Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

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Topic Author
Gullet Fixer
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Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 3:37 pm

Dear Bogleheads,
Happy Valentine's day!
My husband has 90 K in Ohio deferred compensation plan which is a 457b (govt). He would like to roll it over to a fidelity roth IRA.
The instructions he got after calling both places are
1) open a traditional IRA and a roth IRA account at Fidelity.
2) Ohio Deferred compensation will roll over to t-IRA at fidelity
3) convert t-IRA to roth -IRA and pay taxes for the year.
The issue I have is that I already did a backdoor roth for my husband at Vanguard for this year. Will this be considered as two roth conversions for year 2020? Is this allowed? What tax implications does it have?
FWIW- we are a couple in late forties in highest tax bracket. We have no other T-IRA money. All retirement funds are in 403b
Thank you so much for your wise advice!

Gullet Fixer

mega317
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by mega317 » Fri Feb 14, 2020 3:53 pm

What is the reason for rolling it into Roth? That is typically better done when you're in a low bracket. Did he leave that job?

If you're concerned about leaving the back door open, can you leave the 90k where it is, or roll it into another plan perhaps with a new employer?
https://www.bogleheads.org/forum/viewtopic.php?t=6212

Darion
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Darion » Fri Feb 14, 2020 3:54 pm

No answers, just a question and comment.

1. If you are currently in the highest tax bracket, why are you considering a Roth conversion right now?

2. I don't know your long-term plans, but a 457 provides the ability to withdraw after leaving employment without penalty (i.e., no age requirement). Just want to make certain you considered this and don't close a door on this option that can provide some flexibility.

Topic Author
Gullet Fixer
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 4:12 pm

Reason for roth conversion is
1) We have very little in roth money
2)He left that job
3)We would like to keep option of backdoor roth open
Thanks

mega317
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by mega317 » Fri Feb 14, 2020 4:23 pm

I'll leave it to someone more skilled at the math, but I don't know that I would pay almost $40,000 just to leave the back door open. Can you leave the money where it is?
https://www.bogleheads.org/forum/viewtopic.php?t=6212

krow36
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Location: WA

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by krow36 » Fri Feb 14, 2020 5:12 pm

I’m guessing that you are concerned that you will have a large amount in your pre-tax accounts (such as a 457b?) in retirement. And that the eventual required minimum distributions from those accounts along with pensions and social security, will push you into a higher income tax bracket than you are currently in. Is this the case?

If your husband is currently employed, is it possible to use a retirement plan with post-tax Roth contributions? That would allow the tax hit to be spread out of a number of years.

lakpr
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by lakpr » Fri Feb 14, 2020 5:33 pm

To answer the main question in the original post -- it's the balance in the Traditional IRA as of 12/31/2020 that matters.
So if you do want to roll over the 457 plan funds to a tIRA first, then convert to Roth, as long as that's done at least a week before 12/31/2020, you are golden.

Of course, you will end up paying taxes on the $90k, and you need to come up with the funds to pay the taxes OUTSIDE of the $90k, from your other taxable investments.

As others were saying, the better option for now is to leave the 457b plan where it is. In case your husband becomes unemployed in the future (nowadays this is almost to be expected for everyone, not a question of IF but WHEN), he would be able to tap this fund for living expenses without penalties. Taxes are due of course, but quite possibly not at the highest tax bracket he's in now. It might be small potatoes for someone in the highest tax bracket, but mathematically it does not make sense to lose half the value of the fund to taxes now.

retiredjg
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by retiredjg » Fri Feb 14, 2020 5:40 pm

Gullet Fixer wrote:
Fri Feb 14, 2020 3:37 pm
Dear Bogleheads,
Happy Valentine's day!
My husband has 90 K in Ohio deferred compensation plan which is a 457b (govt). He would like to roll it over to a fidelity roth IRA.
The instructions he got after calling both places are
1) open a traditional IRA and a roth IRA account at Fidelity.
2) Ohio Deferred compensation will roll over to t-IRA at fidelity
3) convert t-IRA to roth -IRA and pay taxes for the year.
The issue I have is that I already did a backdoor roth for my husband at Vanguard for this year. Will this be considered as two roth conversions for year 2020? Is this allowed? What tax implications does it have?
FWIW- we are a couple in late forties in highest tax bracket. We have no other T-IRA money. All retirement funds are in 403b
Thank you so much for your wise advice!

Gullet Fixer
There is not enough information to help you with this decision. If you want to discuss whether to do this Roth conversion, you need to tell us a lot more.

However, here are some facts.

1. There is no need for tIRA. He can roll the 457 right into Roth IRA. This does not mean it is a good idea while in a high tax bracket. In fact, it probably isn't.

