403b to Roth or non Roth IRA?

July 18, 2016 4:50 PM

I left my job in August 2015 to do an internship in a school during the 2015-2016 school year. In my previous job I had about $23,000 in a 403b account. I left it there when I left. Should I roll this 403b into a Roth IRA or a regular IRA?

I anticipate making less than $20,000 in 2016 as I completed my internship and am only working part time, though I hope to be working full time again by the fall. I am 30 years old and if [when!] I get a job I should be making more money per year. Does it make sense to open a Roth IRA because my income is significantly lower in 2016? If yes, any recommendations on the company? My 403b is with TIAA if that matters. With limits for the Roth IRA, does that mean I'd need to open one AND something else or leave part of the money in the 403b? Should I leave the money there? A different idea I don't know about?

posted by the twistinside to Work & Money (9 answers total)

Note that rolling over your 403b into a Roth IRA would increase your taxable income for the year by the converted amount. You can convert the whole amount to Roth by converting to a traditional IRA first and then converting that to a Roth (this is common and aboveboard). Aside from changing when you pay taxes on the principal, you might also want to consider that your 403b is probaby invested in a lower-cost fund than a non-institutional account can get. For example, my employer retirement plans have provided access to Vanguard Target Retirement funds with the same asset allocation but lower costs than the ones I can purchase as a retail investor.
posted by silby at 5:24 PM on July 18, 2016 [2 favorites]

If you roll to a Roth you're going to have to pay income taxes on the 403b money. If you have the money to pay the taxes, that's fine. Do the tax calculations to make sure you don't get bumped into a higher tax bracket.

Silby mentions investment costs above and that can vary alot. Vanguard IRA expenses are cheaper than my work retirement plan expenses so if I was in your shoes I'd roll to a traditional IRA at Vanguard.
posted by LoveHam at 9:01 PM on July 18, 2016

Limits on Roth contributions are unrelated to Roth conversion amounts.

Two good times to do a Roth conversion is when one's income is low or when the value of one's holdings (your 403b) are way down. Best is when they are both true. Given recent politics and events in the world and the US, a big US financial market downturn seems possible.

As far as I could tell, all of the TIAA retirement account options are in financial instruments created by TIAA. They're selling to a captive market. I'd be surprised if one couldn't find similar offerings with lower expense ratios at Vanguard.
posted by Homer42 at 9:20 PM on July 18, 2016

With such a low income anticipated, this might indeed be a good year to rollover into a Roth. However, you have to have the cash on hand to pay the resulting taxes. (I think you may also need not to have underpaid taxes last year or make estimated payments, or otherwise you might end up subject to backup withholding for having underpaid two years in a row.)

Unless your 403(b) offers a full menu of Vanguard funds, you probably don't have access to the most inexpensive funds available. That is, it doesn't matter if your 403(b) investment goes into Giant Ripoff Fund Institutional Shares paying 0.45% instead of Giant Ripoff Fund Investor Shares paying 0.55% when you could be in a Vanguard target-date fund for 0.24% or so. You may also be paying an admin fee on your holdings yearly (though some employers cover this). So you're unlikely to lose by moving to individual management.
posted by praemunire at 9:24 PM on July 18, 2016

You can convert the whole amount to Roth by converting to a traditional IRA first and then converting that to a Roth (this is common and aboveboard).

Wait, why would you do this? OP can simply roll the funds directly from OP's 403(b) to a Roth IRA.
posted by praemunire at 9:26 PM on July 18, 2016

Response by poster: Does all the of the 403b money count as 2016 income? Is there a reason Vanguard is recommended?
posted by the twistinside at 4:18 AM on July 19, 2016

Best answer: The 403b money would only count as income if you move it to a Roth, not if you roll it into a Traditional IRA. In addition to having to pay the taxes on it, if your healthcare is subsidized through the Affordable Care Act, you could lose all/most of your subsidies. For those reasons alone, I wouldn't move it to a Roth. You can always convert it, or a portion of it, to a Roth later.
posted by csox at 6:51 AM on July 19, 2016

The 403(b) money will count as income if you are moving it to a post-tax investment vehicle, like a Roth (or if you just withdraw it as a lump sum. Don't do that.). Your original contributions were made with pre-tax money, to be taxed on distribution in retirement. A Roth is post-tax money, and distributions made according to the usual scheme in retirement aren't taxed at all. So you can't go from one to the other without paying the taxes first, because otherwise you wouldn't pay them at any time, and the government's not a fan of that approach. But what "the taxes" are is determined by your income for that year, not what they would have been in the year you earned the money, so paying the taxes when your salary is as low as it's likely ever to be could be a good move

Many people prefer Vanguard because it charges very low fees and almost none of the BS additional charges that many other funds do and because it offers a wide range of index (and target-date, which are funds made up of index funds designed to change their composition over the course of your life) funds. What appear to be small differences in fund costs add up substantially over the course of a lifetime. I think probably 90% of Americans would be best off sticking whatever retirement savings they have into the appropriate Vanguard fund. But, of course, you're not required to use them in particular if you roll over.
posted by praemunire at 6:53 AM on July 19, 2016 [1 favorite]

Response by poster: Thank you everyone!
posted by the twistinside at 11:16 AM on July 24, 2016