Roll over 403b to Roth IRA?

[FutureInternist]

I have approx 200K in 403b from previous job.

The new job is a non-profit so I can roll over to their 401k.

Another option is to pay taxes on it and roll over to Roth IRA (can pay taxes from savings and hence would roll over all of it)

Initially I was thinking that the Roth IRA would be solely for our kid, and that we would rely solely on 401K, 403b etc for our rerirement.

Additionally, since the max Roth IRA for a couple is 12K per year, I could “gain” 16 years of contributions by doing this.

However, given the new SECURE act, and the fact that “Stretch IRAs” are a thing of the past, now I am wondering if that strategy is a good idea.
Worst case scenario would be is rolling it over, then dying a year later in which case the kiddo will have to take the distribution over 10 years and likely not have time to grow.

Another option would be to use what we would have paid in taxes and use that to buy mutual funds in which case we would just have to pay capital gains taxes on them when sold.

Thoughts?

Thanks.

---

Members don't see this ad.

 

[GreenDuck12]

what is your current tax bracket and how close are you to moving up to the next one? Also, do you anticipate your tax rate is higher now or will be higher in the future? If I were going to do this, I would initially roll it over to a traditional IRA and then gradually convert it to ensure it doesn’t push me to a new higher bracket.

 

[FutureInternist]

what is your current tax bracket and how close are you to moving up to the next one? Also, do you anticipate your tax rate is higher now or will be higher in the future? If I were going to do this, I would initially roll it over to a traditional IRA and then gradually convert it to ensure it doesn’t push me to a new higher bracket.

I’m at approx 270K per year, so 24% with about 50K to go before hitting the next bracket.

If things go according to plan, once I have “F you” money, then I will scale back to 1/2 time so bracket in retirement would be lower.

Are we allowed to have a trad IRA? I put 12K (myself and spouse) into it but only to house it for 24 hours or so & then convert to Roth IRA (backdoor).

Even if we were allowed to rollover to a traditional IRA, are taxes not due on it at time of initial 403b to IRA rollover?

I guess I could review my W2 at end of 2020, and then convert only as much as would keep me in the same bracket, but if with bonuses etc I end up crossing then may as well convert the whole thing at once.

 

[GreenDuck12]

you are allowed to have a traditional IRA. However your normal $6k contributions would not be tax deductible at your income level. You do not owe taxes when rolling over pre-tax 403b to a traditional IRA because you would owe taxes when funds are dispersed. To do a conversion from pretax to after tax funds, which is what a Roth is, would be a taxable event. If you anticipate dropping to half time in the near future it would likely be advantageous to do a conversion then. If you do decide to do it now, I would only convert enough to stay in your current bracket each year and spread it out over 4 years.

 

[FutureInternist]

you are allowed to have a traditional IRA. However your normal $6k contributions would not be tax deductible at your income level. You do not owe taxes when rolling over pre-tax 403b to a traditional IRA because you would owe taxes when funds are dispersed. To do a conversion from pretax to after tax funds, which is what a Roth is, would be a taxable event. If you anticipate dropping to half time in the near future it would likely be advantageous to do a conversion then. If you do decide to do it now, I would only convert enough to stay in your current bracket each year and spread it out over 4 years.

That helps
Thanks

 

[dpmd]

Since you plan to be in a lower bracket during retirement I suggest you just roll it into your 401k. Rolling it into a traditional ira would make your backdoor roth more complicated.

 

[GreenDuck12]

Since you plan to be in a lower bracket during retirement I suggest you just roll it into your 401k. Rolling it into a traditional ira would make your backdoor roth more complicated.

That's a good point

 

[FutureInternist]

Since you plan to be in a lower bracket during retirement I suggest you just roll it into your 401k. Rolling it into a traditional ira would make your backdoor roth more complicated.

I am a bit confused by the tax bracket.

Since the tax bracket one falls under is based on the amount withdrawn from funds, and not the actual balance, I find it hard to see how someone would be in a higher tax bracket than while working.

As far as 401K vs Roth IRA, my reasoning was that if they were to be transferred to my kid, then if in Roth IRA, she would at least have 10 years (based on new law) to slowly withdraw funds rather than get the whole chunk if it were in a 401k (or is that not correct)

 

[GreenDuck12]

Only really have to worry about inheritance taxes if the amount is in excess of $11,400,000 for individuals or $28800000 for couples

 

[GreenDuck12]

Also getting a whole chunk wouldn’t be a problem, they could simply put the funds into an appropriately designated fund

 

[dpmd]

I am a bit confused by the tax bracket.

Since the tax bracket one falls under is based on the amount withdrawn from funds, and not the actual balance, I find it hard to see how someone would be in a higher tax bracket than while working.

As far as 401K vs Roth IRA, my reasoning was that if they were to be transferred to my kid, then if in Roth IRA, she would at least have 10 years (based on new law) to slowly withdraw funds rather than get the whole chunk if it were in a 401k (or is that not correct)

They inherit it as a 401k that they can leave as a that or rollover to ira

 

[FutureInternist]

They inherit it as a 401k that they can leave as a that or rollover to ira

Ahh... did not know that.
Just thought that since IRAs now have to be distributed that 401s, 403s etc also do.

Thanks again (and to GreenDuck12)

Time to talk to Fidelity folks 😉

 

[ThoracicGuy]

Are you a W2 or 1099 employee? If a 1099 employee, you could open a solo 401k and move it there. As a W2 employee, I would probably move it to the current 401k to preserve the backdoor Roth.

 

[FutureInternist]

Are you a W2 or 1099 employee? If a 1099 employee, you could open a solo 401k and move it there. As a W2 employee, I would probably move it to the current 401k to preserve the backdoor Roth.

