401(k)/403(b) Distributions When You Have Both Traditional and Roth Money

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tarheel
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401(k)/403(b) Distributions When You Have Both Traditional and Roth Money

Post by tarheel » Thu May 23, 2019 5:40 am

I won't be making portfolio distributions for a long time, but was curious about the mechanics of how things will work when I do.

I have a 403(b) account which has a mix of both traditional and Roth contributions. It's currently about 2:1 traditional:Roth. (I believe in tax diversification).

When I sell actual funds someday, how will it work? Does it matter what funds I bought with either the traditional or Roth contributions? Or will it just treat everything I sell the same - for example, every dollar I receive will be $0.66 taxable and $0.33 post-tax as that is the ratio of the source money? I'm guessing the latter but I have never read anything about this. Thanks!

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dodecahedron
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Re: 401(k)/403(b) Distributions When You Have Both Traditional and Roth Money

Post by dodecahedron » Thu May 23, 2019 6:05 am

I have made both Roth and pretax contributions to my 403b with TIAA.

I recently decided that I wanted roll some of the pretax balance out to an IRA. I was able to do this by choosing the ¨custom¨ tab on the distribution page. The default otherwise, if you don´t choose the custom tab, is to distribute everything pro rata.

So it is legally possible to distribute just pretax or just Roth funds. Whether it is logistically possible may depend on your particular custodian, but I suspect the answer is yes.

I am planning to roll ALL my Roth 403b balances out to a Roth IRA before I reach RMD age, so I won´t face RMDs on the Roth accumulations in my Roth 403b. However, I might well keep some pretax balances in my 403b past that age.

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tarheel
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Re: 401(k)/403(b) Distributions When You Have Both Traditional and Roth Money

Post by tarheel » Thu May 23, 2019 12:49 pm

Right, I understand treating it separately, but my question is say I want to roll my Roth accumulations over to a Roth IRA. Do I have to pick the specific funds I bought with my Roth contributions, or do I pick whatever funds I want?

bryanm
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Re: 401(k)/403(b) Distributions When You Have Both Traditional and Roth Money

Post by bryanm » Thu May 23, 2019 1:24 pm

tarheel wrote:
Thu May 23, 2019 12:49 pm
Right, I understand treating it separately, but my question is say I want to roll my Roth accumulations over to a Roth IRA. Do I have to pick the specific funds I bought with my Roth contributions, or do I pick whatever funds I want?
My understanding is that the funds are partitioned. So, when rolling over Roth 401k/403b money to a Roth IRA, you are limited to the assets in the Roth 401k/403b. You can either do an in-kind transfer (e.g., maintaining the same assets) or liquidate and purchase new assets in the IRA.

So, to answer the question of "Does it matter what funds I bought with either the traditional or Roth contributions?" Yes, I believe it does. When you withdraw/rollover, you select the source of the assets (as either the Roth or Traditional account) and are limited to those assets. (Of course, you may withdraw/rollover from both to get whatever tax treatment you believe is best.)

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Earl Lemongrab
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Re: 401(k)/403(b) Distributions When You Have Both Traditional and Roth Money

Post by Earl Lemongrab » Thu May 23, 2019 1:28 pm

Plans generally use separate accounting. So it's like having a Roth account and a traditional account, possibly others like company match or rollover, each with its own mix of investments. You'll usually see the combined holdings but under the hood it's different.

When you take a distribution, you will likely have to select from the holdings in the sub-account. I discovered this at MegaCorp when I was doing an after-tax distribution. I wanted to take it all from stable value, but that wasn't possible. All you have to do is rebalance the remainder after the distribution.

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