Roth Conversion…401K or IRA

Submitted by David Carrell on Tue, 2022-07-12 16:37

Currently working to close out my 401K. I have retired and I am over 59 1/2. My 401K plan allows in plan conversion to Roth 401K.

As this will be a low income year and I also don’t need any retirement disbursement to live on, I am planning to convert some of my pretax retirement savings into Roth. My question is…is it better to do the conversion inside the 401K plan and then do rollover or rollover into traditional IRA and then do a ‘backdoor’ conversion to a Roth IRA.

Option 1:
Convert $100K of pretax 401K funds into a $100K Roth 401K
Rollover the balance of the pretax 401K ($1.9 mil) into my existing traditional IRA
Rollover the new $100K to my existing Roth IRA
I assume this generates $100K of taxable income due next April

Option 2:
Rollover all of the pretax 401K ($2 mil) into existing traditional IRA
Do a ‘backdoor’ conversion for $100K from the traditional IRA into my existing Roth IRA
I assume this also generates $100K of taxable income due next April

Does it matter which option is selected? I believe the tax implications are the same.

Does it matter if I plan to do additional backdoor Roth conversions in future years?

DAC



Submitted by Alan - IRA critic on Tue, 2022-07-12 17:38

  • There is no difference in the taxes due unless you have after tax non Roth contributions in your 401k. In that case, you would be better off to do a split rollover of the 401k directing the after tax amount to your Roth IRA (tax free), and the pre tax amount to your TIRA. 
  • Not sure about your use of the term “back door Roth”.  A back door Roth entails making a non deductible TIRA contribution because your income is too high for a direct Roth contribution, then converting that TIRA Contribution. That might be the case this year, but after retirement you cannot make any contribution unless it is a spousal contribution using the earned income of a working spouse. 
  • Since you already have a TIRA, any past back door Roth conversions of non deductible contributions would have been mostly taxable conversions. When completing Form 8606 to report the conversion you must show the total value of all your non Roth IRA accounts in determining the taxable amount. Therefore, it is not clear exactly what the transactions are that you are describing as back door Roths.
  • To be clear, if you do not have any non Roth after tax contributions in your 401k, and you already have a pre tax TIRA account, you should roll the entire 401k into your TIRA and then convert the desired amount from there. Do not do the in plan Roth rollover.
  • Note that if you have had a Roth IRA for 5 years, your Roth is qualified and fully tax free including any amount you add to the Roth IRA via conversion.


Submitted by David Mertz on Tue, 2022-07-12 19:41

  • Instead of rolling over to a traditional IRA and then converting to a Roth IRA, you are permitted to roll over straight from the traditional 401(k) account to a Roth IRA in a taxable transaction.
  • Except for possibly better bankruptcy protection in the 401(k), there is probably no good reason to do an In-plan Roth Rollover rather than rolling the same amount over to a Roth IRA.


Submitted by Dan Zaehring on Wed, 2022-07-13 03:29

If the two options are essentially identical from a tax perspective, the choice may come down to the investment management options available in the 401(k) versus the IRA.



Submitted by David Carrell on Wed, 2022-07-13 20:47

Since (in parallel so to speak) I am doing some NUA on stocks, the 401K must be empty this year. As such all this monies, both remaining pre-tax (I am only coverting about 5% to keep tax bracket lower) and Roth conversion will all wind up in a IRA (some traditional and some Roth) per tax code requirements.



Submitted by Alan - IRA critic on Wed, 2022-07-13 21:11

If you are incorporating NUA, you will be taxed on the cost basis of the employer shares as well as the Roth conversion, so hopefully your cost basis per NUA shares is quite low. Using NUA will reduce the amount you can convert if you are aiming to convert up to the top of a certain bracket.



Submitted by William Tuttle on Thu, 2022-07-14 13:12

Expanding on DMX’s small point.

  • About 20% of states do not provide unlimited creditor protection. Does yours?
  • 401k plans are ERISA qualified and receive federal anti-alienation asset protection.
  • Does your 401lk allow discretionary withdrawals in retirement?
  • Do you have any liabilty/credit risks where you should protect your retirement accounts?
  • It may be better to do in-plan Roth rollovers (IRRs) and leave the assets there until distribution, rather that rolling over to a Roth IRA.


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