Sanity check: IRA shuffle

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overthought
Posts: 95
Joined: Tue Oct 17, 2017 3:44 am

Sanity check: IRA shuffle

Post by overthought » Mon Oct 30, 2017 4:26 pm

Looking for a sanity check for the following planned shuffle involving of my 401(k) and various IRA accounts:

Currently situation:
  • His Fidelity 401(k) containing only pre-tax contributions.
  • His large-ish rollover IRA containing pre-tax money from a previous employer's 401(k). TD Ameritrade, no account fee.
  • His Roth IRA containing after-tax money from previous employer's 401(k). TD Ameritrade, no account fee.
  • His and her traditional IRA containing max non-deductible contributions from 2016 plus growth. Edward Jones account, frozen since fiduciary law took effect earlier this year. Account fee $40/year/each.
The plan:
  • Nov 2017, pull rollover IRA into the 401(k), removing its pre-tax money from the equation before 31 Dec 2017. I don't think the pro-rata rule applies in this case because it's not a taxable event?
  • Jan 2018, max out non-deductible contributions to his and her IRA for both 2017 and 2018 ($22k total).
  • Mar 2018, Roth conversion for his IRA, sending pre-tax to a new TDA IRA and after-tax to existing TDA Roth.
  • Mar 2018, Roth conversion for her IRA, sending pre-tax and after-tax to new traditional and Roth IRA at TDA.
Desired outcomes:
  • Get out of EJ
  • Move existing non-deductible IRA contributions under Roth umbrella without owing tax on the growth
  • Max out tax-advantaged for 2017 and 2018
  • Set the stage for backdoor Roth in future years
Note that the pre-tax 401k is already maxed out for 2017, and household income expected to be over IRA deduction and Roth contribution limits for both 2017 and 2018.

Am I missing any pitfalls here? If I understand correctly, the rollover IRA needs to disappear before year end 2017, and the Roth conversion needs to happen in 2018, or the pro-rata rule would apply to the conversion (which would be bad, the rollover IRA is 5x bigger than the IRA).

SlowMovingInvestor
Posts: 212
Joined: Sun Sep 11, 2016 11:27 am

Re: Sanity check: IRA shuffle

Post by SlowMovingInvestor » Mon Oct 30, 2017 4:51 pm

overthought wrote:
Mon Oct 30, 2017 4:26 pm
Looking for a sanity check for the following planned shuffle involving of my 401(k) and various IRA accounts:

Currently situation:
  • His Fidelity 401(k) containing only pre-tax contributions.
  • His large-ish rollover IRA containing pre-tax money from a previous employer's 401(k). TD Ameritrade, no account fee.
  • His Roth IRA containing after-tax money from previous employer's 401(k). TD Ameritrade, no account fee.
  • His and her traditional IRA containing max non-deductible contributions from 2016 plus growth. Edward Jones account, frozen since fiduciary law took effect earlier this year. Account fee $40/year/each.
The plan:
  • Nov 2017, pull rollover IRA into the 401(k), removing its pre-tax money from the equation before 31 Dec 2017. I don't think the pro-rata rule applies in this case because it's not a taxable event?
  • Jan 2018, max out non-deductible contributions to his and her IRA for both 2017 and 2018 ($22k total).
  • Mar 2018, Roth conversion for his IRA, sending pre-tax to a new TDA IRA and after-tax to existing TDA Roth.
  • Mar 2018, Roth conversion for her IRA, sending pre-tax and after-tax to new traditional and Roth IRA at TDA.
Desired outcomes:
  • Get out of EJ
  • Move existing non-deductible IRA contributions under Roth umbrella without owing tax on the growth
  • Max out tax-advantaged for 2017 and 2018
  • Set the stage for backdoor Roth in future years
Note that the pre-tax 401k is already maxed out for 2017, and household income expected to be over IRA deduction and Roth contribution limits for both 2017 and 2018.

Am I missing any pitfalls here? If I understand correctly, the rollover IRA needs to disappear before year end 2017, and the Roth conversion needs to happen in 2018, or the pro-rata rule would apply to the conversion (which would be bad, the rollover IRA is 5x bigger than the IRA).
1) You can put the rollover IRA into a 401K right now, and do the conversion this year itself. No need to wait till next year, you just do the conversion again next year with new non deductible contributions. What's important is your year end IRA holdings, not what you had during the year. It doesn't matter if you had a rollover IRA in 2017, as long as you don't have it at the end of the year.
2) You can do the Her IRA even without the rollover, because she has no additional IRA.

Also, you say
[*] Mar 2018, Roth conversion for his IRA, sending pre-tax to a new TDA IRA and after-tax to existing TDA Roth.
[*] Mar 2018, Roth conversion for her IRA, sending pre-tax and after-tax to new traditional and Roth IRA at TDA.
The reference to pre-tax is a little confusing.
You will have to pay tax on the growth when you do the conversion. However, it is also possible (if his employer accepts it) to send the growth in his IRA to his employer's 401K, and rollover just the contributions. For Her IRA, that really wouldn't be possible, and tax on the growth will be due.

