Finance Gurus: rollover of 401k and Roth 401k accounts

[Coronita]

I’m planning on leaving my current employer for a better opportunity with a lot better comp package.

With my current employer, part of my retirement account is a traditional 401k and part of it is a Roth 401k.

Question: I understand that generally you do not want to rollover your traditional 401k into an IRA account that you had made after tax contributions to… Otherwise, it will be a major PITA to deal with sorting out what money is pre-tax versus what money was after-tax contributions when you start withdrawing…

But my question is for Roth 401k’s, there’s no harm in rolling that over into a Roth IRA that you already opened, right? I mean, Roth 401k and Roth IRAs are both with after tax contributions, and there’s no need from keep those sources separate, right?

[no_such_reality]

flu, call the custodian of your current accounts have them verify the impacts for you. They should spin backflips to go get the money.

[ucodegen]

[quote=flu]I’m planning on leaving my current employer for a better opportunity with a lot better comp package.

With my current employer, part of my retirement account is a traditional 401k and part of it is a Roth 401k.[/quote]
Odd to do a Roth through an employer – it kind of limits your selection. Was there some sort of match?

[quote=flu]Question: I understand that generally you do not want to rollover your traditional 401k into an IRA account that you had made after tax contributions to… Otherwise, it will be a major PITA to deal with sorting out what money is pre-tax versus what money was after-tax contributions when you start withdrawing…[/quote]
You can create a rollover IRA specifically for the task. (Create an empty rollover IRA account and then roll the traditional 401K into it)

[quote=flu]
But my question is for Roth 401k’s, there’s no harm in rolling that over into a Roth IRA that you already opened, right? I mean, Roth 401k and Roth IRAs are both with after tax contributions, and there’s no need from keep those sources separate, right?[/quote]
It should be ok.. check with the financial institution you are rolling over into.

[Coronita]

Why would a Roth 401k be odd? Aside from a matching contribution, some of us are disqualified from contributing to a a Roth IRA and have preconditions that prevent us from doing a backdoor Roth IRA. Also With a Roth 401k, one can contribute up to 18k/year if one choices not to contribute to a traditional 401k. I think that’s a lot more than most people can can contribute to a Roth IRA.

[SK in CV]

Oy. Don’t follow advice from people on the internet that don’t know what the F they’re talking about.

It does not matter whether you roll the 401K into an existing or a brand new IRA account. The computation for recovering non-deductible contributions is exactly the same. Having a separate IRA for the rollover won’t change anything.

There could be difference with the Roth 401k, but only having to do with the 5 year rule, and the order in which non-qualifying distributions are treated. (Non-qualifying distributions are those made before age 59 1/2 and/or less than 5 years after the Roth was created.) If all accounts were begun (Roth 401K and regular contributory Roth) more than 5 years before distributions and all distributions are after age 59 1/2, then it won’t make any difference.

[Coronita]

[quote=SK in CV]Oy. Don’t follow advice from people on the internet that don’t know what the F they’re talking about.

It does not matter whether you roll the 401K into an existing or a brand new IRA account. The computation for recovering non-deductible contributions is exactly the same. Having a separate IRA for the rollover won’t change anything.

There could be difference with the Roth 401k, but only having to do with the 5 year rule, and the order in which non-qualifying distributions are treated. (Non-qualifying distributions are those made before age 59 1/2 and/or less than 5 years after the Roth was created.) If all accounts were begun (Roth 401K and regular contributory Roth) more than 5 years before distributions and all distributions are after age 59 1/2, then it won’t make any difference.[/quote]

Thank you that’s what I thought about the Roth to Roth rollover. Just wanted confirmation.

The only reason why I wanted I keep money rolled from a traditional 401k into a separate rollover IRA account different from an IRA account that I contributed to with after tax dollars is because for me i thought it would be easier when I start taking distributions for it. I can assume account X is entirely pretax contributions while account B is with after tax contributions…in case I get more senile in my old age.