W2.
What do you mean by “preserving” the backdoor Roth?

 

[ThoracicGuy]

W2.
What do you mean by “preserving” the backdoor Roth?

As others have mentioned, if you move the 403b to a traditional IRA and then try to do a backdoor Roth contribution, you would be subject to the pro rata rule and would owe conversion taxes on it. If you have no traditional IRA monies (tIRA, SEPIRA, etc), then there is no tax on it unless you had growth of the money from the time you put it in to the time you convert it to a Roth.

 

[TheHungarianCPAPFS]

My suggestion is to roll your 401(k) into your current 403(b). One of the reasons for a 401(k) or 457 or 403(b) is that program is protected from creditors under the ERISA act. Therefore either you our your beneficiaries would be protected from any creditor. If your money is in a Roth IRA, you dont have the same protection. I would convert 401(k) into a Roth when my income is in a lower tax bracket, or have some huge losses from a business venture that otherwise I wouldn't be able to use, or have a large medical bill or other large itemized deductions that would bring my income to a lower tax bracket. Or with some carfeul planning slowly, over the years, keeping your tax bracket down, I would do partial conversions to keep the effective tax rate down. I dont know your tax situation, so I cannot comment on that, but didn't understand what you meant by the kid would have to take distributions. Hope this helps.

 

[FutureInternist]

My suggestion is to roll your 401(k) into your current 403(b).
One of the reasons for a 401(k) or 457 or 403(b) is that program is protected from creditors under the ERISA act.

Therefore either you our your beneficiaries would be protected from any creditor.

If your money is in a Roth IRA, you dont have the same protection.
I would convert 401(k) into a Roth when my income is in a lower tax bracket, or have some huge losses from a business venture that otherwise I wouldn't be able to use, or have a large medical bill or other large itemized deductions that would bring my income to a lower tax bracket. Or with some carfeul planning slowly, over the years, keeping your tax bracket down, I would do partial conversions to keep the effective tax rate down.

I dont know your tax situation, so I cannot comment on that, but didn't understand what you meant by the kid would have to take distributions. Hope this helps.

Thanks for the detailed response.

Some clarifications-

I do not currently have a 401k.
I have a 403b and a 457.
Once I start my new job, I will have only a 401k so was trying to figure out what to do with what I do have in 403/457.

Did not know about these retirement accounts being protected from creditors so that may be one reason to not roll over into an IRA.

I was planning on waiting till end of each year to see which tax bracket I am in, and then only convert enough to get me to the max within that bracket.

Re- Kid having to take distributions - Given the new SECURE act, there is no longer a stretch IRA (where beneficiaries could do RMDs over the course of their lifetime from an inherited IRA). The new law states that beneficiaries must take all of it out within ten years of inheriting.
My concern was if I converted most or all of current 403b/457 into Roth, and paid a high tax, only to then die soon and then the kid would have to pay tax again on their distribution, with not enough time in ten years to perhaps make enough to have taxes come out of distribution itself and not lower the inheritance by much.

 

[ThoracicGuy]

Thanks for the detailed response.

Some clarifications-

I do not currently have a 401k.
I have a 403b and a 457.
Once I start my new job, I will have only a 401k so was trying to figure out what to do with what I do have in 403/457.

Did not know about these retirement accounts being protected from creditors so that may be one reason to not roll over into an IRA.

I was planning on waiting till end of each year to see which tax bracket I am in, and then only convert enough to get me to the max within that bracket.

Re- Kid having to take distributions - Given the new SECURE act, there is no longer a stretch IRA (where beneficiaries could do RMDs over the course of their lifetime from an inherited IRA). The new law states that beneficiaries must take all of it out within ten years of inheriting.
My concern was if I converted most or all of current 403b/457 into Roth, and paid a high tax, only to then die soon and then the kid would have to pay tax again on their distribution, with not enough time in ten years to perhaps make enough to have taxes come out of distribution itself and not lower the inheritance by much.

If your 457 is a governmental 457, you can send that to your new 401k. You could also put it into your own IRA, but again it blocks your ability to do the backdoor Roth. The 403b can go to the 401k or IRA.

A nongovernmental 457 can only go into other nongovernmental 457s.

 

[NITRAS]

I currently have a non-governmental 457b, which is a non-qualified retirement account. When I leave this position, I have the options to roll it to another non-governmental 457b, take a lump sum, or take it over 10 years.

I technically have a 457f as well, which is bit different as well.

I suspect your 457 is a non-governmental one, and you will have to see your plan forms to see if you have to take it as a lump sum or if you can spread it out over a few years.

I kinda had planned on using the lump sum money to pay the taxes on rolling my pre-tax monies into ROTH when I move jobs. . . But that will probably depend on a lot factors. If I’m at my current job for few more years, I’ll probably plan on rolling my matching 401k into ROTH (which I can do annually) and paying the taxes out of pocket.

 

[TheHungarianCPAPFS]

Do you realize, that paying taxes on $200k of income, you will cost you about $40K+in Federal plus your state taxes? For you to recoup over $50K in taxes paid, either outside your investment or with the investment, @ 5%/ year return, will take 5 years to recoup. If you want to convert, my suggestion would be to move that money into an IRA and slowly, year by year convert the money when your income is in the lower tax bracket, have some large itemized deductions or losses from other sources that reduces your taxable income. Otherwise, my suggestion is to roll it over into another 401(k), 403(b) or 457 that will accept outside contributions. You will have to talk to your HR department about it. This way the money in the account will be protected from creditors under the Pension Act, unlike in an IRA where creditors can touch that account, including the IRS and remove the money from it. Hope this helps.