403B to IRA to Roth IRA in lower income year.

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Dolcetto
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Joined: Wed Sep 13, 2017 2:50 pm
Location: Portland, Oregon

403B to IRA to Roth IRA in lower income year.

Post by Dolcetto » Wed Sep 13, 2017 4:16 pm

Hello,

I've been a long time lurker here and am finally making my first post. I have a question about converting some pre-tax retirement assets to post-tax in a lower income year. I am 30 years old and have been unemployed during all of 2017 so far. I recently accepted a job offer for a position earning $80,000 year. Between previous unemployment payments and my income for the rest of this year in my new position, my gross income for 2017 will be about $25,000 - $30,000.

My present retirement investments include:

TIAA-CREF
403B $7,000
401A $7,000
both invested in TLLIX TIAA-CREF Lifecycle Index 2050 Fund - Institutional Class (special 0.10% expense ratio)

Vanguard
Roth IRA $14,000
VFIFX Vanguard Target Retirement 2050 Fund Investor Shares

I will make the maximum $5,500 contribution to my Roth IRA this year.

Since this is going to be a low income year for me, I think it makes sense to convert the pre-tax retirement assets I have to post-tax in order to pay taxes now at a lower rate. I can't rollover the funds in the 401A until I am age 55. My plan is thus to roll the 403B assets into a Vanguard IRA, and then convert/transfer those assets to my Roth IRA at Vanguard. I will pay the taxes for the conversion with cash.

Based on my reading, this seems like a solid plan, but I want to make sure there aren't any pitfalls that I am not aware of. Also, a few specific questions:

1. How long should I expect this entire process to take?
2. Does this process need to be complete before the end of the year, or can it extend to tax day like normal Roth IRA contributions?
3. Do I need to pay the taxes when I do the conversion or can I wait until I file my tax return?

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FiveK
Posts: 3150
Joined: Sun Mar 16, 2014 2:43 pm

Re: 403B to IRA to Roth IRA in lower income year.

Post by FiveK » Wed Sep 13, 2017 10:56 pm

It would have to be done this year. IIRC, 2 weeks +/- 1.5 weeks is a reasonable timing expectation.

It will likely be easiest for you to handle taxes by withholding enough from your new job.

See the following links for a couple of options:
Roth IRA Conversion Checklists - Fidelity
Why choose Vanguard for your 401k rollover? | Vanguard

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celia
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Location: SoCal

Re: 403B to IRA to Roth IRA in lower income year.

Post by celia » Thu Sep 14, 2017 12:52 am

I think you should start by asking the 403b administrator if they have a form they need filled out or if Vanguard can just pull it from them with you providing all the information on a Vanguard form. In other words, find out what their procedure is. When I did it, the 403b administrator (or 457?) needed proof that I was no longer employed with the participating company, not just that my contributions had stopped. So it took time for me to get their form and have my employer sign off that I was no longer employed.

Also ask what their policy is on participating in electronic transfer of funds or does a check need to be mailed out. My administrator had to mail the check to me and I could then forward it on, but the check was made out to the new administrator For Benefit Of <celia>. The one thing you DO NOT want is a check made out to you.

So if the 403b wants some paperwork done on their end, I would allow 4 weeks for it all to be completed. It would probably take 1.5 weeks if they don't need a form and Vanguard handles everything.

PS. If a check goes through your hands, make a photocopy of it before forwarding it on.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: 403B to IRA to Roth IRA in lower income year.

Post by retiredjg » Thu Sep 14, 2017 8:02 am

If you are single and your gross income is $25k to $35k, you have some space in the 15% bracket to convert pre-tax money to Roth. However, you may not have a lot of space so be careful with that if you don't want to convert at 25% instead of 15%. With the small amount involved ($7k) it seems like you can probably do it.

The conversion would have to be completed by the end of the year to be included in 2017 taxable income. Note that you can have the 403b rolled directly to Roth IRA. It does not have to go into tIRA first and be converted to Roth IRA.

The taxes are due with your next tax filing. You might want to increase your withholding at your new job enough to cover much of it.

In a low income year, you might benefit from the Saver's Credit. The Wiki has information. However, doing the conversion may increase your income to the point that the saver's credit is small or non-existent.

I've also heard people talk about the earned income credit - I don't know what that is exactly, but you might see if the Wiki has info on that as well.

Dolcetto
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Joined: Wed Sep 13, 2017 2:50 pm
Location: Portland, Oregon

Re: 403B to IRA to Roth IRA in lower income year.

Post by Dolcetto » Thu Sep 14, 2017 9:36 am

Thanks to all of you for the excellent information. I sounds like to err on the side of caution, I should begin the rollover process no later than the beginning of November. Although I have claimed it in the past (when I was earning less money right after college), I hadn't thought about the impact of the Saver's Credit (https://www.irs.gov/retirement-plans/pl ... ers-credit). It is quite a significant factor to consider since it credits up to 50% of an IRA or Roth IRA contribution and it looks like my AGI could be within or beyond the phaseout range depending on whether I do the rollover and when my new employer actually pays me. Once I get my first paycheck and know on what days I will be payed, I'll be able to do more precise math and make the best decision possible. Thanks again for all the help.

retiredjg
Posts: 30628
Joined: Thu Jan 10, 2008 12:56 pm

Re: 403B to IRA to Roth IRA in lower income year.

Post by retiredjg » Thu Sep 14, 2017 9:39 am

Either way - saver's credit or lower cost conversion - you get a least some financial benefit for your low income year. Good luck!

Dolcetto
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Joined: Wed Sep 13, 2017 2:50 pm
Location: Portland, Oregon

Re: 403B to IRA to Roth IRA in lower income year.

Post by Dolcetto » Thu Oct 19, 2017 8:33 pm

Thank you to everyone who commented. I completed the rollover/conversion. The money was out of the market for a week and I was, frankly, surprised that in the year 2017 two of the largest retirement account trustees (TIAA and Vanguard) still mail paper checks to each other for this very common transaction.

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FiveK
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Re: 403B to IRA to Roth IRA in lower income year.

Post by FiveK » Thu Oct 19, 2017 9:07 pm

Dolcetto wrote:
Thu Oct 19, 2017 8:33 pm
I completed the rollover/conversion.
That's the important part - well done!

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