403b to a Rollover IRA or Roth IRA

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Topic Author
Kickstart
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Joined: Thu Jan 25, 2018 8:23 pm

403b to a Rollover IRA or Roth IRA

Post by Kickstart » Tue Nov 05, 2019 10:09 pm

This is my wife's retirement so I don't want to make the wrong choices for her. But she worked part time for a hospital and earned 18K in a 403b. She no longer works there and is now self employed basically, and may never have an employer 401k retirement plan again. I want to move her 18k from the old 403b into a Rollover IRA with Charles Schwab. Question is because she wants to start investing on her own in an IRA (6K per year), does it make more sense to go ahead and move the 18K into a Roth IRA and pay the taxes on that additional income this year?
We are both 33 and married filing jointly this year at an income of about 130K plus the additional 18K (tax deductible) from her 403b. I assume that has us owing about 3,900$ in income taxes on the 18K if we move that tax deducted money into a Roth IRA this year. After this year we plan to make about 200k a year and will both contribute 6K a year to our Roth IRA using a backdoor. With her having no prior Roth IRA and no future employer retirement plan, this 18K in the 403B converted to a Roth IRA makes more sense as she has 35 years for it to grow tax free, and gives her a 3 year head start on adding 18K to a Roth IRA. Am I missing anything obvious?

Alan S.
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Re: 403b to a Rollover IRA or Roth IRA

Post by Alan S. » Tue Nov 05, 2019 11:36 pm

Kickstart wrote:
Tue Nov 05, 2019 10:09 pm
This is my wife's retirement so I don't want to make the wrong choices for her. But she worked part time for a hospital and earned 18K in a 403b. She no longer works there and is now self employed basically, and may never have an employer 401k retirement plan again. I want to move her 18k from the old 403b into a Rollover IRA with Charles Schwab. Question is because she wants to start investing on her own in an IRA (6K per year), does it make more sense to go ahead and move the 18K into a Roth IRA and pay the taxes on that additional income this year?
We are both 33 and married filing jointly this year at an income of about 130K plus the additional 18K (tax deductible) from her 403b. I assume that has us owing about 3,900$ in income taxes on the 18K if we move that tax deducted money into a Roth IRA this year. After this year we plan to make about 200k a year and will both contribute 6K a year to our Roth IRA using a backdoor. With her having no prior Roth IRA and no future employer retirement plan, this 18K in the 403B converted to a Roth IRA makes more sense as she has 35 years for it to grow tax free, and gives her a 3 year head start on adding 18K to a Roth IRA. Am I missing anything obvious?

If your expected income increases are quite likely meaning her self employment income will be quick to develop and also expected to last for a few years, conversion now makes good sense. She would not want to roll it over to a TIRA since her back door Roth conversions would then be mostly taxable due to the pre tax TIRA balance. The other alternative is to leave the 403b alone as that would not result in her back door Roth conversions being taxable. The investment options and expenses she would pay annually if she leaves the 403b intact are another factor to consider. If these factors are not favorable, leaving the 403b in place is not advisable.

Note that a direct rollover to a Roth IRA of the 403b plan (formally called a "qualified rollover contribution") must be held 5 years before it can be withdrawn without a 10% penalty, and this rollover will be older than her back door Roth conversions, therefore they would have to come out prior to those non taxable conversions.

Topic Author
Kickstart
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Re: 403b to a Rollover IRA or Roth IRA

Post by Kickstart » Wed Nov 06, 2019 12:10 am

Alan,
I'm not sure I understand. Seemed obvious to me that at age 33, 18k now could be worth 200k much later, and paying some taxes on 18k now would be a better investment than paying taxes on 200k in withdraws later in life. (Can someone tell me does 3,900$ seem right on taxes we would owe on 18K?) Maybe I'm missing something but I dont want to mess up here moving the 403b to a Rollover IRA then transferring it to a Roth IRA.

Another question Charles Schwab has instructed me to have Fidelity do a "direct rollover of all assests" with a check issued to us payable to Charles Schwab with wifes name and acct number. Then we forward the check to Charles Schwab for them to deposit into her Rollover IRA. Then she uses that acct as a tIRA or we can transfer the cash to a Roth IRA and of course pay taxes on the extra income from the pretaxed 18k. Does that seem like the right path for a direct rollover? He said with 401k's they dont do direct transfers trustee to trustee like I do with my SIMPLE IRA to my tIRA.

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teen persuasion
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Re: 403b to a Rollover IRA or Roth IRA

Post by teen persuasion » Wed Nov 06, 2019 8:26 am

Kickstart wrote:
Wed Nov 06, 2019 12:10 am
Alan,
I'm not sure I understand. Seemed obvious to me that at age 33, 18k now could be worth 200k much later, and paying some taxes on 18k now would be a better investment than paying taxes on 200k in withdraws later in life. (Can someone tell me does 3,900$ seem right on taxes we would owe on 18K?) Maybe I'm missing something but I dont want to mess up here moving the 403b to a Rollover IRA then transferring it to a Roth IRA.

