Author Topic: Rollover to new 403(b) or traditional IRA?  (Read 1272 times)

biffyclyro

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Rollover to new 403(b) or traditional IRA?
« on: June 20, 2017, 02:28:16 PM »
Hi!

I知 a newish investor still learning the ropes. I have $11,000 in my current 401k with poor options (a bond fund and 500 index fund are the only affordable ones, which is where my money is at the moment). I知 starting a new job next month, and I値l have a 403(b) with Vanguard target date retirement funds. I知 still at least 25 years from retirement.

It痴 not a matter of if I値l roll over, but where I値l roll over my 401k to. So my questions:

Do I roll it into my new 403(b), or do I roll it over to a new traditional IRA at Vanguard where I could dump it into VTSAX? That .04 expense ratio is catching my eye, but compared to my current fund options, even the Vanguard target funds (.16 ER) will be a welcome respite from high expenses.
Are there benefits or drawbacks that I知 not thinking of with respect to either option? Would an IRA rollover affect a backdoor Roth conversion at some point in the future?

Like I said, I知 still trying to educate myself. I appreciate your help. Thank you!

dandarc

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Re: Rollover to new 403(b) or traditional IRA?
« Reply #1 on: June 20, 2017, 02:41:43 PM »
Would an IRA rollover affect a backdoor Roth conversion at some point in the future?
That is the drawback of rolling over to an IRA - screws up a backdoor Roth IRA.  Now, it sounds like your 403(b) takes rollovers, can you do them at a later date, or is it a "right when you're hired only" thing?

Other thing to ask yourself is "will I even need to do a backdoor Roth IRA in the future?"  It takes quite a lot of income to have to do a backdoor Roth.

Semi-unrelated question - you have a 403(b), do you also have a government 457 at your disposal?  All things being equal, I'd fund the 457 first, ideally both if you have them.  Of course, things are usually not equal, so take different expense ratios and so on into account.

Finally the really good news -
I知 still at least 25 years from retirement.
If you take the lessons on this blog / forum to heart, you're probably quite a bit closer than 25 years to being able to retire. 

biffyclyro

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Re: Rollover to new 403(b) or traditional IRA?
« Reply #2 on: June 21, 2017, 07:45:09 AM »
Thank you for your response! I had kind of an oh duh moment reading it. Is the purpose of a Roth conversion solely to contribute to a Roth when your income is too high to otherwise contribute? Or can it also be used to convert pre-tax funds to a Roth at some point down the line, even if you never go over those income restrictions?

The 403(b) accepts rollovers at any time. I don't have a government 457 available, only the 403(b). So it's either roll it over into my new 403(b) or throw it into a new traditional IRA. I'm probably overthinking this, but I just want to ensure I'm making an informed decision.

dandarc

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Re: Rollover to new 403(b) or traditional IRA?
« Reply #3 on: June 21, 2017, 08:16:20 AM »
So you can rollover to the 403B at any time - that means there isn't much risk to either approach so pick one and do it.  It sounds like you don't need to do the Backdoor Roth at this time.

So, there are multiple uses for Roth conversions, but the basic purpose is "pay tax now, and change the amount converted from traditional to Roth".  During the accumulation phase, if your income is too high for regular Roth contributions, you can use a backdoor Roth IRA to get money in to a tax advantaged account you otherwise couldn't.  If your 403B has the requisite features, you might even do a "Megabackdoor Roth" at some point.  As you get to early retirement, you might do a Roth-IRA ladder to get your money out of your traditional accounts gradually.  Even after you're 59.5 and don't have to do conversions to finagle penalty-free withdrawals, you might do a conversion because you like the tax rate you'll pay today vs. your likely tax rate later.

The only use of the Roth conversion that having other tIRA money out there screws up is the backdoor Roth IRA, as far as I know.  That is because, when you do a backdoor Roth IRA, you are converting non-deductible tIRA contributions.  But when you do this, remember that 1) you aggregate all of your tIRA accounts and then 2) pro-rate the non-deductible and deductible tIRA portions.  So if you put $5K in to your tIRA in an attempt to do a backdoor Roth, then convert $5K, but you have $95K in tIRA money out there from an old rollover, you'll pay tax on 95% of that conversion - not what you were trying to do.


Occurs to me we might be talking about two different things, so list of terms as I mean them.

Backdoor Roth - a technique to get around Income limits for Roth IRA contributions.  Make a non-deductible contribution to tIRA, then more or less immediately convert to Roth.  You can get $5500 into your Roth IRA this way when you otherwise could not.

MegaBackdoor Roth - if your 401K or 403B allows, a way to get a lot of money into your Roth IRA.  Make after-tax contributions (not Roth) to 401K/403B, then rollover/convert to Roth IRA.  You can cover the gap between your traditional or Roth election + any employer contributions up to the $54K limit, so you can potentially put a lot of money into a Roth IRA via this channel.  No concerns about pro-ration on this, per IRS guidance.  http://www.madfientist.com/after-tax-contributions/

Roth Conversion Ladder - convert money today, paying any tax owed, so you can withdraw the conversion amount tax and penalty free after the conversion is aged for 5 years.  Repeat conversion in 1 year for money to be withdrawn in 6 years and so on.  Usually used to bridge from FIRE date to age 59.5.

biffyclyro

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Re: Rollover to new 403(b) or traditional IRA?
« Reply #4 on: June 22, 2017, 07:34:26 AM »
Thanks for the breakdown! I appreciate it.