One Year 401K Gap

[svelte]

I switched jobs this summer and won’t be able to join the new company’s 401K until Jan 2018. Gulp!

I haven’t been in this position in, well, ever!

Recommendations? What can I do with that cash for the next year that is most beneficial to my retirement years?

[ltsddd]

Shouldn’t you be able to put that in an IRA?

[Myriad]

Roth IRA.
Once that is full, use a normal IRA without deduction for any contributions you want to make above the Roth IRA max. Contribute until you can invest in 401k. Wait a year, then roll the IRA into the Roth IRA.

[ltsddd]

There’s an income limit for Roth IRA.

[Coronita]

I think the contributions limits for a Roth and Traditional IRA are the same, but tha the Roth IRA’s also get phased out as your M-AGI increases, and could be completely phased out.

If you have no other IRA’s (just 401k’s), you could do a backdoor traditional IRA to Roth IRA conversion, I believe without incurring any tax consequences if done correctly.

[svelte]

Thanks.

I did some research based on your comments.

I’m not eligible for the Roth IRA because our MAGI is too high.

I can’t deduct contributions from IRA because my spouse is covered by a retirement plan and our MAGI is too high. That pretty much kills any benefit to using a traditional IRA for a year, I think.

SO where else could I put that $$ to approximate what would have went into a 401K?

1. Pay down mortgage. Since current payoff date is a few years into retirement, if I pay it down now I could bring that payoff date in, potentially to equal my retirement date. This has a similar effect to having contributed that $$ to the 401K during 2017.

2. Pay off solar panels. We could also use the $$ that would have went into the 401K to pay off the solar panels. This would have the benefit of freeing up cash now, but really doesn’t benefit our retirement any.

I lean towards #1, but am open to other ideas…

[Coronita]

The other thing you can consider, svelte, is if your kids are still young and planning to go to college, and you are planning to pay for all/part of it, you can increase your contributions to a 529 plan.

As far as your solar + mortgage question. I would probably just put the extra cash aside and keep it as emergency cash, maybe split it 50/50 with half paying of mortgage and half as emergency cash.

I would mention tax exempt munis, but the moment I do that, I think phaster would hijack this thread.

I would contribute to a Roth IRA via backdoor if I could. Unfortunately, I made the mistake of rolling out one of my previous employer’s 401k into a rollover IRA. So I can’t do a backdoor Roth IRA without paying taxes for the conversion. But my then again, my current and previous employer both offered a traditional 401k and a Roth 401k account.

[Coronita]

The purpose of first contributing to the traditional IRA and then converting to a roth IRA is so that you can indirectly contribute to Roth IRA even though your AGI is greater than what is allowed to directly open a Roth.

If you first contributed to a traditional IRA, did nothing with that amount, and then converted it to a Roth IRA, you are indirectly funding a Roth IRA, and futhermore, if you follow certain rules, you wouldn’t have a taxable event do the conversion.

Normally, when you do a traditional IRA to Roth IRA, you must pay taxes on your IRA distribution. But since your contribution to your traditional IRA was with after tax dollars, and since you won’t have any capital gains on it before you converted it to a Roth IRA, there is no tax event. There are certain specific rules you must follow to do this. It’s known as the “pro-rata” rules that you must follow to make sure it’s not a taxable event when you convert from Traditional to Roth IRA.

I believe the most important part of this rule is that you don’t have any other IRA accounts elsewhere, or this won’t work. (Previous 401k accounts, are ok since the IRS treats IRA’s and 401ks differently. So you generally should not rollover old 401k accounts into rollover IRA’s unless your previous employer doesn’t allow you to keep the 401k account OR the fund selection/plan of your previous employer sucks)

Details of backdoor Roth IRA are found here. And as usual, talk to a CPA, since I’m no accountant, and I probably oversimplified things and probably omitted important details for you to get this to work. I’m just giving you the idea of what could be done. Viability and Implementation details are left as an exercise for the reader.

http://www.rothira.com/what-is-a-backdoor-roth-ira
https://www.betterment.com/resources/retirement/401ks-and-iras/roth-ira-rules-smart-ways-to-avoid-taxes-on-a-conversion/

[no_such_reality]

Good ideas, but let’s talk about the obvious one.

What kind of company has a 401K that you can’t enroll in for more than 6 months? Let alone 18 months. And what are the details around the plan?

If you started this summer, I could maybe see missing some arbitrary 6 months cutoff. Even then, most companies will let you enroll and start contributing to the 401K, you’re just not eligible for match until the 6 month mark.

I’d say take a good long look at the plan, verify the management of it, match, vesting, expense ratios, etc. and most importantly, getting your money out when you leave.

[Coronita]

[quote=no_such_reality]Good ideas, but let’s talk about the obvious one.

What kind of company has a 401K that you can’t enroll in for more than 6 months? Let alone 18 months. And what are the details around the plan?

If you started this summer, I could maybe see missing some arbitrary 6 months cutoff. Even then, most companies will let you enroll and start contributing to the 401K, you’re just not eligible for match until the 6 month mark.