2. If you do this (possibly dumb) thing, it will not affect the back door.

3. Yes, you can do as many conversions in a year as you want.

4. The tax implications is that you will pay tax at the highest rates on 90k. It may affect other things as well.

5. You probably should just leave the money where it is. If you feel there are reasons not to do that, what are they?

Topic Author
Gullet Fixer
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 5:47 pm

mega317 wrote:
Fri Feb 14, 2020 4:23 pm
I'll leave it to someone more skilled at the math, but I don't know that I would pay almost $40,000 just to leave the back door open. Can you leave the money where it is?
Yes; there is option of leaving it there. But two drawbacks: plan fees are high and 2) I would like to consolidate the accounts

Topic Author
Gullet Fixer
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Joined: Sun Sep 29, 2019 8:25 pm

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 5:48 pm

krow36 wrote:
Fri Feb 14, 2020 5:12 pm
I’m guessing that you are concerned that you will have a large amount in your pre-tax accounts (such as a 457b?) in retirement. And that the eventual required minimum distributions from those accounts along with pensions and social security, will push you into a higher income tax bracket than you are currently in. Is this the case?

If your husband is currently employed, is it possible to use a retirement plan with post-tax Roth contributions? That would allow the tax hit to be spread out of a number of years.
Yes; that is right. His plan does not have Roth options at this time

Topic Author
Gullet Fixer
Posts: 27
Joined: Sun Sep 29, 2019 8:25 pm

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 5:51 pm

lakpr wrote:
Fri Feb 14, 2020 5:33 pm
To answer the main question in the original post -- it's the balance in the Traditional IRA as of 12/31/2020 that matters.
So if you do want to roll over the 457 plan funds to a tIRA first, then convert to Roth, as long as that's done at least a week before 12/31/2020, you are golden.

Of course, you will end up paying taxes on the $90k, and you need to come up with the funds to pay the taxes OUTSIDE of the $90k, from your other taxable investments.

As others were saying, the better option for now is to leave the 457b plan where it is. In case your husband becomes unemployed in the future (nowadays this is almost to be expected for everyone, not a question of IF but WHEN), he would be able to tap this fund for living expenses without penalties. Taxes are due of course, but quite possibly not at the highest tax bracket he's in now. It might be small potatoes for someone in the highest tax bracket, but mathematically it does not make sense to lose half the value of the fund to taxes now.
Thanks Lakpr for the prudent advice. Will hold off for now

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

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by retiredjg » Fri Feb 14, 2020 5:52 pm

Gullet Fixer wrote:
Fri Feb 14, 2020 5:47 pm
mega317 wrote:
Fri Feb 14, 2020 4:23 pm
I'll leave it to someone more skilled at the math, but I don't know that I would pay almost $40,000 just to leave the back door open. Can you leave the money where it is?
Yes; there is option of leaving it there. But two drawbacks: plan fees are high and 2) I would like to consolidate the accounts
What are the fees?

Topic Author
Gullet Fixer
Posts: 27
Joined: Sun Sep 29, 2019 8:25 pm

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 5:55 pm

retiredjg wrote:
Fri Feb 14, 2020 5:40 pm
Gullet Fixer wrote:
Fri Feb 14, 2020 3:37 pm
Dear Bogleheads,
Happy Valentine's day!
My husband has 90 K in Ohio deferred compensation plan which is a 457b (govt). He would like to roll it over to a fidelity roth IRA.
The instructions he got after calling both places are
1) open a traditional IRA and a roth IRA account at Fidelity.
2) Ohio Deferred compensation will roll over to t-IRA at fidelity
3) convert t-IRA to roth -IRA and pay taxes for the year.
The issue I have is that I already did a backdoor roth for my husband at Vanguard for this year. Will this be considered as two roth conversions for year 2020? Is this allowed? What tax implications does it have?
FWIW- we are a couple in late forties in highest tax bracket. We have no other T-IRA money. All retirement funds are in 403b
Thank you so much for your wise advice!

Gullet Fixer
There is not enough information to help you with this decision. If you want to discuss whether to do this Roth conversion, you need to tell us a lot more.

However, here are some facts.

1. There is no need for tIRA. He can roll the 457 right into Roth IRA. This does not mean it is a good idea while in a high tax bracket. In fact, it probably isn't.

