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I'm a bit overwhelmed after looking up information regarding rollover of my 401k into a Roth IRA. If I'm to be honest with myself, I'm not knowledgeable in the personal finance subject and really just need a couple of questions answered in simple terms.

I have no finance background and am fairly new to investing.

I have a 401k that is currently inactive. I haven't rolled it over to a new account after leaving my last job in 2011, so it hasn't grown.

In the next few years, I'd like to buy a house and would like to use my future Roth savings to put towards a down payment.

Ideally what I would like to do is take some of my money from my bank accounts and max out my Roth IRA contributions from 2015. Also, I'd like to rollover the $20,000 that I have in the inactive 401k into the same Roth.

I've never owned a house and I believe you can use the money from the Roth towards the purchase of your first property.

So here are my questions:

  1. Can I contribute $5.5k into a Roth for 2015 from my personal checking account? If so, will i be hit with fees? I don't think so because I already paid taxes on the money in my bank account and Roth is after tax.

  2. What is the best approach to rollover my 401k with $20k into the same Roth IRA? Is the backdoor Roth method real and should I consider it?

I will most likely have more questions later, bu this is a good start.

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For #1, I see no advantage in putting money from your non-retirement savings into a Roth just for the purpose of using it as a down payment on your house. Why not just put the $5.5K directly toward the down payment?

For #2, dollars converted from a traditional 401K or IRA to a Roth are considered income, and will be taxed at your marginal rate. So if your marginal tax rate is 25%, you will need to pay $5K in order to convert the $20K. Usually this payment is done independent of the conversion amount--in other words, you would convert the full $20K but pay the $5K in taxes out of other funds (checking/savings).

Based on your stated goals of using the money for a down payment on a house, I don't see any advantage to contributing (or converting) to a Roth IRA.

  • #1. I see your point. I guess I was thinking that the IRA would grow over time and my down payment on a house would be larger from the interest. – theeviininja Mar 7 '16 at 19:32
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    @theeviininja Your regular investment can also grow over time, no? Nothing special about roth here. – Joe Mar 7 '16 at 19:36
  • I have 0 in Roth right now. Instead, I have all my money in a savings account. I wanted to have it work for me and thought contributing the 5.5k for 2015 might be beneficial and eventually would help with the house. – theeviininja Mar 7 '16 at 19:39
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    I think @Joe is saying you could put that savings in a regular brokerage account and invest it that way. Note that if you NEED the full balance for the down payment, you might not want to put any of that money at risk (either in non-retirement brokerage account OR in a Roth IRA). – Phil Sandler Mar 7 '16 at 19:59
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There is some advantage to putting your house downpayment in the Roth to get tax-free growth. However this advantage is offset by the risk of the investment losing value in the short period before you take advantage of it. You might go this route if the timeline is greater than 5 years and you use a conservative investment vehicle.

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