by NYCInv » Wed Jan 22, 2014 6:44 pm
I'm in need of a little direction on how to save for retirement
and what to do with my existing accounts.
I currently contribute the max to my 403b and in 2013 I started phasing out of Roth contributions (these are at Vanguard). In 2015 I'm getting married and I'll be unable to contribute to a Roth because we'll be above the income limit. I know I can contribute to a non deductible IRA and recharacterize it to a Roth, but I have ~$50K sitting in a Vanguard rollover IRA from my prior employer's 401k plan so any recharacterizations will be prorated. I also have the option to contribute to a 457 plan at work.
I expect to be in a higher tax bracket when I retire, so I think my best option is to convert the rollover IRA to a Roth and pay the taxes this year (I'll be in a higher bracket in 2015), though the taxes will need to come out of the rollover IRA balance since I can't afford the tax bill out of pocket. My two alternatives are to move the rollover IRA into my current 403b plan (funds have higher expenses) or to leave the money where it is and prorate any future recharacterizations.
Is there any real reason to move it to the 403b or keep the money where it is?
I currently contribute the max to my 403b and in 2013 I started phasing out of Roth contributions (these are at Vanguard). In 2015 I'm getting married and I'll be unable to contribute to a Roth because we'll be above the income limit. I know I can contribute to a non deductible IRA and recharacterize it to a Roth, but I have ~$50K sitting in a Vanguard rollover IRA from my prior employer's 401k plan so any recharacterizations will be prorated. I also have the option to contribute to a 457 plan at work.
I expect to be in a higher tax bracket when I retire, so I think my best option is to convert the rollover IRA to a Roth and pay the taxes this year (I'll be in a higher bracket in 2015), though the taxes will need to come out of the rollover IRA balance since I can't afford the tax bill out of pocket. My two alternatives are to move the rollover IRA into my current 403b plan (funds have higher expenses) or to leave the money where it is and prorate any future recharacterizations.
Is there any real reason to move it to the 403b or keep the money where it is?
by Texas hold em71 » Wed Jan 22, 2014
10:46 pm
Are you under 59.5? If so and If you don't have the money to pay
the taxes outside of the IRA, you'll be subject to a 10 percent penalty on the
part you don't put in the Roth and hold out for taxes.
From the wiki:
"If the tax is paid out of the converted assets, the payment is considered an early distribution and is subject to both income tax, and if one is under age 59 1/2, a 10 percent penalty tax. [5]"
From the wiki:
"If the tax is paid out of the converted assets, the payment is considered an early distribution and is subject to both income tax, and if one is under age 59 1/2, a 10 percent penalty tax. [5]"
by Duckie » Wed Jan 22, 2014 11:07 pm
NYCInv, welcome to the forum.
NYCInv wrote:Is there any real reason
to move it to the 403b or keep the money where it is?
You can either:
1.
Convert it (not recharacterize), which will be a big tax hit you can't afford.
2. Roll it over to the current 403b/potential 457, which won't cost you in taxes, but the employer plan has to allow for incoming rollovers and should have decent options.
3. Leave it in the IRA and pay the pro-rata taxes for a dozen years or so. I'm not going to do the math but eventually you'll use up the $50K pre-tax value and won't have to deal with the pro-rata issue. It's like a conversion spread out over years instead of all at once.
2. Roll it over to the current 403b/potential 457, which won't cost you in taxes, but the employer plan has to allow for incoming rollovers and should have decent options.
3. Leave it in the IRA and pay the pro-rata taxes for a dozen years or so. I'm not going to do the math but eventually you'll use up the $50K pre-tax value and won't have to deal with the pro-rata issue. It's like a conversion spread out over years instead of all at once.
If the plan does allow for incoming rollovers and has decent
options I would roll it over. It's a lot simpler.
by NYCInv » Thu Jan 23, 2014 12:06 pm
Texas hold em71 wrote:Are you under 59.5? If so
and If you don't have the money to pay the taxes outside of the IRA, you'll be
subject to a 10 percent penalty on the part you don't put in the Roth and hold
out for taxes.