If only a part of the IRA is converted, tax will be due on a pro-rated portion of the growth. It's not like you can send the growth to a regular IRA, and the after-tax to a Roth, and avoid paying taxes on the growth. However, you can send the growth to a 401k if the employer accepts it, and defer tax on that.

overthought
Posts: 95
Joined: Tue Oct 17, 2017 3:44 am

Re: Sanity check: IRA shuffle

Post by overthought » Mon Oct 30, 2017 5:11 pm

SlowMovingInvestor wrote:
Mon Oct 30, 2017 4:51 pm
The reference to pre-tax is a little confusing.
You will have to pay tax on the growth when you do the conversion. However, it is also possible (if his employer accepts it) to send the growth in his IRA to his employer's 401K, and rollover just the contributions. For Her IRA, that really wouldn't be possible, and tax on the growth will be due.
My 401(k) does actually accept traditional IRA roll-ins, so I could do that if necessary if the year-end balance is all that matters.

I'm not sure why it would be necessary, though, if this article is correct?

SlowMovingInvestor
Posts: 212
Joined: Sun Sep 11, 2016 11:27 am

Re: Sanity check: IRA shuffle

Post by SlowMovingInvestor » Mon Oct 30, 2017 5:31 pm

overthought wrote:
Mon Oct 30, 2017 5:11 pm
SlowMovingInvestor wrote:
Mon Oct 30, 2017 4:51 pm
The reference to pre-tax is a little confusing.
You will have to pay tax on the growth when you do the conversion. However, it is also possible (if his employer accepts it) to send the growth in his IRA to his employer's 401K, and rollover just the contributions. For Her IRA, that really wouldn't be possible, and tax on the growth will be due.
My 401(k) does actually accept traditional IRA roll-ins, so I could do that if necessary if the year-end balance is all that matters.

I'm not sure why it would be necessary, though, if this article is correct?
I don't think that article is correct. If the untaxed portion goes to a 401k, tax is deferred. But not if it goes to an IRA. You can try and fill a trial form 8606 to see what would happen if you did what was suggested in the article.

SlowMovingInvestor
Posts: 212
Joined: Sun Sep 11, 2016 11:27 am

Re: Sanity check: IRA shuffle

Post by SlowMovingInvestor » Mon Oct 30, 2017 5:51 pm

Also, the article you link cites the following IRS page to support the 'multiple destination' idea'

https://irs.gov/retirement-plans/ro ... ment-plans

But that IRS page only talks about rollovers from retirement plans to IRAs, not for conversions.

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Duckie
Posts: 5074
Joined: Thu Mar 08, 2007 2:55 pm

Re: Sanity check: IRA shuffle

Post by Duckie » Mon Oct 30, 2017 6:22 pm

overthought wrote:Looking for a sanity check for the following planned shuffle involving of my 401(k) and various IRA accounts:
Better plan:
  1. Roll his Rollover IRA into his 401k ASAP.
  2. Open new TIRA accounts (his and hers) and a new Roth IRA account (hers) at TD Ameritrade.
  3. Roll both Edward Jones TIRA accounts into TD Ameritrade TIRA accounts.
  4. Contribute $5.5K to each TIRA account at TD Ameritrade for 2017 (preferably in 2017).
  5. Convert all TIRA assets to Roth (preferably in 2017 as long as the Rollover IRA is gone).
  6. File IRS Form 8606 with your taxes next spring.
Do 4, 5 and 6 again next year.

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celia
Posts: 7081
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Sanity check: IRA shuffle

Post by celia » Mon Oct 30, 2017 6:32 pm

overthought wrote:
Mon Oct 30, 2017 4:26 pm
Currently situation:
  • His Fidelity 401(k) containing only pre-tax contributions.
  • His large-ish rollover IRA containing pre-tax money from a previous employer's 401(k). TD Ameritrade, no account fee.
  • His Roth IRA containing after-tax money from previous employer's 401(k). TD Ameritrade, no account fee.
  • His and her traditional IRA containing max non-deductible contributions from 2016 plus growth. Edward Jones account, frozen since fiduciary law took effect earlier this year. Account fee $40/year/each.
...
Desired outcomes:
  • Get out of EJ
  • Move existing non-deductible IRA contributions under Roth umbrella without owing tax on the growth
  • Max out tax-advantaged for 2017 and 2018
  • Set the stage for backdoor Roth in future years

That article has several things wrong with it. Don't follow it.

Let's start with the rules for what 401Ks can accept:
Most 401Ks can accept rollovers from other 401Ks or Rollover IRAs that contain previous rollovers of 401Ks.
Some 401Ks can accept tIRAs that contain tax-deferred contributions and their growth.
No 401K is permitted to accept non-deductible tIRA contributions. They may or may not accept their growth.

