what to do with 403b and 457 $$

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J295
Posts: 1677
Joined: Sun Jan 01, 2012 11:40 pm

what to do with 403b and 457 $$

Post by J295 » Thu Nov 08, 2018 8:51 pm

Daughter taught school in Massachusetts and then in California. She is going to figure out what to do with her 403b $$ (Mass) and 457 $$ (Cal), but was hoping I could give her a little direction. The amounts are not substantial ($10k total).

Generally, what are her options/what do people generally recommend? ..... can both be rolled over into one IRA? .... leaving such modest amounts in each system doesn't look appealing ...... cashing and paying tax and penalty doesn't seem appealing .....

Thoughts?

Thank you!

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arcticpineapplecorp.
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Joined: Tue Mar 06, 2012 9:22 pm

Re: what to do with 403b and 457 $$

Post by arcticpineapplecorp. » Thu Nov 08, 2018 9:05 pm

yes, she should roll it over into an IRA.

Many plans don't allow small balances to remain and will cash you out.

Just because they cash you out doesn't mean you can't contribute what they send you to an IRA, but to avoid the penalties you would have to replace the tax money that was withheld (add that the after tax amount sent to you in the IRA) and then would get the tax deduction the following year (and avoid the 10% penalty).

It's cumbersome and unnecessary to do it that way, as you say, but you've got to take the bull by the horns, contact Vanguard to set up an IRA which the money will be transferred and then do a trustee to trustee (direct) transfer between companies. That's the important part and how you should describe what you're (she's) trying to do.

I did this with a 403b and a 401k I had when I left two jobs in my 20s and didn't want to leave the money behind or get cashed out and taxes withheld and penalties imposed. So I set up a Rollover IRA with Vanguard and then rolled over both 403b and 401k from previous employers. Don't remember having any problems doing so whatsoever. But I called Vanguard, they had to set up the dummy Rollover IRA (no money in it until the rollover occurred) and they sent me paperwork to get to my previous employers to do the trustee to trustee transfer.

A few years later during the Great Recession since the amount in the Rollover IRA was smallish (and smaller still due to the crash of 08-09) I decided to roll the monies from the Rollover IRA to my Roth IRA. Once of the best decisions I've made. I was in a low tax bracket. Paid less taxes on the conversion because the value had fallen and then was converted. And because of the hardship for so many the tax bill was allowed to be spread out over two years (that was a one-time thing).

So that would be something to consider as well (rolling over to a Roth) but she might have to roll it into a Rollover IRA first and then convert to a Roth IRA second. Just a thought. But if she does that she'll have to make sure she has the money to pay the tax on any conversion from pre-tax to post tax. But she wouldn't have a penalty if she converts from pre-tax to post tax. The penalty only applies if you cash out a pre-tax account prior to 59 1/2 and/or have no hardship exemptions.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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StormShadow
Posts: 597
Joined: Thu Feb 09, 2012 6:20 pm

Re: what to do with 403b and 457 $$

Post by StormShadow » Thu Nov 08, 2018 9:18 pm

J295 wrote:
Thu Nov 08, 2018 8:51 pm
Daughter taught school in Massachusetts and then in California. She is going to figure out what to do with her 403b $$ (Mass) and 457 $$ (Cal), but was hoping I could give her a little direction. The amounts are not substantial ($10k total).

Generally, what are her options/what do people generally recommend? ..... can both be rolled over into one IRA? .... leaving such modest amounts in each system doesn't look appealing ...... cashing and paying tax and penalty doesn't seem appealing .....

Thoughts?

Thank you!
If her new employer also has a 403b and 457, she can see if she can transfer over there. That's what I did with my 403b when I switched jobs.

I did this for tax purposes, since I hold a Roth IRA and the 403b was pre-tax.

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