth IRA. If you are 55 years old this year, the Roth IRA monies will all become tax and penalty free 5 years later at age 60 or 61. Even if you start Roth conversions from the 401k after age 57, those conversions will become tax and penalty free 5 years after the first Roth IRA has been opened.

 

[Al18]

G-Man,
I found out living on 401K withdrawals between ages 55 and 59 1/2 is not optimum, because IRS rules dictate 20% of 401K withdrawals must be withheld for Federal tax. Your actual taxes will probably be lower, but you'll need to wait to file your taxes to get a refund.


If you are still working, I'd work on building up your savings in CD's and a brokerage account to live on until you are 59 1/2.

 

[G-Man]

I agree. If you are going to rollover a 401k to a tIRA, just do it all at once. In fact, your 401k plan may require it. So I also agree that it is crucial to read your 401k plan documents regarding partial distribution. Just because the IRS says you can draw under the Rule of 55 without tax penalty, doesn't mean your plan must allow it.

I have confirmed my 401K plan allows the Rule of 55 many years ago. So, there is no 10% early withdrawal penalty.

 

[G-Man]

G-Man,
I found out living on 401K withdrawals between ages 55 and 59 1/2 is not optimum, because IRS rules dictate 20% of 401K withdrawals must be withheld for Federal tax. Your actual taxes will probably be lower, but you'll need to wait to file your taxes to get a refund.


If you are still working, I'd work on building up your savings in CD's and a brokerage account to live on until you are 59 1/2.

I heard about that. Let me check on that.

 

[pb4uski]

G-Man,
I found out living on 401K withdrawals between ages 55 and 59 1/2 is not optimum, because IRS rules dictate 20% of 401K withdrawals must be withheld for Federal tax. Your actual taxes will probably be lower, but you'll need to wait to file your taxes to get a refund.


If you are still working, I'd work on building up your savings in CD's and a brokerage account to live on until you are 59 1/2.

WADR, worrying about the float on probably 1/2 of the federal tax withheld seems a bit silly to characterize as suboptimal to me... and you can minimize the float detriment simply timing your 401k withdrawals to near the end of the year.

Seems to me more like a minor annoyance than a major detriment.

 

[Gumby]

I have confirmed my 401K plan allows the Rule of 55 many years ago. So, there is no 10% early withdrawal penalty.

The question is not whether there is a 10% penalty -- that's for the IRS to determine. The question is whether the plan allows partial withdrawals - that's at the discretion of the plan. I would make doubly sure of that. And the answer may have changed in the years since you first checked.

 

[G-Man]

G-Man,
I found out living on 401K withdrawals between ages 55 and 59 1/2 is not optimum, because IRS rules dictate 20% of 401K withdrawals must be withheld for Federal tax. Your actual taxes will probably be lower, but you'll need to wait to file your taxes to get a refund.


If you are still working, I'd work on building up your savings in CD's and a brokerage account to live on until you are 59 1/2.

Could you deploy the following strategy to accommodate for the 20% federal tax withholdings:

Age 57 - Amount Needed + 20% federal tax withholdings = Total amount to withdraw from 401K
Age 58 - (Amount Needed - leftover dollars from previous year federal tax withholdings) + 20% federal tax withholdings = Total amount to withdraw from 401K
Age 59 - (Amount Needed - leftover dollars from previous year federal tax withholdings) + 20% federal tax withholdings = Total amount to withdraw from 401K

So, you essentially withdraw left dollars from your 401K each year until Age 59 1/2 to accommodate for 20% federal tax withholdings.

I'm looking at this from a wrong perspective.

PS. Sorry. pb4uski summed it up better than I did.

 

[G-Man]

The question is not whether there is a 10% penalty -- that's for the IRS to determine. The question is whether the plan allows partial withdrawals - that's at the discretion of the plan. I would make doubly sure of that. And the answer may have changed in the years since you first checked.

I have confirmed it does. In addition, I have the option to select which investment account to take the distribution from. Our 401K plan is very flexible.

 

[G-Man]

Back-door Roth and Roth conversions in Retirement

This is a continuation of my discussion in the other thread ...
https://www.early-retirement.org/fo...t-4-withdrawal-rate-in-retirement-114806.html

Here a summary. I plan to retire in 1 1/2 years at age 57. All of my retirement investments is in 401K. I would like to reduce my tax liability in retirement by executing Roth conversions if possible.

Before I retire, I think it's a no-brainer to go ahead and create a back-door ROTH and contribute $7K for the remaining 2 years while still working.

Feedback and opinions please.

 

[Gumby]

A thread to hive off G-Man's discussion about setting up a Roth for when he retires and wants to do Roth conversions.

 

[latexman]

Ok. My company started offering a Roth 401K years ago and allow in-plan roth conversions.

Roth 401k funds can be rolled over directly to a Roth IRA. So, open a Roth IRA now with $1 to start the 5 year clock, and contribute to your Roth 401k. Then roll the Roth 401k into the Roth IRA when you retire.

If I rollover dollars from my traditional 401K (pre-tax dollars) to a Roth 401K (post-tax dollars) in my current plan, would that trigger a taxable event where I would need to paid the taxes for that year? That would possibly put me in a higher tax bracket, and I need to come up with the dollars to paid for the taxes.

Maybe I'm not understanding this clearly.

Yes, you misunderstoof what I said. I never mentioned a traditional 401k. I don't know if one can legally rollover from a t410k to a R401k.

My MegaCorp offers a R401k, and when I retire I plan on rolling my R401k funds into a Roth IRA I've had for 6-7 years. My Fidelity FA has confirmed that is possible, and a non-taxable event.

 

[G-Man]

Does everyone agree that's it a no-brainer to go ahead and setup a back-door ROTH this year? Only have 2 years to contribute earned income ($7K each) since I'm retiring in 2 years.

 

[Gumby]

I don't know if everyone agrees, but I think it is a good idea.

 

[G-Man]

I found this youtube video explaining Roth conversions in Retirement for 401k retirement income.

 

[Al18]

I think opening your RothIRA now is a good idea.

You’re 401k plan provider (Fidelity, Vanguard, etc. ) has an advisor you can contact to guide you thru the process of setting up your RothIRA - at no charge to you. Take advantage of the advisor.