Backdoor Roth IRA Conversion from 401k, with exisiting IRA balances

Submitted by Kevin Fehskens on Tue, 2019-04-16 20:00

Hello,

I left a salaried W-2 job in the middle of last year and became a consultant. I am trying to employ the backdoor Roth IRA strategy. I have some cash in an existing IRA that was rolled over from various employers. Here are the numbers for my 2018 contributions and my current IRA picture:

2018 Contributions:
Pre-tax: Employee, withheld via payroll to 401k, rolled over to Wealthfront IRA – $15,535
Pre-tax: Self-employed, as profit sharing contribution to E-Trade Individual 401k – $17,078
After-tax: Contributions to E-Trade Individual 401k – $21,922
Total qualified retirement plan contributions – $54,535

Existing retirement accounts:
Wealthfront IRA — $220k (including 2018 rollover from employer plan)
Wealthfront Roth IRA – $45k

1. Can I contribute the $21,922 after-tax balance from the E-Trade Individual 401k to the Wealthfront Roth IRA without applying the pro-rata rules?
2. If the answer to 1 is yes, is this a two step process in which I have to convert the balance from the 401k to a Traditional IRA first, then a Roth IRA?
3. If the pro-rata rules apply given the facts above, can I roll the Wealthfront IRA to the E-Trade Individual 401k, then rollover the $21,922 to the Roth IRA?
4. If I do #3, should I leave the Wealthfront IRA amount in the 401k if I plan to do after-tax 401k contributions and a rollover to the Roth IRA next year as well?

I am an accountant, but IRAs are not my specialty and I want to make sure I get this right so I do not have any surprises in April of 2020. Any help and/or advisor referrals are appreciated.

Thanks,
Kevin



Submitted by William Tuttle on Tue, 2019-04-16 21:41

  • First, terminaology matters. What do you mean by “After-tax: Contributions to E-Trade Individual 401k”? It is ambiguous. An individual 401k directly through Etrade does not support employee after-tax contributions. To be clear, are you referring to post-tax designated Roth contributions to an Etrade Individual 401k or are you referring to employee after-tax contributions to an Etrade custodial account through a custom one-participant 401k plan with a TPA?
  • Second, a direct rollover from an employer plan of a traditional 401k account, a designated Roth account or an employee after-tax account can go directly to a Roth IRA, They do not go through a traditional IRA account, are not reported on Form 8606 and are not subject to pro-rata taxation considerations. A rollover from traditional 401k account would be fully taxable, a rollover from a designated Roth account would be  tax-free and only the earnings taxable from an employee after-tax account.
  • Third, IRS regulations prohibit the in-service rollover of employee elective contributions prior to age 59 1/2. IRS regualtions allow but do not require in-service rollovers of vested employer contributions. Etrade has restrictions on the inservice-rollover of vested employer contributions based on time since contribution and/or length of service.
  • Since you can not separate service from a sole proprietor,  you could only rollover the employee elective contributions and maybe the employer contributions after terminating the Etrade Individual 401k plan. Under the successor plan rule, you could not adopt another 401k until one year had elapsed. 
  1. Not without terminating the Etrade Individual 401k if these are designated Roth 401k contributions.
  2. If these are employee after-tax 401k contributions a direct rollover to a Roth IRA would be as I exaplained above. A two steps process would be counter-productive subjecting any Roth conversions from any IRA to pre-rata taxation with all of the IRA pre-tax balances.
  3. Subject to the conditions in 1 & 2.
  4. What you are trying to do with this amount in the Wealthfront IRA.
  5. For that matter what is the benefit you are trying to obtain with any of these steps.

Submitted by Kevin Fehskens on Wed, 2019-04-17 23:23

I am trying to make an after-tax contribution to the 401(k) after the salary deferral and employer profit sharing pieces.  It seems E-Trade’s boilerplate Individual 401(k) will not allow me to make an after-tax contribution to the plan, then roll it over to a Roth IRA.  I am trying to maximize the amount I can put in a Roth IRA, up to the 2018 $55k defined contribution plan limit.  After your response and some further research, I am now looking to see whether or not I can hire a TPA to amend the plan I set up with E-Trade, so I can perform this rollover in the future.I included the Wealthfront information in case the pro-rata rules apply.

Submitted by William Tuttle on Thu, 2019-04-18 01:17

This would require amending your Etrade Individual 401k to a plan supporting employee after-tax contributions. Such plan admendments can not apply prior to 1/1 of the current plan year . It would have had to have been amended by 12/31/18.

Add new comment

Log in or register to post comments