Another question Charles Schwab has instructed me to have Fidelity do a "direct rollover of all assests" with a check issued to us payable to Charles Schwab with wifes name and acct number. Then we forward the check to Charles Schwab for them to deposit into her Rollover IRA. Then she uses that acct as a tIRA or we can transfer the cash to a Roth IRA and of course pay taxes on the extra income from the pretaxed 18k. Does that seem like the right path for a direct rollover? He said with 401k's they dont do direct transfers trustee to trustee like I do with my SIMPLE IRA to my tIRA.
You need to compare your tax rate in retirement to the rate right now (if you pay the tax now by converting). You already recognise that your rate in the near future will be higher than now (so if you definitely want to convert, now is better than later), but is your rate now lower than in retirement? Also, what about state taxes? You might be in a different state tax situation in retirement (move, or some states do not tax retirement withdrawals in full or partially).

As for the check issued to you that you forward to Schwab, that sounds like the routine we went thru when DH rolled his 401k to Vanguard. The check is made out FBO so-and-so's IRA, not to you directly. We got a postage paid envelope to mail the check to Vanguard. It took a few weeks for the process to play out.

Topic Author
Kickstart
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Re: 403b to a Rollover IRA or Roth IRA

Post by Kickstart » Wed Nov 06, 2019 2:00 pm

We are in Texas, so no state tax. I dont know how one knows what their tax rate will be when they retire, too many variables to consider. Other than the tax rate may continue to rise over 30 years. I do know after this year we will be making more money so I imagined adding 18k in pretax income to our total salary this year is better than next year being in a higher tax bracket. For someone like my wife starting their only retirement account late, I assumed moving 18K from a 403b to a Roth IRA was going to be the clear winner on this forum, versus leaving the 18k in a tIRA, and starting a new Roth IRA with just 6K.
If 18K grows to 200K in a tIRA, she will pay taxes on all that money she draws out in retirement. Versus paying a possible 3,900$ now in income taxes to move 18K to a Roth IRA and it grow to 200K tax free with no minimum withdraw amounts at any age. Is that not common sense, or am I really missing something about why one would care about what her future tax rate will be? Taxes on 200K is far worse than taxes now on 18K no matter the small rate differences, right?

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FiveK
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Re: 403b to a Rollover IRA or Roth IRA

Post by FiveK » Thu Nov 07, 2019 2:26 am

Kickstart wrote:
Wed Nov 06, 2019 2:00 pm
Is that not common sense, or am I really missing something about why one would care about what her future tax rate will be?
You are missing something. ;)

Join the crowd - others have thought similarly. See the second of two Common misconceptions (and the rest of that article if you want more details).

Silk McCue
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Re: 403b to a Rollover IRA or Roth IRA

Post by Silk McCue » Thu Nov 07, 2019 7:30 am

Kickstart wrote:
Wed Nov 06, 2019 12:10 am
Alan,
I'm not sure I understand. Seemed obvious to me that at age 33, 18k now could be worth 200k much later, and paying some taxes on 18k now would be a better investment than paying taxes on 200k in withdraws later in life. (Can someone tell me does 3,900$ seem right on taxes we would owe on 18K?) Maybe I'm missing something but I dont want to mess up here moving the 403b to a Rollover IRA then transferring it to a Roth IRA.

Another question Charles Schwab has instructed me to have Fidelity do a "direct rollover of all assests" with a check issued to us payable to Charles Schwab with wifes name and acct number. Then we forward the check to Charles Schwab for them to deposit into her Rollover IRA. Then she uses that acct as a tIRA or we can transfer the cash to a Roth IRA and of course pay taxes on the extra income from the pretaxed 18k. Does that seem like the right path for a direct rollover? He said with 401k's they dont do direct transfers trustee to trustee like I do with my SIMPLE IRA to my tIRA.
I am reading Alan response differently than you are. This is my take.
If your expected income increases are quite likely meaning her self employment income will be quick to develop and also expected to last for a few years, conversion now makes good sense.
If this is true go for it and perform the Roth Conversion.
She would not want to roll it over to a TIRA since her back door Roth conversions would then be mostly taxable due to the pre tax TIRA balance.
If you don't convert then don't roll over to IRA or back door Roth conversions will be impacted.
The other alternative is to leave the 403b alone as that would not result in her back door Roth conversions being taxable. The investment options and expenses she would pay annually if she leaves the 403b intact are another factor to consider. If these factors are not favorable, leaving the 403b in place is not advisable.
. If you don't roll the 403b you can do back door Roth conversions but if the fees are outrageous on the 403b you've got to deal with that reality.
Note that a direct rollover to a Roth IRA of the 403b plan (formally called a "qualified rollover contribution") must be held 5 years before it can be withdrawn without a 10% penalty, and this rollover will be older than her back door Roth conversions, therefore they would have to come out prior to those non taxable conversions.
Educational advice regarding penalty free withdrawals from 403b rolled to Roth IRA. Not you can roll the 403b directly to a Roth IRA and not go through the two step process of opening an IRA and then converting it. It is a neater process.

