Hello community,
I currently have a traditional 401k and a Roth IRA which I fund via backdoor conversions. Since all the contributions for the Roth IRA conversion are post-tax non-deductible contributions, I do not owe taxes on the conversion (IRA to Roth IRA that is).
Now, I have learned that my employer offers a Roth 401k option! I would like to understand the best bang for my situation:
1 - Will changing to a Roth 401k affect the abovementioned Roth IRA conversions in any way ? Is there any tax I should beware of?
2 - What is the best way to Rollover the current 401k balance (less than $10k) to a Roth 401k ? Will that affect the Roth IRA contributions in any way?
I would like to keep take advantage of the Roth 401k while continuing with the tax-free backdoor Roth IRA conversions as usual. Please be specific and on point in your response.
Thanks in advance!
Happy holidays!
1 - Will changing to a Roth 401k affect the abovementioned Roth IRA conversions in any way ? Is there any tax I should beware of? No ... none.
2 - What is the best way to Rollover the current 401k balance (less than $10k) to a Roth 401k ? Will that affect the Roth IRA contributions in any way? Ask the employer if it can be done ... doubtful it can. You will simply have a balance in each 401K account going forward.
If you are allowed to roll the 401K to an IRA and then convert it to a ROTH then go that route. FYI all the balance in the IRA at the end of the year must all be converted to keep this "back door" system you have going clean.
2 - What is the best way to Rollover the current 401k balance (less than $10k) to a Roth 401k ? Will that affect the Roth IRA contributions in any way?
You may be allowed to do this, but it would be considered a Roth conversion, and you would owe income tax on the converted amount, which you would have to fund from other financial resources, since you can't divert or withdraw any part of the pre-tax 401(k) to pay the tax on the conversion.
There's no "best" way, you just ask your HR department or the 401(k) custodian if your plan allows it and then you tell them to do it. Once you have the funds in a Roth 401(k) you can allocate it to whatever investment options your plan allows.
If you do a conversion (which is a special type of rollover) it does not affect your contributions for the year, because rollovers are not contributions and don't count against the contribution limit.
You can also simply allocate new contributions to the Roth option and leave your old contributions in the traditional account, you will just have two different accounts at the custodian. And of course, Roth option contributions are after-tax, so your taxable income and tax owed will both increase.