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Emptying rollover IRA to avoid prorata

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  • Emptying rollover IRA to avoid prorata

    new to investing- glad to find WCI , in the process of learning
    33yo ,currently in training, have an emergency fund, maxed out on employer 401 k contribution, using vanguard/charles schwab/robinhoid brokerage account for investing additional savings

    I am interested in doing back door Roth IRA contribution starting this year.

    however, i have 175k in rollover ira in vanguard( rolled from my previous employers 401 k over 5 yearsWould like to pursue reverse rollover into 401k
    my current employers 401 k at transamerica( invests through vanguard) does-accept the rollover . However vanguard asked me sell the current holding to cashout for them to issue a check as they donot tranfsfer the holdings as such

    questions
    is it advisable to cash out my rollover ira-which has a mix of mutual funds and dividend yielding ETFs - what are the implications as i plan to direct it all into 401k in a timely manner ? (concerned as it shows negative investment return by 2% at this time. is it sensible to time the market in this instance while selling ?what strategy could be used in this instance?

    Is it gonna be worth the above hastle to do the back door ira?


  • #2
    wow-in training and you have $175k in an IRA already? you must've been employed before medical school. Yes you need to sell everything, and be in touch with your 401k provider about who to make the check out to and where to mail it and where all the necessary paperwork is for an incoming rollover. You cannot time the market. Just put that out of your mind. Sell the assets, then the check will be mailed. The whole process might put you out of the market for 1-2 weeks. But it is what it is, and in the grand scheme of things, just a tiny tiny hiccup. I just did this recently as I switched employers and due to the time out of the market I think my 401k money missed out on 1% of gains. still worth it

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    • #3
      In fellowship training, have worked as a hospitalist prior to fellowship. Reassuring to know it is a tiny hiccup in the grand scheme of things. Would there be any tax implications even after doing it with in the specified time?

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      • #4
        No. As long as you specify the pre tax amount and roll it over to another qualified pre tax account there’s no tax consequence. Try to do a direct rollover. You can do an indirect rollover but then you have a 60 day window. Google the difference between direct and indirect rollovers

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        • #5
          I don't think VG allows direct rollovers. If all of your TIRA is pre-tax, then you'll cash out the full amount, withhold no taxes on the distribution, and mail the check to your 401k the next day after receiving it. There are no tax implications; you are just moving a pre-tax IRA to a pre-tax 401k. Make sure your 401k accepts rollovers and that you have all of the paperwork completed so there will be no delay in redepositing. I'm not worried about what the market will do in a week or even a month, but that you'll somehow miss that 60-day deadline to redeposit and have to make it a final distribution complete with tax and penalties. We actually had a client do this a few years ago - despite warnings and reminders from Michelle, he forgot to redeposit his $250k TIRA "loan" within 60 days. Terrible consequences, totally unnecessary.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Originally posted by jfoxcpacfp View Post
            I don't think VG allows direct rollovers. If all of your TIRA is pre-tax, then you'll cash out the full amount, withhold no taxes on the distribution, and mail the check to your 401k the next day after receiving it. There are no tax implications; you are just moving a pre-tax IRA to a pre-tax 401k. Make sure your 401k accepts rollovers and that you have all of the paperwork completed so there will be no delay in redepositing. I'm not worried about what the market will do in a week or even a month, but that you'll somehow miss that 60-day deadline to redeposit and have to make it a final distribution complete with tax and penalties. We actually had a client do this a few years ago - despite warnings and reminders from Michelle, he forgot to redeposit his $250k TIRA "loan" within 60 days. Terrible consequences, totally unnecessary.

            I have checked with my current 401k, they do accept rollovers. I will be moving pretax IRA (with employer contribution too) to a pretax 401k. However, I was also planning to switch from pretax 401k to roth 401k contribution in the near future .Is it a good idea or not to do it?

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            • #7
              Originally posted by JBME View Post
              No. As long as you specify the pre tax amount and roll it over to another qualified pre tax account there’s no tax consequence. Try to do a direct rollover. You can do an indirect rollover but then you have a 60 day window. Google the difference between direct and indirect rollovers
              I have called vanguard and my current 401k(one america) , they apparently both donot do or accept a direct rollover.

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              • #8
                A direct rollover check cannot be accepted? That typically involves only the name printed on the check (FBO hemocmd). Verify that direct transfer isn’t being confused with a direct rollover by check.
                We did two last year, direct rollover by check. They simply wouldn’t direct transfer. Vanguard wrote the check and Fidelity accepted it.
                It makes a difference on the coding of your year end tax document.

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                • #9
                  I'm pretty sure if a plan accepts an indirect rollover then they'd accept a direct. also called an institutional transfer.

                  As for Roth 401k, we need to know more. What is your current marginal tax rate (fed+state)? How much do you have in pre-tax money now? Taxable? tax-free? if you are in training the usual guidance is to do Roth 401k but do you have a spouse who works? all of these answers would help us provide better guidance

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                  • #10
                    Originally posted by hemoncmd View Post


                    I have checked with my current 401k, they do accept rollovers. I will be moving pretax IRA (with employer contribution too) to a pretax 401k. However, I was also planning to switch from pretax 401k to roth 401k contribution in the near future .Is it a good idea or not to do it?
                    Sure, no reason not to do this. You don't have to keep contributing to the pre-tax, you'll just have to rebalance what you r/o. And employer contrib's w/b pre-tax. Might want to see if your plan has a self-directed brokerage option for more investment choices.
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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