From the wiki:
"If the tax is paid out of the converted assets, the payment is considered an early distribution and is subject to both income tax, and if one is under age 59 1/2, a 10 percent penalty tax. [5]"
From the wiki:
"If the tax is paid out of the converted assets, the payment is considered an early distribution and is subject to both income tax, and if one is under age 59 1/2, a 10 percent penalty tax. [5]"
I'm 29...so the 10 percent penalty would apply. Thanks for pointing that out!
by NYCInv » Thu Jan 23, 2014 12:18 pm
Thanks Duckie!
My 403b doesn't have many options...I was in a lifecycle fund that did abysmal last year but changed it to some decent mutual funds with fees ranging from .8-1% (my Vanguard rollover ranges from .05-.22%). I suppose the fees are still low, but if I ever changed jobs I'd have to either leave the money in the 403b or I'd rollover to an IRA again and be in the same position I'm in now, no?
My 403b doesn't have many options...I was in a lifecycle fund that did abysmal last year but changed it to some decent mutual funds with fees ranging from .8-1% (my Vanguard rollover ranges from .05-.22%). I suppose the fees are still low, but if I ever changed jobs I'd have to either leave the money in the 403b or I'd rollover to an IRA again and be in the same position I'm in now, no?
by Duckie » Thu Jan 23, 2014 6:11 pm
NYCInv wrote:My 403b doesn't have many
options...I was in a lifecycle fund that did abysmal last year but changed it
to some decent mutual funds with fees ranging from .8-1% (my Vanguard rollover
ranges from .05-.22%). I suppose the fees are still low, but if I ever changed
jobs I'd have to either leave the money in the 403b or I'd rollover to an IRA
again and be in the same position I'm in now, no?
List your current 403b and potential 457 options (names, ticker symbols, and especially expense ratios). Let's see what you could have. And if you change jobs maybe your new job has a better employer plan and you could roll it there.
Is your 457 plan a governmental plan or not? It makes a big difference.
by Meg77 » Thu Jan 23, 2014 6:40 pm
I wouldn't worry about it at this point. You're 29 and will
probably have lots of different employers and retirement plans and tax brackets
over the course of your life. I don't see any reason to convert anything to
Roth right now and pay taxes, especially since you can't afford the tax bill
anyway (which makes it kind of a moot point - there's definitely no reason to
pay taxes from the IRA and pay the penalty just to convert).
Keep doing what you are doing - max out your employer plan and contribute what you can to your Roth. When and if you can roll your Vanguard IRA into a decent employer plan, do so and start doing a backdoor Roth IRA. In addition, remember that there may be future years where your joint income is low you'll qualify to contribute directly (he gets laid off, you take time off with a new baby, things happen) and can also take advantage of a Roth conversion then.
Make sure you have plenty of liquidity though too. I'm getting married in April and both of us having access to enough cash to do the things we want to do has mattered a lot more than optimizing our retirement account structures (i.e. I haven't pushed him to do a backdoor Roth yet since we just drained most of our liquidity buying a house and are currently focused on figuring out how to afford furniture, a honeymoon, etc without throwing off our long term goals). Just my two cents! Best wishes on your engagement.
Keep doing what you are doing - max out your employer plan and contribute what you can to your Roth. When and if you can roll your Vanguard IRA into a decent employer plan, do so and start doing a backdoor Roth IRA. In addition, remember that there may be future years where your joint income is low you'll qualify to contribute directly (he gets laid off, you take time off with a new baby, things happen) and can also take advantage of a Roth conversion then.
Make sure you have plenty of liquidity though too. I'm getting married in April and both of us having access to enough cash to do the things we want to do has mattered a lot more than optimizing our retirement account structures (i.e. I haven't pushed him to do a backdoor Roth yet since we just drained most of our liquidity buying a house and are currently focused on figuring out how to afford furniture, a honeymoon, etc without throwing off our long term goals). Just my two cents! Best wishes on your engagement.
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