I’d say take a good long look at the plan, verify the management of it, match, vesting, expense ratios, etc. and most importantly, getting your money out when you leave.[/quote]

Some small/mid size companies do this, for different reasons. It’s not necessarily a indication of the health of the company. And so long as it was disclosed this would be the case, it would be one extra negotiation with the company as part of the compensation package.

The biggest issues I’ve had with my new company’s 401k plan, is the lack of fund selection. I don’t like the available funds they have, since most of them are these “target retirement” fund of funds. And most funds are actively managed funds versus passive indexes. So, the way I dealt this, was pick only the few index funds that my current plan has, and rebalance the rest of my 401k/IRA elsewhere so that I wouldn’t be lopsided. So my current 401k has a lopsided heavy tilt towards large cap blend, mid cap blend indexes, no small cap, no international, and some short term bonds, while as my other accounts have mostly small came, some bonds, and no mid and large cap allocation.

I’m also trying out one of them “robo-advisors” to see when I should rebalance certain things.

Slight highjack (sorry svelte).

[no_such_reality]

I’m curious what you think those reasons are?

Other than laziness and not thinking it’s important?

I’m serious. I can understand a probationary cleaning before enrollment, but nearly 18 months with what appears to be a once a year enrollment?

I’ve seen this at some small firms but not to this extent and just my anecdotal observation, the lack of importance they place on having this critical compensation component for their employees permeates a lot of activities in the company.

I get they don’t have great fund selection, that’s a side effect of being small and herded into fee generating plan by the servicer. (that has it’s own concerns)

[Anonymous]

I have my own company with one employee – myself – and I was able to start participating in a 401K day one.

It does sound odd that there is a delay of more than a year. I’m no payroll accountant but I cannot even guess as to why a company would have this policy.

As for advice: If you are over the income limits for Roth and traditional IRA contributions I don’t think there’s are any options that stand out as clearly better. Of course if you have high interest debt, paying that down is a no-brainer. Otherwise just save/invest it in a brokerage account as you would do normally.

[flu]

[quote=no_such_reality]I’m curious what you think those reasons are?

Other than laziness and not thinking it’s important?

I’m serious. I can understand a probationary cleaning before enrollment, but nearly 18 months with what appears to be a once a year enrollment?

I’ve seen this at some small firms but not to this extent and just my anecdotal observation, the lack of importance they place on having this critical compensation component for their employees permeates a lot of activities in the company.

I get they don’t have great fund selection, that’s a side effect of being small and herded into fee generating plan by the servicer. (that has it’s own concerns)[/quote]

In the bay area, some companies did this as one of many ways to discourage you from leaving within one year, similar to sign on bonus fine print that stated you had to return the bonus if you left within a year. I guess there is also an administrativr pita of dealing with plans when the employee doesnt stay that long

[Myriad]

[quote=flu]
I would contribute to a Roth IRA via backdoor if I could. Unfortunately, I made the mistake of rolling out one of my previous employer’s 401k into a rollover IRA. So I can’t do a backdoor Roth IRA without paying taxes for the conversion. But my then again, my current and previous employer both offered a traditional 401k and a Roth 401k account.[/quote]

Thanks for writing out in more detail what I was trying to say in shorthand.
You’re right about the pro-rata rule. If you don’t have that issue, then a nondeductible IRA is similar to an After-Tax 401K. as donated by this post.

IRS Notice 2014-54 Acquiesces On Splitting After-Tax 401(k) Contributions For Roth Conversion

I’m currently doing the after-tax 401k since I’ve maxed mine out. I debating on switching to the nondeductible IRA, since I suspect the Back-door IRA strategy will be closed in the next administration.

[svelte]

Thanks for the thoughts all.

I’m not thrilled by the almost 1.5 year wait, obviously, but the benefits of joining the firm way outweighed the 401K issue so I jumped. Still glad I did, just trying to offset the one negative of jumping – the 401K start period.

Their policy is that a new employee is not eligible to join until their 1 year anniv, then they have to wait until the next enrollment period which is every 6 month. Since I started in Aug, I’m not at one year until Aug 2017 and next open enrollment is Jan 2018. Ouch. One good part is that I cashed out a good chunk o change at the old place and they took a boatload out for 401K, so it really feels more like a year of donations missed, not a year and a half.

Can’t for the life of me understand what good that wait does the new company, as I’d be putting in MY money not theirs. Waiting a year to start their match I can see, but waiting on my part? Makes no sense.

My wife is an accountant and says she sees a lot of companies with that rule, though many are shortening it now.

Flu, thanks for the back door explanation. Probably way more work and risk than I want to put in – after all, the max I could put into an IRA is just a fraction of what I’d put into a 401K in 2017…think I’ll consider your other suggestion of putting part towards mortgage and a part under the mattress. I’ll run the numbers of how much I’d have to throw at the mortgage to have it paid off when I’m 67, that might steer me towards the right split.

I also should check to see what fund choices they offer – hopefully it isn’t crappy! That might influence my decision on how long I stay.

Again, thanks all. It never ceases to amaze me the weird positions I find myself in.

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