- December 5, 2023
- Posted by: legaleseblogger
- Category: Related News
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Heading: Understanding the Implications of Transferring Funds from a Traditional 401K to a Roth IRA
I. Current Situation: Traditional 401K and Preference for Roth Tax Structure
At present, I have approximately $80,000 in a Traditional (pre-tax) 401K from a previous employer. Given my investment preferences and desire for a Roth tax structure, I am seeking to transfer these funds into an existing Roth IRA. It is important to note that I do not currently possess a traditional IRA nor do I intend to open one in the future.
II. Process for Transfer and Potential Tax Considerations
My understanding of the transfer process involves the following steps:
1. Transfer funds from Traditional 401K to a Rollover IRA, which essentially functions as a traditional IRA.
2. Engage in partial conversion to Roth IRA on an annual basis to manage tax implications. It is important to note that the amount converted is considered as income tax for the respective year.
III. Anticipated Use of Backdoor Roth and Potential Implications
While I have not yet utilized a backdoor Roth, I anticipate doing so in the coming years due to income limits. It is important to consider whether the completion of conversions and the depletion of the rollover IRA will have any future ramifications, particularly in relation to utilizing a backdoor Roth. I have encountered conflicting information online regarding the pro-rata rule and other potential issues that may hinder the use of a backdoor Roth. As such, I am eager to gain clarity and insight into any potential future implications to avoid detrimental consequences.
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It doesnÔÇÖt stop you per se, but if you already have a TIRA balance you would also need to convert that (and pay taxes) to Roth when you want to do the first Backdoor Roth next year. It sounds like you are already planning to convert this prior 401k to a Roth IRA anyway and pay the taxes, in which case itÔÇÖs not a big issue. But some people donÔÇÖt realize the tax implications of this, seems like you do
I’m not sure you’re allowed to have money in a traditional if you’re trying to do a backdoor Roth. Correct me if I’m wrong but it might cause a taxable event.