So he can/should first rollover the tax-deferred (pre-tax) tIRA at Ameritrade to his 401K if the 401K accepts it. If the 401K will also accept the growth on the non-deductible tIRA contributions, roll that over too after he liquidates the account to a money market fund (to keep it from changing value). ALWAYS DO A CUSTODIAN-TO-CUSTODIAN ROLLOVER. If he takes possession of the money (other than a check made out to the other custodian, not to him), it gets messy and can cause tax problems later.

Then, move the EJ accounts to Ameritrade or another custodian, vested just like they are. I assume the $40/account fee will apply again if the accounts stay at EJ into 2018. Then CONVERT the existing tIRAs containing non-deductible contributions into the existing Roth or a new Roth. Only the growth will be taxed but it won't be that much since the contributions have only been in the account about a year. In the future, do the conversion on the day after the contribution is made, to avoid growth occurring in the traditional IRA.

Then you are set to do non-deductible contributions for 2017 either this year or next. It doesn't matter which year it is done, since there will be no tax consequence if you convert the day after the contributions are made.

The only outcome you can't do is:
  • Move existing non-deductible IRA contributions under Roth umbrella without owing tax on the growth
because all the dollars in that account are considered co-mingled. Whether you convert $1 or all of it, there will be pro-rated taxes on each dollar withdrawn. This is the same as paying taxes on all the "growth" dollars.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

overthought
Posts: 95
Joined: Tue Oct 17, 2017 3:44 am

Re: Sanity check: IRA shuffle

Post by overthought » Mon Oct 30, 2017 9:46 pm

celia wrote:
Mon Oct 30, 2017 6:32 pm
Let's start with the rules for what 401Ks can accept:
Most 401Ks can accept rollovers from other 401Ks or Rollover IRAs that contain previous rollovers of 401Ks.
Some 401Ks can accept tIRAs that contain tax-deferred contributions and their growth.
No 401K is permitted to accept non-deductible tIRA contributions. They may or may not accept their growth.
Huh, I never knew that last part. Where does it come from? There's no mention on the IRS rollover chart, for example. It just says a Roth IRA can't roll into a 401k. Fidelity didn't blink either, when I asked if I could roll a tIRA into my 401k (I would have expected them to qualify it somehow if they weren't legally allowed to accept non-deductible contributions).

I'm also confused how that claim jives with this one:
celia wrote:
Mon Oct 30, 2017 6:32 pm
The only outcome you can't do is:
  • Move existing non-deductible IRA contributions under Roth umbrella without owing tax on the growth
because all the dollars in that account are considered co-mingled. Whether you convert $1 or all of it, there will be pro-rated taxes on each dollar withdrawn. This is the same as paying taxes on all the "growth" dollars.
If a 401k roll-in is allowedrequired to differentiate between after-tax principal and pre-tax growth, why would a custodian-to-custodian transfer not be allowed to do the same?

Granted, this *is* the IRS we're talking about, so I can accept if the law is inconsistent... or perhaps neither IRA transfers nor 401k roll-in is allowed to differentiate?

SlowMovingInvestor
Posts: 212
Joined: Sun Sep 11, 2016 11:27 am

Re: Sanity check: IRA shuffle

Post by SlowMovingInvestor » Tue Oct 31, 2017 6:42 am

overthought wrote:
Mon Oct 30, 2017 9:46 pm
celia wrote:
Mon Oct 30, 2017 6:32 pm
Let's start with the rules for what 401Ks can accept:
Most 401Ks can accept rollovers from other 401Ks or Rollover IRAs that contain previous rollovers of 401Ks.
Some 401Ks can accept tIRAs that contain tax-deferred contributions and their growth.
No 401K is permitted to accept non-deductible tIRA contributions. They may or may not accept their growth.
Huh, I never knew that last part. Where does it come from? There's no mention on the IRS rollover chart, for example. It just says a Roth IRA can't roll into a 401k. Fidelity didn't blink either, when I asked if I could roll a tIRA into my 401k (I would have expected them to qualify it somehow if they weren't legally allowed to accept non-deductible contributions).

I don't know whether it's legally allowed or not, but it would rarely make sense to transfer non deductible IRA contributions to a 401k. And you can't assume that Fido would warn you about any problems (especially for something that's uncommon -- the rep may not even think about it).

overthought
Posts: 95
Joined: Tue Oct 17, 2017 3:44 am

Re: Sanity check: IRA shuffle

Post by overthought » Tue Oct 31, 2017 7:01 am

Tried running this idea through turbo tax, but it can't handle a rollover whose destination is split between tIRA and Roth. That puts it into the "too clever for my taste" category.

Also, I finally realized: It wouldn't actually matter if I did manage to split the destination with a single transaction---the year-end total for all non-Roth IRA would still be non-zero and I'd still owe tax on a partial conversion under the pro rata rule.

I really have no idea how Fidelity could pull just the pre-tax growth into my 401(k)... what would it even look like? Anyway, going that route would only save me ~$200 in tax, so I'll probably just do it straightforward way Duckie recommends.

Thanks, all!

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