2. If you do this (possibly dumb) thing, it will not affect the back door.

3. Yes, you can do as many conversions in a year as you want.

4. The tax implications is that you will pay tax at the highest rates on 90k. It may affect other things as well.

5. You probably should just leave the money where it is. If you feel there are reasons not to do that, what are they?

Yes; there is option of leaving it there. But concerns are:1) there is an account maintenance fee 2) I would like to consolidate the accounts3) not much Roth bucket

Topic Author
Gullet Fixer
Posts: 27
Joined: Sun Sep 29, 2019 8:25 pm

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 6:04 pm

retiredjg wrote:
Fri Feb 14, 2020 5:52 pm
Gullet Fixer wrote:
Fri Feb 14, 2020 5:47 pm
mega317 wrote:
Fri Feb 14, 2020 4:23 pm
I'll leave it to someone more skilled at the math, but I don't know that I would pay almost $40,000 just to leave the back door open. Can you leave the money where it is?
Yes; there is option of leaving it there. But two drawbacks: plan fees are high and 2) I would like to consolidate the accounts
What are the fees?
Seems to be 30 dollars per quarter; Iam looking for the expense ratios

krow36
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Location: WA

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by krow36 » Fri Feb 14, 2020 6:28 pm

Is the his plan?
Ohio state 457 plan investments: https://www.ohio457.org/investments
Expense ratios: https://www.ohio457.org/assets/faq-pdfs/OhioIPR.pdf

Topic Author
Gullet Fixer
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Joined: Sun Sep 29, 2019 8:25 pm

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 6:49 pm

krow36 wrote:
Fri Feb 14, 2020 6:28 pm
Is the his plan?
Ohio state 457 plan investments: https://www.ohio457.org/investments
Expense ratios: https://www.ohio457.org/assets/faq-pdfs/OhioIPR.pdf
Thank you so much! That’s the one

Topic Author
Gullet Fixer
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Joined: Sun Sep 29, 2019 8:25 pm

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 6:50 pm

Thank you all for the advice. I will leave the money in that plan

retiredjg
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by retiredjg » Fri Feb 14, 2020 6:54 pm

Gullet Fixer wrote:
Fri Feb 14, 2020 6:50 pm
Thank you all for the advice. I will leave the money in that plan
Not so fast.

It might be best to move it even if it is not a good idea to roll it to Roth. There are probably other choices.

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runner9
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by runner9 » Fri Feb 14, 2020 6:58 pm

Gullet Fixer wrote:
Fri Feb 14, 2020 6:04 pm
retiredjg wrote:
Fri Feb 14, 2020 5:52 pm
Gullet Fixer wrote:
Fri Feb 14, 2020 5:47 pm
mega317 wrote:
Fri Feb 14, 2020 4:23 pm
I'll leave it to someone more skilled at the math, but I don't know that I would pay almost $40,000 just to leave the back door open. Can you leave the money where it is?
Yes; there is option of leaving it there. But two drawbacks: plan fees are high and 2) I would like to consolidate the accounts
What are the fees?
Seems to be 30 dollars per quarter; Iam looking for the expense ratios
Ohio 457 charges 0.14% annually, deducted quarterly. However, their Vanguard funds are lower expense ratios than an individual investor can get at Vanguard. Personally I feel lucky my wife and I have access to Ohio 457 and I consider it to have low fees.

retiredjg
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by retiredjg » Fri Feb 14, 2020 7:23 pm

It is obviously a great plan, but sometimes former employees pay more than current employees. The question is if that is happening here and if yes, it is worth it?

There is no way to know this without other information.

Topic Author
Gullet Fixer
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Fri Feb 14, 2020 8:02 pm

retiredjg wrote:
Fri Feb 14, 2020 7:23 pm
It is obviously a great plan, but sometimes former employees pay more than current employees. The question is if that is happening here and if yes, it is worth it?

There is no way to know this without other information.
What other information can I provide?
Thanks

krow36
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Location: WA

Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by krow36 » Fri Feb 14, 2020 9:40 pm

retiredjg wrote:
Fri Feb 14, 2020 7:23 pm
It is obviously a great plan, but sometimes former employees pay more than current employees. The question is if that is happening here and if yes, it is worth it?
I think it is very unlikely that a state-run 457b plan will have higher fees for former employees than they have for current employees. I’ve maintained a list of states that have state-run 457b plans available to teachers on the 457b forum of 403bwise.com. About half the states have such plans. In looking over fee schedules, I’ve never seen that, but could have missed it.

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runner9
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by runner9 » Sat Feb 15, 2020 7:44 am

As a long time participate in Ohio457 who reads every newsletter, etc. I've never seen any mention of different fees for current or former contributors/employees/etc.

retiredjg
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by retiredjg » Sat Feb 15, 2020 8:39 am

Then the question boils down to whether it is a good choice to pay $30 per quarter to maintain this $90k account. If not, where can it be rolled that it will not affect using the back door for Roth contributions?

Pros: the 457 can be used as a second tier emergency fund because the money is available any time by paying tax, but there is no penalty; leaves things open for the back door

Cons: you want to consolidate; you may not want to pay the $120 a year (although moving it to another account may not eliminate that)

retiredjg
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by retiredjg » Sat Feb 15, 2020 8:42 am

Gullet Fixer wrote:
Fri Feb 14, 2020 8:02 pm
retiredjg wrote:
Fri Feb 14, 2020 7:23 pm
It is obviously a great plan, but sometimes former employees pay more than current employees. The question is if that is happening here and if yes, it is worth it?

