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Author: NarnCeredir One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75600  
Subject: Where to Rollover? Date: 4/13/2011 10:33 AM
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Hi everyone,

I will be beginning a new job this fall, and the main retirement vehicle is a hybrid pension system (the Wisconsin Retirement System -- I created a thread a month ago on this topic). I have close to $25,000 in a 403 (b) at my current university, and am seeking some advice on where I should move this money. I currently have a Roth IRA with Ameritrade, but am trying to weigh my options.

I could rollover these funds directly into the WRS, where I'm guaranteed by law a 5% return per year (and in the past 25 years the fund has averaged a 10.3% return per year). Additionally, my new university offers a 403 (b) as well as a 457. The 457 is most attractive, as if I opened an IRA, I planned on investing in Vanguard's Wellington Fund, which is offered as an option in the 457. There is an account maintenance fee of $1 per month, adding an additional dollar at $50,000, then $100,000, etc. The Wellington fund is of the Admiral Shares variety, though, so the operating expenses plus monthly fee would be less than if I opened a traditional IRA with a regular Wellington investment with Vanguard, at least for quite awhile. I'm not sure where the breaking point would be.

My other option is to open an IRA with Vanguard or to open an IRA with Ameritrade. I am correct in assuming that I cannot rollover my 403 (b) into my Roth IRA? I would like to keep contributing to whatever type of vehicle I choose, as my student loan repayments are based on my adjusted gross income, and thus I can significantly lower my AGI through investing in a 403 (b), 457, or traditional IRA. I do fall below the phaseout range for IRA deductions, and probably will for at least 10 years. One caveat is that I am not married, but this may change soon, and we would file our taxes married filing separately so that my student loan payments would not take her income into account. Then the IRA deduction wouldn't apply, as I believe the phaseout is in the $0 to $10,000 range.

Any thoughts?

Cheers,
-Narn Ceredir
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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68887 of 75600
Subject: Re: Where to Rollover? Date: 4/13/2011 11:11 AM
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I could rollover these funds directly into the WRS, where I'm guaranteed by law a 5% return per year (and in the past 25 years the fund has averaged a 10.3% return per year).

Do you think your investments in an IRA will guarantee you a 5% return, with the potential of a higher return?

I am correct in assuming that I cannot rollover my 403 (b) into my Roth IRA?

No. You can roll your 403(b) into your Roth IRA. However, it will be considered a conversion in addition to being a rollover, and you will owe taxes, at your marginal rate, on the money you roll over. For $25k at a 25% Federal rate, you would owe an additional $6250 in taxes for 2011. Wisconsin probably would also charge taxes on it.

I would like to keep contributing to whatever type of vehicle I choose, as my student loan repayments are based on my adjusted gross income, and thus I can significantly lower my AGI through investing in a 403 (b), 457, or traditional IRA.

Then you probably don't want to do a conversion to your Roth until you have paid off your student loans, since it would increase your AGI.

One caveat is that I am not married, but this may change soon, and we would file our taxes married filing separately so that my student loan payments would not take her income into account.

Are you sure that filing separately will accomplish not counting your wife's income? This site http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlinde... on student loans talks about how your payments are calculated:

Income Contingent Repayment

(not available for parent PLUS loans)

This plan gives you the flexibility to meet your Direct Loan obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income (AGI, plus your spouse's income if you're married), family size, and the total amount of your Direct Loans.


This wording seems to indicate that you add your spouses' income in addition to your AGI. And you would only have an AGI that was separate from your spouses' if you filed separately.

Seems to me that rather than trying to game the system, you'd be better off just living together until your loans are repaid, or else just bite the bullet and repay your student loans based on your joint income.

AJ

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68888 of 75600
Subject: Re: Where to Rollover? Date: 4/13/2011 11:40 AM
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One consideration in where to put it is that this money is pre-marriage so that if it is kept in a separate account then, depending on your state laws, it may not have to be split in the event of a divorce. If you have it in a retirement account where you may make post marriage contributions then the entire amount may need to be split in a divorce since it was mixed with post marriage money.

I don't know about state pension plans but with private pension plans one risk of leaving it with a former employer is that if the pension plans defaults and is taken over by the PBGC, then you may not have the option of taking it out as a lump sum anymore. I would tend to take the money out and put it into an IRA or Roth just for simplicity. I would assume that you are relatively young and will have decades until you retire. If so then a targeted retirement fund or a balanced mutual fund is almost certain to earn more than the rate you will get in the fixed income pension account.

Greg

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Author: NarnCeredir One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68889 of 75600
Subject: Re: Where to Rollover? Date: 4/13/2011 11:44 AM
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Hi AJ,

It's a tough call on the +/- 5% return. I just don't know.

I obviously don't want to shoulder the tax burden of converting the 403 (b) to my Roth -- that doesn't make a lot of sense, so that option looks to be out of the picture.

As for my student loan repayment, it is the Income-Based Repayment plan (IBR) and not the Income-Contingent Repayment(ICR). They're slightly different, and the former allows the borrower to only include his or her income if filing married filing separately returns. If we combined our incomes, the monthly payment would be very large and would hinder our other financial goals. And to be perfectly honest, I do not plan on repaying my loans completely. IBR loans are forgiven after 25 years or, most important for many borrowers, after 10 years based on the Public Service Forgiveness program. I'm not trying to game the system, really, but am trying to figure out what makes the most financial sense and what to do with my retirement money from my current position.

Cheers,
-Narn Ceredir

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Author: NarnCeredir One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68890 of 75600
Subject: Re: Where to Rollover? Date: 4/13/2011 11:57 AM
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One consideration in where to put it is that this money is pre-marriage so that if it is kept in a separate account then, depending on your state laws, it may not have to be split in the event of a divorce. If you have it in a retirement account where you may make post marriage contributions then the entire amount may need to be split in a divorce since it was mixed with post marriage money.

I don't know about state pension plans but with private pension plans one risk of leaving it with a former employer is that if the pension plans defaults and is taken over by the PBGC, then you may not have the option of taking it out as a lump sum anymore. I would tend to take the money out and put it into an IRA or Roth just for simplicity. I would assume that you are relatively young and will have decades until you retire. If so then a targeted retirement fund or a balanced mutual fund is almost certain to earn more than the rate you will get in the fixed income pension account.


Interesting! That's a very realistic perspective that I had not considered. I'll look into laws on the Wisconsin Retirement System and 457s concerning divorce.

-Narn Ceredir

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