401k vs. IRA vs. Back Door Roth

Investing
#1

Hello,
I have traditional 401k in my previous job that I am getting to roll over to Vanguard IRA for simplicity and tax reasons. I am not rolling my traditional 401k from previous employer to my new employer. Currently, I am within the Roth IRA contribution limit (less than $140k annual salary) and get to contribute to the annual $6k. I am projected to be above $140k annual salary in the next few. My questions:

  1. If I rollover old employer 401k to Vanguard IRA, will I be able to still do backdoor Roth IRA once my salary increases beyond $140k? Is it a good idea to rollover old 401k to Vang IRA if I know I will be above the $140k annual salary in a few months?
  2. When #1 happens, will I have to convert ALL of my Vang (which will not include 401k from old employer) to backdoor Roth and will that be a tax implication?
  3. Instead of rolling old 401k over to Vanguard IRA, should I roll over to employer 401k?

I am just trying to see if rolling over my old 401k to Vang IRA makes sense or should I roll over to employer 401k incase my salary increases above $150k and then I have to do backdoor roth for the entire Vang IRA. Thank you!

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#2

Hi Bansari,

Good question! If you plan to do a backdoor Roth IRA, I would be cautious of rolling over your old 401k money to an IRA. This is because you will run into the pro-rata rule when your traditional IRA has a mix of pre-tax contributions (from your 401k) and post-tax contributions (from wanting to do a backdoor Roth IRA). This means that when you do a backdoor Roth IRA, you can’t only convert your post-tax contributions. Instead, it would be a proportion of your pre-tax and post-tax contributions, which would then incur a taxable event. This is quite complicated, so you may want to ask a CPA!

To answer #2, you cannot convert ALL of your IRA when doing a backdoor Roth IRA because you still have the $6000/year contribution limit.

In order to avoid this mess, I would either keep the money in the old 401k or roll it over to your new 401k if that is allowed.

1 Like
#3

Thanks for the response! You just saved me from making a huge mistake which was anyway not sitting well with me. I think I’ll just roll over my old 401k to new 401 k so I can better prepare for back door later.

#4

Hi Vivi, Let me just go ahead and ask you this question then. All figures are hypothetical. Say I make $120k right now. I max out my ROTH IRA for the year by Jan 2022. I get a raise to $300K in May 2022. What happens to the whole 124k-140k limit for the backdoor roth IRA for the year? I maxed my Roth IRA when my income was low now I am way beyond the limits ROTH IRA sets for doing Roth IRA so do I have to do any adjustments? How?