There is no way to know this without other information.
What other information can I provide?
Thanks
When is he likely to retire? What other accounts does he have? You mentioned a 403b - what does it look like in terms of expense ratios and administrative fees? Do you have an emergency fund?

Topic Author
Gullet Fixer
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Sat Feb 15, 2020 10:00 am

retiredjg wrote:
Sat Feb 15, 2020 8:39 am
Then the question boils down to whether it is a good choice to pay $30 per quarter to maintain this $90k account. If not, where can it be rolled that it will not affect using the back door for Roth contributions?

Pros: the 457 can be used as a second tier emergency fund because the money is available any time by paying tax, but there is no penalty; leaves things open for the back door

Cons: you want to consolidate; you may not want to pay the $120 a year (although moving it to another account may not eliminate that)
We have 6 months of expenses as emergency fund in various checking/ savings accounts
He is 52; plans to retire at 67 or later; his 403 b is approx 800 K: distributed in S& P 500, total international market and long term treasury index fund.Account maintenance fee is 60 dollars per year
Iam 48, working. I have a 403 b- approx 800 k; same allocation as above- I plan to work for at least 10 more years.

We also have a 457b ( non govt)with around 40 K.

The old 457b is govt; so can be converted to IRA. Also will have more options to invest at no cost
Thank you

retiredjg
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by retiredjg » Sat Feb 15, 2020 10:34 am

If you do not need this 457b as more emergency fund, he could probably roll it into the current 403b, eliminating the $120 a year admin fee and consolidating accounts. You did not mention the ERs of those funds - I'm making the assumption the ERs are low.

You already have $1.6 million in (presumably) tax-deferred accounts and intend to work quite awhile longer. Your tax-deferred accounts could be pretty large. Maybe even large enough to cause you problems later on.

I'm wondering if you will have pensions as well.

You may need to give consideration to how much you will have in tax-deferral when you reach the age of RMDs. It may be too much. You two might want to retire earlier than your current plan.

Topic Author
Gullet Fixer
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Sat Feb 15, 2020 11:44 am

retiredjg wrote:
Sat Feb 15, 2020 10:34 am
If you do not need this 457b as more emergency fund, he could probably roll it into the current 403b, eliminating the $120 a year admin fee and consolidating accounts. You did not mention the ERs of those funds - I'm making the assumption the ERs are low.

You already have $1.6 million in (presumably) tax-deferred accounts and intend to work quite awhile longer. Your tax-deferred accounts could be pretty large. Maybe even large enough to cause you problems later on.

I'm wondering if you will have pensions as well.

You may need to give consideration to how much you will have in tax-deferral when you reach the age of RMDs. It may be too much. You two might want to retire earlier than your current plan.
Thank you so much for your thoughtful responses. We don’t have any pensions. Yes; ERs are low in 403b. We hope to pay for our two kids college expenses starting in 2 and 4 years respectively. So, we may not be able to save as much as before during those years. We did not save much for their college fund before- just started las year( due to lack of knowledge/ interest). We will plan on reassessing where we stand when the kids are done with their education. We started our careers debt free and we hope to pass that along to our kids.

Katietsu
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Katietsu » Sat Feb 15, 2020 2:20 pm

I would probably leave the 457b alone for the next few years. It is low cost and available for withdrawal without penalty. Since you appear to have no traditional IRAs, keeping the 457b where it is (compared to a traditional IRA) also keeps open the way for Back Door Roth’s. Speaking of which, are you doing Back Door Roth’s now? I would recommend it.

Converting to Roth in the highest tax bracket with your account values makes no sense to me. This works out to your benefit only if your marginal tax bracket in retirement is more than it is now. That is not impossible but seems unlikely.

Topic Author
Gullet Fixer
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Re: Roll over from 457b from Ohio deferred compensation to roth IRA- tax consequences?

Post by Gullet Fixer » Sat Feb 15, 2020 3:42 pm

Katietsu wrote:
Sat Feb 15, 2020 2:20 pm
I would probably leave the 457b alone for the next few years. It is low cost and available for withdrawal without penalty. Since you appear to have no traditional IRAs, keeping the 457b where it is (compared to a traditional IRA) also keeps open the way for Back Door Roth’s. Speaking of which, are you doing Back Door Roth’s now? I would recommend it.

Converting to Roth in the highest tax bracket with your account values makes no sense to me. This works out to your benefit only if your marginal tax bracket in retirement is more than it is now. That is not impossible but seems unlikely.
Thank you. Yes, we started doing Backdoor Roths since last year

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