-----

My take. Given the information shared including your inferred ages I would convert the 403b in a heartbeat and put it behind you. The numbers are modest and so right/wrong in the long term is negligible. I expect that it will be right in the rear view mirror.

The Federal taxes on the conversion of $18k fully in the 22% bracket will be $3960. You will want to pay the taxes out of your taxable account and not from the 403b/IRA itself. To do otherwise would be a mistake.

The guidance from Charles Schwab sounds correct to me based on the source of the funds being a 401k. The rules are different than IRA's.

Cheers

Topic Author
Kickstart
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Joined: Thu Jan 25, 2018 8:23 pm

Re: 403b to a Rollover IRA or Roth IRA

Post by Kickstart » Thu Nov 07, 2019 9:01 am

Silk McCue wrote:
Thu Nov 07, 2019 7:30 am

My take. Given the information shared including your inferred ages I would convert the 403b in a heartbeat and put it behind you. The numbers are modest and so right/wrong in the long term is negligible. I expect that it will be right in the rear view mirror.

The Federal taxes on the conversion of $18k fully in the 22% bracket will be $3960. You will want to pay the taxes out of your taxable account and not from the 403b/IRA itself. To do otherwise would be a mistake.

The guidance from Charles Schwab sounds correct to me based on the source of the funds being a 401k. The rules are different than IRA's.

Cheers
Thank you. Ive done some more reading and understand more now about back door roth process. Charles Schwab explained this wrong to me the other day that we could have multiple IRA accounts (one money, one with zero balance) and still do a back door roth but that will incur more taxes due to the pro rata rule. I will move the 403b money to the rollover IRA then convert it over to her Roth IRA immediately. And will we claim the extra 18k as income and pay the tax difference on our tax return...? They arent giving me the option to convert directly from the 403b to her Roth IRA. But I was told I can keep her rollover IRA acct and with a 0 zero balance we can use that to make the backdoor Roth contributions each year like a tIRA.

Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: 403b to a Rollover IRA or Roth IRA

Post by Silk McCue » Thu Nov 07, 2019 9:21 am

Kickstart wrote:
Thu Nov 07, 2019 9:01 am
Thank you. Ive done some more reading and understand more now about back door roth process. Charles Schwab explained this wrong to me the other day that we could have multiple IRA accounts (one money, one with zero balance) and still do a back door roth but that will incur more taxes due to the pro rata rule. I will move the 403b money to the rollover IRA then convert it over to her Roth IRA immediately. And will we claim the extra 18k as income and pay the tax difference on our tax return...? They arent giving me the option to convert directly from the 403b to her Roth IRA. But I was told I can keep her rollover IRA acct and with a 0 zero balance we can use that to make the backdoor Roth contributions each year like a tIRA.
Don't know why you can't roll straight to Roth but it doesn't effect the end result so no harm, no foul. Many folks maintain zero balance IRAs (one for each spouse) used only for back door Roths so that will work for one of you. The other will need to open an IRA for this purpose when you perform the first back door for them.

From a tax perspective you need to make certain taxes are paid in a timely fashion or you will owe penalties and interest. If you meet Safe Harbor rules for withholding then you can pay the tax in April with your return. If not you need to make an estimated payment in January. You may need to fill out tax forms that prove you paid taxes throughout the year in a timely fashion. You can avoid any chance of this being an issue with the IRS by bumping up withholding from your W2 incomes between now and the end of the year to satisfy the taxes due. We do this for Roth conversions every year the last 3 months of the year.

Cheers

Topic Author
Kickstart
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Joined: Thu Jan 25, 2018 8:23 pm

Re: 403b to a Rollover IRA or Roth IRA

Post by Kickstart » Thu Nov 07, 2019 4:16 pm

Silk McCue wrote:
Thu Nov 07, 2019 9:21 am
Many folks maintain zero balance IRAs (one for each spouse) used only for back door Roths so that will work for one of you. The other will need to open an IRA for this purpose when you perform the first back door for them.
I have a tIRA with my SIMPLE IRA transfers in it. (Too much to convert to a Roth). And I have a Roth IRA. My wife will now have money in a Roth IRA, and zero balance in the Rollover IRA which I understand she can us that as a tIRA to do the the backdoor Roth conversion. However I can not do a backdoor roth with my tIRA having so much money due to pro rata taxes. We both work, is there a way she could contribute my 6k for my Roth through her rollover IRA to be converted as a backdoor Roth for my Roth IRA account? I know working spouses can invest in a roth for the other spouse if they do not work. So could she invest 12k a year in her tIRA and backdoor 6k to her roth IRA and 6k to my roth IRA?

Silk McCue
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Re: 403b to a Rollover IRA or Roth IRA

Post by Silk McCue » Thu Nov 07, 2019 4:50 pm

All IRA's and Roths are Individual Retirement Accounts so although funds can come from either spouse to fund them the accounts are only owned by the individual. Therefore it is not possible to perform a backdoor Roth in your name as it would invoke the pro rata rule.

In a perfect world you would utilize another retirement vehicle such as a 401k rather than an IRA based one and then roll the existing funds into it so that you would clear the path for Backdoor Roths.

Cheers

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