Roth conundrum

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dodecahedron
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Roth conundrum

Post by dodecahedron » Sat Oct 04, 2014 10:20 pm

So I have had a TIAA-CREF 403(b) account (pretax) for decades and I recently decided to open a TIAA-CREF Roth 403(b) at my current employer.

The first contribution went into the Roth 403b a few days ago and I was super surprised to see that TIAA-CREF basically comingles both the pretax and posttax Roth in a single account. There is a little footnote notation about the amount of the total balance that is Roth, but if, for example, I want to change my asset allocation, it looks like my only option is to change both the pretax and posttax accounts proportionately pro rata. There's no way, for example, to say that I want all equities in my Roth and all fixed income in my pretax funds.

This seems really odd. Now it turns out that my current employer offers 403b's from both TIAA-CREF and Fidelity, so I guess I could set up my Roth 403b at Fidelity, which would allow me to control the asset allocations separately in the pretax 403b at TIAA-CREF and the posttax Roth at Fidelity, but it seems kind of weird that TIAA-CREF doesn't make it easier by just creating a separate account. Also, I have some reasons for not wanting to deal with Fidelity if I can.

For other folks who have both traditional and Roth retirement accounts with a single provider (whether 403b or 401k), I wonder how common it is for the provider just to commingle the pretax and posttax account in this way?

123
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Re: Roth conundrum

Post by 123 » Sat Oct 04, 2014 11:25 pm

I'm familiar with the 401K offered to employees at Wells Fargo Bank. It uses a single account for both traditional and Roth 401K contributions in a manner similar to your description as far as the participant is concerned. I haven't played around with the account statement numbers or the on-line account information to ascertain algebraically how the individual investments break down between traditional and Roth positions. However, it would have to be tracked in order for tax information to be appropriately calculated. I'm guessing that the employer wants to present the positions in the accounts in the simplest manner to participants.

Perhaps these mixed accounts are too new for large employers to have resolved all the issues in presenting detail to the participants. However, the inability to separately direct investments in the traditional and Roth sides of the account is a significant limitation.
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August
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Re: Roth conundrum

Post by August » Sat Oct 04, 2014 11:36 pm

I have a 401k at Fidelity. They co-mingle the roth and traditional accounts similar to what you describe. I have no idea if that is just my 401k plan or if Fidelity does it for all their retirement plans.

HurdyGurdy
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Re: Roth conundrum

Post by HurdyGurdy » Sun Oct 05, 2014 12:24 am

My 457 managed by ING (now Voya?) also commingles my pretax and post-taxed contributions in the same account.
Last edited by HurdyGurdy on Sun Oct 05, 2014 12:46 am, edited 1 time in total.

LeeMKE
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Re: Roth conundrum

Post by LeeMKE » Sun Oct 05, 2014 12:29 am

Wow. I never heard of this. Fidelity has my Roth and IRA accounts separated, as have I done at all other investment houses.
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dodecahedron
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Re: Roth conundrum

Post by dodecahedron » Sun Oct 05, 2014 7:45 am

LeeMKE wrote:Wow. I never heard of this. Fidelity has my Roth and IRA accounts separated, as have I done at all other investment houses.


TIAA-CREF also has my Roth and traditional IRA accounts separated as well just as you describe for Fidelity. I think this issue only arises with employer-based retirement accounts (i.e., 401ks, 403bs, and the like.)

cherijoh
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Re: Roth conundrum

Post by cherijoh » Sun Oct 05, 2014 8:34 am

LeeMKE wrote:Wow. I never heard of this. Fidelity has my Roth and IRA accounts separated, as have I done at all other investment houses.


There is a huge difference between employer plans and IRAs. Did you expect that the employer plan sets up separate independent accounts for every employee? It doesn't work that way. IRAs and employer plans are two different animals. If you have both a Roth and Traditional 401k for the same employer, the default would be to comingle them. Otherwise instead of a maximum of 1 sub-account per employee, the maximum becomes 2. Complexity adds cost - and most employees would probably invest them identically anyway.

I guess 403b plans allow you to choose between multiple trustees, so you can get around this. But for 401k plans, this is definitely the norm.

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House Blend
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Re: Roth conundrum

Post by House Blend » Sun Oct 05, 2014 8:54 am

dodecahedron wrote:For other folks who have both traditional and Roth retirement accounts with a single provider (whether 403b or 401k), I wonder how common it is for the provider just to commingle the pretax and posttax account in this way?

I believe this is the usual way Roth options are handled in employer plans. If they offer in-plan conversions, you have a bit more control.

My employer puts the matching contributions into a 401(a) (always tax-deferred). Employee contributions go into a 403(b) and/or a 457(b). Both of those have Roth options and the same fund choices. Especially if one is starting out fresh, you could put (say) the contributions you want Roth'd into the 457(b) and tax-deferrals into the 403(b).

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dodecahedron
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Re: Roth conundrum

Post by dodecahedron » Sun Oct 05, 2014 9:01 am

cherijoh wrote:
LeeMKE wrote:Wow. I never heard of this. Fidelity has my Roth and IRA accounts separated, as have I done at all other investment houses.


