As part of our efforts to bring you actionable strategies to help you reach your ideal retirement, we’re tackling a complex question today.
If you have rollover IRA accounts, and have wondered if you should roll these to your 401k, this episode is for you.
Today we walk through five consoderations you should think through before you implement a backdoor Roth strategy.
Why you might want to rollover your IRA into your 401K
Many people reach a level in the middle of their careers where they can no longer contribute to a Roth IRA. This often happens after a couple of job changes and many people end up with multiple rollovers and different retirement accounts.
The backdoor Roth IRA is one way a person can continue to contribute to a Roth IRA even after they have surpassed the income limitations. Of course, like all things in retirement savings, there are certain rules that one must abide by.
One of those rules is the pro rata rule which stipulates that when saving in a backdoor Roth, you can’t have funds in an IRA. In order to implement the strategy you can’t have pretax monies in an IRA, rollover IRA, or a simple or SEP IRA however, you can have money in a 401K or 403B.
This is why one of our listeners wonders if they should rollover their traditional IRA back into their current 401K.
If you do want to implement a backdoor Roth strategy, the first step is to roll over any pretax IRA accounts into your 401K or 403B. Of course, this can only be done if the plan allows it.
Considerations before implementing a backdoor Roth strategy
Whether or not you should do a backdoor Roth seems like a simple question. There are only two options. Either keep your portfolio as is and save it in a brokerage account or do the backdoor Roth.
However, before you make that decision you should consider whether the backdoor Roth strategy would be worth it. The longer the timeline you have available the more it could pay off. If you have a longer timeline for retirement, then it makes sense to implement the strategy. However, if you are only a few years away from retirement the strategy won’t be worth it.
Next, you’ll want to consider your tax bracket. The higher your tax rate is the greater the benefit of the backdoor Roth. Don’t only consider your tax bracket this year but also what it may be in the future. A financial professional can help you see the big picture.
Lastly, you’ll also want to think about how your portfolio will be allocated during the process. As you are rolling over your account, the funds may be out of the market for weeks
If you are considering a backdoor Roth strategy reach out to us to see how we can help.
Outline of This Episode
[2:41] Should I roll my traditional IRA to a 401K?
[5:04] 5 considerations before implementing a backdoor Roth strategy
Resources & People Mentioned