[SK in CV]

[quote=flu]
The only reason why I wanted I keep money rolled from a traditional 401k into a separate rollover IRA account different from an IRA account that I contributed to with after tax dollars is because for me i thought it would be easier when I start taking distributions for it. I can assume account X is entirely pretax contributions while account B is with after tax contributions…in case I get more senile in my old age.[/quote]

Only 2 numbers are important to figure out how much is taxable when you begin taking distributions. The FMV of ALL your IRA’s as of 12/31 of the prior year and dollar amount of non-deductible contributions. Earnings in one account v another is immaterial.

If you put $5000 in non-deductible contributions 10 times into 1 account and it never earned a dime for 10 years and is still exactly $50,000, and also have a $400,000 rollover IRA, distributions will be 50,000/450,000 non taxable for the 1st distribution, no matter which account it comes from.

[ucodegen]

[quote=flu]Why would a Roth 401k be odd? Aside from a matching contribution, some of us are disqualified from contributing to a a Roth IRA and have preconditions that prevent us from doing a backdoor Roth IRA. Also With a Roth 401k, one can contribute up to 18k/year if one choices not to contribute to a traditional 401k. I think that’s a lot more than most people can can contribute to a Roth IRA.[/quote]
Ok, understand it is an income limit and contribution limit issue wrt selection.

Roth 401ks would tend to limit your selection of investments/mutual funds to the ones that your plan provid(es/ed).

And yes, 18k is a lot more than upper limit on Roth IRA.

[ucodegen]

[quote=SK in CV][quote=flu]
The only reason why I wanted I keep money rolled from a traditional 401k into a separate rollover IRA account different from an IRA account that I contributed to with after tax dollars is because for me i thought it would be easier when I start taking distributions for it. I can assume account X is entirely pretax contributions while account B is with after tax contributions…in case I get more senile in my old age.[/quote]

Only 2 numbers are important to figure out how much is taxable when you begin taking distributions. The FMV of ALL your IRA’s as of 12/31 of the prior year and dollar amount of non-deductible contributions. Earnings in one account v another is immaterial.

If you put $5000 in non-deductible contributions 10 times into 1 account and it never earned a dime for 10 years and is still exactly $50,000, and also have a $400,000 rollover IRA, distributions will be 50,000/450,000 non taxable for the 1st distribution, no matter which account it comes from.[/quote]
The problem is that you have to take the brokerages record as gospel, and I have had a problem on a Rollover that I had to correct. Not all brokerages may create the problem that I had (was the source not destination acct) and it probably depends which source has the post-tax(for likelihood for it to occur). The IRS takes the brokerage’s numbers over yours. Fore-burned, forewarned. It is not guaranteed that you will have the same problem as I.

Using your numbers, what happened was that the post tax contrib of $50,000 became 0/500,000 non taxable, instead of 50,000/450,000. I caught it fairly quickly though.

[Coronita]

[quote=ucodegen][quote=flu]Why would a Roth 401k be odd? Aside from a matching contribution, some of us are disqualified from contributing to a a Roth IRA and have preconditions that prevent us from doing a backdoor Roth IRA. Also With a Roth 401k, one can contribute up to 18k/year if one choices not to contribute to a traditional 401k. I think that’s a lot more than most people can can contribute to a Roth IRA.[/quote]
Ok, understand it is an income limit and contribution limit issue wrt selection.

Roth 401ks would tend to limit your selection of investments/mutual funds to the ones that your plan provid(es/ed).

And yes, 18k is a lot more than upper limit on Roth IRA.[/quote]

Agreed, but in my case, the fund choices are all vanguard index and select fidelity funds, the same I put my own money into elsewhere.

Also since my average job expectancy is 2-3 years per employer, they’ll get rolled over anyway.

[ucodegen]

[quote=flu]Agreed, but in my case, the fund choices are all vanguard index and select fidelity funds, the same I put my own money into elsewhere.

Also since my average job expectancy is 2-3 years per employer, they’ll get rolled over anyway.[/quote]
Your employer’s choices were much better than average. Do you mind telling me who was the managing firm for the 401k (curiousity).

[SK in CV]

[quote=ucodegen]The problem is that you have to take the brokerages record as gospel, and I have had a problem on a Rollover that I had to correct. Not all brokerages may create the problem that I had (was the source not destination acct) and it probably depends which source has the post-tax(for likelihood for it to occur). The IRS takes the brokerage’s numbers over yours. Fore-burned, forewarned. It is not guaranteed that you will have the same problem as I.

