An Argument Against IRA Rollover

You got it. Just one more detail in a very complex tax system. Although, you should now be able to roll the pre-tax dollars into the current

Joe

I second what Joe said- the IRA custodian for me (T Rowe) keeps track of my rollover contributions and deposits separately. My 401k custodian also keeps track of my rollover contributions and plan contributions separately.

I have done "partial" 401k to IRA rollovers as my plan allowed (I have had 1 job, but 4 employers- based on buy outs, sell offs and similar). One employer had a pension which I was cashed out of when we were sold- that went into a rollover- then another employer let us roll over old 401k monies into a Rollover IRA and I took advantage of that.

The effect of it all was my first two employers money is now completely in Rollover IRA my third employer and current employer money is in my 401k (I could not rollover the 3rd employer money into IRA) but yet I see the current contributions and prior plan contributions on my performance screens, so I know that information is still tracked.

Try converting the rollover IRA into your present 401k if the plan allows it.

I've been debating whether or not to go through all this pain

-- sell all investments in IRA, rollover to existing employer, fund traditional IRA, convert traditional IRA to Roth IRA. Is it worth the effort? I'm hoping the lawmakers remove the income limit for contributing to the Roth and then we can get the same result without all the hassle of the paperwork...

If the laws stay as they are for many years, it's probably going to be worth it. But if the laws are changed in a year or two, it seems like a whole of effort for nothing.

Guess there's no way to know which was the laws will go in future...

Anoop

There are many factors to consider. For those who have a current sum that post tax money, a change in law (the lifting of any income limits for a Roth deposit) still won't help them. I doubt any new law would permit choosing to convert only the post tax money, thus my suggestion. To your point, there's the risk that the transfer will leave your money uninvested for a period of time, and if the market makes a major move, that could negate some or all of the potential gain of converting. One should also look carefully at the 401(k) expenses, both the fund fees and admin fees, if additional.

The way to deal with that is to shift things around before the process. If the IRA funds you plan to are in stocks of one sort or another, convert to cash first and adjust in other accounts so that the cash represents a portion of the fixed-income allocation. Then you aren't out of the market during the changeover. Once those funds are transferred from the IRA to the 401(k), then reallocate as desired.

Brian

I've been completely out of the market since early 2008, so this is not an issue. The only thing that I have in the IRA is one TIPS, which if I do sell, would sell for a profit...but I would have to sell it to transfer the funds to the 401(k). My employer allows me to create a regular trading account so no issues around fees either.

It's just the pain of the paper work -- put money in non-deductible IRA, and then convert to Roth -- which I'm wondering whether or not is worth it. Anyone doing this already care to comment on the hassle? Do these need to be reported on tax returns?

Anoop

I'd do some math. $1000 of non-deducted IRA, over 30 yrs, at 7.2%/yr ave return (for napkin purposes) will become $8000, $7000 of which is taxed at ordinary income, say 25% or $1750. Of course the present value of that $1750 may be just $800, but that's for each $1000 in the account. Is the hassle to fill out two sets of forms so great that it's not worth that effort? Only you can decide that.

Years ago, when mortgage rates were falling in the late 80's early 90's, I marveled at how may people I talked to who didn't want to bother refinancing when the rates had fallen so much that they'd repay the costs of the refinance within 6 months or less. "paperwork-phobia" I suppose.

Considering the long-term benefits of tax-free growth, my answer would be a resounding "yes!"

I've done various rollovers and conversions the past couple of years. The pain isn't too severe in my estimation. Generally, with a conversion within the same custodian, it's not a big deal at all. For a conversion, Wells Fargo requires a form to be filled out, which is a modifiable PDF (can't save though). It takes a minute or so. It can then be mailed or faxed in. I just did one last night.

Other brokerages, I'm sure, allow it to be done via their web site. That would be even easier.

You would complete Form 8606 for the combined non-deductible IRA contribution and the conversion. If you use tax software, that will do it for you. Otherwise you'll need to work through the form. As it would a total conversion with no tax due, it's not a big deal. That's, of course, as long as you don't have other IRAs with taxable funds hanging around to confuse the issue.

Brian

I suspect that the only reason the were willing to lift the income limit on conversions was that the projections showed them taking in more short-term taxes when they capture the deductible contributions on the rollover -- which they would not do if high-income folks just contribute directly to a Roth.

Of the folks who make the back-door Roth contributions via making non-deductible traditional contributions and then rolling over, I figure more than half of the folks who do so will already have substantial deductible contributions in their IRA and thus the Gov't captures extra early taxes from them.

The back-back-door to avoid that, of course, is if your IRA has loads of employer plans rollovers - and you can roll them again into a new employer plan. Pain in the butt, but better than the previous option which for higher-income folks was no Roth at all...

That all said, unless you're pretty sure that there's a substantial income-drop in your future, it may well be worth rolling over and paying taxes sooner. While rates may not go up (don't make bets on this), I don't think anyone has any expectation of them going down.