There is a huge difference between employer plans and IRAs. Did you expect that the employer plan sets up separate independent accounts for every employee? It doesn't work that way. IRAs and employer plans are two different animals. If you have both a Roth and Traditional 401k for the same employer, the default would be to comingle them. Otherwise instead of a maximum of 1 sub-account per employee, the maximum becomes 2. Complexity adds cost - and most employees would probably invest them identically anyway.

I guess 403b plans allow you to choose between multiple trustees, so you can get around this. But for 401k plans, this is definitely the norm.


Interesting perspective. My late husband and I certainly have had experience with employers that have set up multiple subaccounts for us when they were all pretax. A number of our employers had one subaccount for employer contributions and another subaccount for employee mandatory contributions and still another subaccount for employee voluntary contributions. I wouldn't think it would be that big a deal to set up separate subaccounts for traditional vs. Roth (especially since if the provider does NOT do this at an institution like mine, which offers a choice of providers, they risk losing some of the assets to the other provider.)

At this point, it is not a big deal for me because I currently plan to have the assets invested identically. But I do hope to roll the Roth proceeds (only) out of the 403b into a Roth IRA prior to turning 70 1/2, so I don't have RMDs on the Roth balance. I hope that will be possible.

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dodecahedron
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Re: Roth conundrum

Post by dodecahedron » Sun Oct 05, 2014 9:03 am

House Blend wrote:
dodecahedron wrote:For other folks who have both traditional and Roth retirement accounts with a single provider (whether 403b or 401k), I wonder how common it is for the provider just to commingle the pretax and posttax account in this way?

I believe this is the usual way Roth options are handled in employer plans. If they offer in-plan conversions, you have a bit more control.

My employer puts the matching contributions into a 401(a) (always tax-deferred). Employee contributions go into a 403(b) and/or a 457(b). Both of those have Roth options and the same fund choices. Especially if one is starting out fresh, you could put (say) the contributions you want Roth'd into the 457(b) and tax-deferrals into the 403(b).


Interesting idea to use a 457(b). I have never had access to one of those but that may be about to change.

Minot
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Re: Roth conundrum

Post by Minot » Sun Oct 05, 2014 2:06 pm

dodecahedron wrote:At this point, it is not a big deal for me because I currently plan to have the assets invested identically. But I do hope to roll the Roth proceeds (only) out of the 403b into a Roth IRA prior to turning 70 1/2, so I don't have RMDs on the Roth balance. I hope that will be possible.

Another possible issue would be beneficiaries. I'd prefer to leave my Roth to my heir(s) and my Traditional to charities, since charities would end up with the full amount vs. heirs who would pay taxes on any withdrawals.

Geologist
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Re: Roth conundrum

Post by Geologist » Sun Oct 05, 2014 2:26 pm

My TIAA pretax and Roth 403b operates exactly the same way as does yours. I found it as disconcerting as you have when I first started my Roth 403b contributions, but I'm used to it now.

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dodecahedron
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Re: Roth conundrum

Post by dodecahedron » Sun Oct 05, 2014 2:45 pm

Minot wrote:
dodecahedron wrote:At this point, it is not a big deal for me because I currently plan to have the assets invested identically. But I do hope to roll the Roth proceeds (only) out of the 403b into a Roth IRA prior to turning 70 1/2, so I don't have RMDs on the Roth balance. I hope that will be possible.

Another possible issue would be beneficiaries. I'd prefer to leave my Roth to my heir(s) and my Traditional to charities, since charities would end up with the full amount vs. heirs who would pay taxes on any withdrawals.


Good point. The idea of setting up a separate Roth (either via a second provider, in my case Fidelity Roth posttax and TIAA-CREF traditional pretax) or via a 457/403b split is looking even better.

Alan S.
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Re: Roth conundrum

Post by Alan S. » Sun Oct 05, 2014 10:42 pm

The tax code clearly requires the designated Roth to be maintained as a totally separate account from the pre tax account, and behind the presentation of these accounts, they actually are separate or the plan has a serious violation to correct.

However, there must be considerable record keeping savings by requiring the investments to be identical, and I believe the investment restrictions go hand in hand with the abbreviated accounting presentation, and this practice had spread to many plans. If anyone participates in a plan without investment choice restrictions that also appears to be commingled in presentation to the employee, please advise. I would like to see if these two negatives always go hand in hand.

With an up to date processing platform, there is no reason for presenting the two accounts to appear commingled, but those who resent not having asset allocation freedom and who can split by provider have a work around. But this is likely not an option for most plans. Would recommend keeping the pressure on the plan administrators, because I expect accounting transparency goes hand in hand with lifting the investment restrictions.

NOTE: For those wishing to avoid designated Roth RMDs, you have to roll the plan over to a Roth IRA by the end of the calendar year prior to the year you will reach 70.5. If you avoid RMDs after 70.5 through the "still working" exception, the year you retire will become an RMD distribution year, so you will not avoid at least one designated Roth RMD if you had a balance at the end of the prior year. However, at that age you can probably make in service rollovers to your Roth IRA thereby reducing the balance of the designated Roth.

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