Using your numbers, what happened was that the post tax contrib of $50,000 became 0/500,000 non taxable, instead of 50,000/450,000. I caught it fairly quickly though.[/quote]

There was nothing for you to catch. The only brokerage numbers that are important are the FMV of the accounts as of 12/31 of the year prior to distribution. The brokerages do not report cumulative deductible or non-deductible contributions. That’s taxpayers’ responsibility. Those cumulative non-deductible contributions are supposed to be reported on tax returns every year (on form 8606), even if no new non-deductible contributions have been made for the tax year.

[ucodegen]

[quote=SK in CV]The only brokerage numbers that are important are the FMV of the accounts as of 12/31 of the year prior to distribution. The brokerages do not report cumulative deductible or non-deductible contributions. That’s taxpayers’ responsibility. Those cumulative non-deductible contributions are supposed to be reported on tax returns every year (on form 8606), even if no new non-deductible contributions have been made for the tax year.[/quote]

The cumulative deductible and non deductible contribs are also reported to IRS by brokerage.

http://montereyprivatewealth.com/blog/2014/6/13/how-your-ira-contribution-is-reported-to-the-ira

When the brokerages record goes wrong, you need to get it fixed. The brokerages now have additional tracking requirements – ie. they now track and report your basis to the IRS, while previously (several years back) they didn’t.

search on ‘adjusted’:
https://www.irs.gov/businesses/small-businesses-self-employed/cost-basis-reporting-faqs

While your have to do your schedule-D with your calc’d basis, and manage carry-over losses, records of types of IRA contribs(post vs pre tax) etc, the IRS now runs a shadow record on incomes near $100,000/yr and up to ensure tax compliance on higher income individuals. I had the IRS correct me on a stock basis, the only way the IRS could have known was to have the record of stock transaction when I bought it a few years earlier (it was minor and in my favor). NOTE: Never been audited – so far

If you don’t think such tracking is possible:

[SK in CV]

[quote=ucodegen]
The cumulative deductible and non deductible contribs are also reported to IRS by brokerage. [/quote]
No, they aren’t. Ever. Brokers have no way of knowing whether you’ve deducted IRA contributions. So no, it’s not possible. They do report FMV, on form 5398, due in May each year.

[quote=ucodegen]
While your have to do your schedule-D with your calc’d basis, and manage carry-over losses, records of types of IRA contribs(post vs pre tax) etc, the IRS now runs a shadow record on incomes near $100,000/yr and up to ensure tax compliance on higher income individuals. I had the IRS correct me on a stock basis, the only way the IRS could have known was to have the record of stock transaction when I bought it a few years earlier [/quote]

IRA distributions aren’t reported on Sched D. Ever. IRS requirements for brokerages recently (maybe 4 years ago) increased to require reporting of basis of securities which are sold in non-retirement accounts. The IRS does not keep the info of your purchases every year. Brokers report the basis (if available) of what you sold every year. This has nothing to do with IRA distributions.

The IRS runs matching programs on all returns, irrespective of income. If income that was reported on 1099’s or W-2’s or other income/deduction reporting isn’t consistent with what was reported on returns, correction letters are issued if the amount is sufficient. They’ve been doing this for decades. This also has nothing to do with recovering non-deductible IRA contributions.

[SK in CV]

[quote=ucodegen]Oh yes, a nit to pick –
[quote=SK in CV]Those cumulative non-deductible contributions are supposed to be reported on tax returns every year (on form 8606), even if no new non-deductible contributions have been made for the tax year.[/quote]
[/quote]

Pick away. You’re wrong, irrespective of your limited reading of the instructions. Basis of non-deductible IRA’s, net of prior year cost recovery, is reported on line 2 of form 8606. It is practically the only proof that the IRS will accept that you’ve maintained the records. They (The form 8606) can, in fact, be filed as a stand alone form. You can file them late all the way back to 1995, though it’s conceivably possible for failure to file penalties to be assessed. I’ve never seen that penalty assessed for a late filed 8606. I have prepared dozens for clients, in order to fix their improperly prepared returns.

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