403b to TIRA question

[Valueinvestor2]

Hi Bogleheads,

I am a long time reader of the forum and I am now posting with a question regarding my 403b. Situation is below. Any help answering is greatly appreciated.

I have contributed to my Roth via backdoor process in years 2017, 2018, 2019. In order to do this, I opened a traditional IRA, funded it with the max of post tax dollars, then converted to a Roth. I only have used my TIRA for this purpose so the balance is almost always $0 except when I have funds waiting to converted to Roth.

I currently have my retirement funds in multiple 403b accounts (current and previous employers). In 2020 I plan to move all my funds from previous 403b accounts to my TIRA to allow more flexibility (i.e. low cost index funds)

I have read up on the pro rata rule and I want to double check to make sure that I am thinking about this correctly as I don’t want to have any taxes as a result (having no taxes or penalties is my main goal here). My understanding is that if I would move funds into my TIRA from 403b in 2019, then I would have a significant tax obligation since my balance in my TIRA will be > $0. So therefore I am waiting until 2020 to make this move. In 2020 I will forgo the backdoor Roth to avoid the pro rata rule.

Now my questions

Even though I did a backdoor Roth conversion in 2019, as long as I wait until Jan 1, 2020 to move 403b funds to TIRA, then I will not be subject to the pro rata rule assuming that I do not convert $6000 to a backdoor Roth in 2020?

If in the future, If I wanted to take advantage of the backdoor Roth, I could move funds from TIRA to current 403b (assuming my plan allows) and as long as my TIRA account is $0 at end of year I will not be subject to pro rata rule?

Is my understanding correct that the pro rata rule is only dependent upon your TIRA (all accounts but i only have 1) if you have a balance on Dec 31 in the TIRA in the calendar year that you made the backdoor Roth conversion? So even though I made a conversion in 2019 and have $0 balance in TIRA on dec 31, 2019, I can transfer funds on Jan 1, 2020 from 403b to TIRA, forgo backdoor Roth in 2020 and not be impacted by pro rata rule or any tax issues even though I fully plan to maintain that balance in my TIRA through 2020 and beyond?

Anything else that I should be aware of concerning taxes?

Thanks so much!

[krow36]

I think your understanding of the Backdoor Roth process is correct. Hopefully you've been completing a Form 8606 for each of those years.

[livesoft]

So it appears your idea is to have a rollover IRA for most of the tax year so that you can use passively-managed, low-expense ratio index funds there, but to have it all in a 403(b) on the last possible day of each tax year so that your form 8606 will not show any IRA balance each year. So that's two complete transfers each tax year. Do I have that right?

[Valueinvestor2]

So it appears your idea is to have a rollover IRA for most of the tax year so that you can use passively-managed, low-expense ratio index funds there, but to have it all in a 403(b) on the last possible day of each tax year so that your form 8606 will not show any IRA balance each year. So that's two complete transfers each tax year. Do I have that right?

No. I just want to roll my old 403b into TIRA one time in 2020. I am willing to forgo the backdoor Roth option (because I will have too much in TIRA which may subject me to prorata rule).

From here on out I plan on having my New TIRA and my current 403b (current employer offers better low cost index funds).

[livesoft]

If your current employer 403(b) has decent funds

and

you are able to rollover your other 403(b)s into your current employer 403(b), then why don't you attempt that?

[Valueinvestor2]

If your current employer 403(b) has decent funds

and

you are able to rollover your other 403(b)s into your current employer 403(b), then why don't you attempt that?

Sorry for the confusion. Current employer has lower cost index funds relative to previous employer, but TIRA is better overall. Hence my desire to move to TIRA.

Thanks!

[lakpr]

What exactly are the expense ratios in your 403b, versus the expense ratios available to the public in retail IRA side? Perhaps we are talking pennies? What is the total amount saved in your past 403b even? Perhaps we can quantify the impact of your decision based on certain reasonable assumptions?

[Valueinvestor2]

What exactly are the expense ratios in your 403b, versus the expense ratios available to the public in retail IRA side? Perhaps we are talking pennies? What is the total amount saved in your past 403b even? Perhaps we can quantify the impact of your decision based on certain reasonable assumptions?

I already did the math on the expense ratios and it is significant. My main questions are above. Any tax experts that can weigh in would be greatly appreciated. I just want to make sure I am thinking about this correctly and don’t want to suffer any consequences unknown to me.

Thanks!

[lakpr]

What exactly are the expense ratios in your 403b, versus the expense ratios available to the public in retail IRA side? Perhaps we are talking pennies? What is the total amount saved in your past 403b even? Perhaps we can quantify the impact of your decision based on certain reasonable assumptions?

I already did the math on the expense ratios and it is significant. My main questions are above. Any tax experts that can weigh in would be greatly appreciated. I just want to make sure I am thinking about this correctly and don’t want to suffer any consequences unknown to me.

Thanks!

If you already did the math, then yes, what you suggest is correct. The balance in all tIRA accounts as of 12/31 is what matters. The important point also to remember here is that, it includes all "Outstanding Rollovers" as well. So you will need to initiate the transfer from old 403b accounts to the rollover tIRA only in the new year. So, don't even start the paperwork until 2020.