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I worked for an educational institution for a few years, and while there contributed a few thousand dollars to a TIAA-CREF 403(b). When I left that job a year ago and went to work in the private sector, I left the money in that account, since I was told that I could not roll it over into the 401(k) my new employer provided. I was recently told that what I should have done instead was roll the funds in that account into an IRA, instead. Before doing this, however, I want to make sure that I understand the relevant issues.

As I understand it, then, I wouldn't incur the early withdrawal penalty so long as I put the disbursement from the 403(b) into an IRA within 60 days; my current salary, however, is higher than the cutoff for the traditional IRA, so I would have to go to a Roth IRA. Would the 60 day period be affected by the fact that the transfer was to a Roth? Also, my current employer is not matching contributions to my 401(k) yet, so I was planning on contributing to a Roth this year; would the rollover affect my ability to contribute? Also, I assume that I would have to pay taxes on the Roth rollover, since otherwise I would be getting tax-exempt pre-tax savings; would this be at the rate I should have paid when I was contributing to the 403(b), or the rate I pay now?

And, finally, what advantage would I be gaining from rolling over to an IRA in the first place? I anticipate my salary increasing enough before retirement to make the change from tax-deferred to tax-exempt post-tax savings worth it, but in terms of accessibility of funds, etc., is there any reason to switch? (That is, did the person who originally told me to roll the funds over to an IRA, not knowing that I would have to go to a Roth, know what they were talking about?)

Thanks,

Sweth.
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As I understand it, then, I wouldn't incur the early withdrawal penalty so long as I put the disbursement from the 403(b) into an IRA within 60 days; my current salary, however, is higher than the cutoff for the traditional IRA, so I would have to go to a Roth IRA.

You'd better arrange a direct transfer of the 403-b assets to the IRA custodian rather than taking them into your possession and within 60 days opening the IRA yourself. Reason: if you take the money yourself, there will be mandatory withholding (20%) by your 403-b custodian and you will not see this money again until you file your return next year. In the meanwhile you have to transfer the whole value of your 403-b account into the IRA (you'll have to come up with the 20% withheld yourself) or face the 10% penalty for early distribution on the transfer amount shortfall.

Secondly, there is NO salary level cutoff for a rollover into a Traditional IRA; this is only relevant for new contributions. You can rollover any amount regardless of current income.

Also, my current employer is not matching contributions to my 401(k) yet, so I was planning on contributing to a Roth this year; would the rollover affect my ability to contribute?

No

Also, I assume that I would have to pay taxes on the Roth rollover, since otherwise I would be getting
tax-exempt pre-tax savings; would this be at the rate I should have paid when I was contributing to the 403(b), or the rate I pay now?


If you were to rollover into a Roth (it would have to go from the 403-b to a tradional or conduit IRA and then to a Roth), the taxation would be based on your current tax situation.

And, finally, what advantage would I be gaining from rolling over to an IRA in the first place? I anticipate my salary increasing enough before retirement to make the change from tax-deferred to tax-exempt post-tax savings worth it, but in terms of accessibility of funds, etc., is there any reason to switch? (That is, did the person who originally told me to roll the funds over to an IRA, not knowing that I would have to go to a Roth, know what they were talking about?)

You don't have to go to a Roth unless you feel that the tax-exempt distributions in retirement would be better than tax-deferred, but you may want to transfer into a traditional IRA and convert to a Roth incrementally (if your AGI permits it), to reduce the tax hit on the conversion, if the amount is large enough. Trannsferring out of the 403-b would give you more investment options, but if the custodian allows you to keep your assets there and you're happy with the investment options and performance, you don't have to rollover into an IRA at all. Leaving the money would preseve a borrowing option not available with an IRA.

WTR
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sweth,

I can answer some of your questions, hopefully someone else can take up the slack.

I left the money in that account, since I was told that I could not roll it over into the 401(k) my new employer provided.

This is correct. 403b money cannot be transferred to a 401k, but it can be rolled over to an IRA.

As I understand it, then, I wouldn't incur the early withdrawal penalty so long as I put the disbursement from the 403(b) into an IRA within 60 days; my current salary, however, is higher than the cutoff for the traditional IRA, so I would have to go to a Roth IRA.

You do not "have to" go to a Roth IRA to roll over your 403b account. The salary limit prohibits you from contributing new money to an IRA, but the money you've already put into the 403b in the past can be put into an IRA without tax consequences.

403b money cannot be rolled directly into a Roth IRA in any case--you would have to first roll it to an IRA, then convert that to a Roth, paying taxes (at your current rate) on the conversion.

If you roll it into an IRA, you do have 60 days to make the deposit; however it is much better to do a "direct rollover" where the money is transferred directly to your IRA from the 403b and never passes through your hands (the 403b distribution check should be made payable to your IRA account, not to you). If the 403b distribution check is made payable to you, it is required that 20% be withheld for federal income tax, so when you put the money in the IRA you would have to come up with that 20% from your own pocket. You would get back what was withheld when you file your tax return.

Also, my current employer is not matching contributions to my 401(k) yet, so I was planning on contributing to a Roth this year; would the rollover affect my ability to contribute?

Your ability to contribute to a Roth is not affected by 401k participation one way or another. The determining factor is the income limits. The rollover, if you did it, would not be included in your income since it is money you had put away in prior years.

Also, I assume that I would have to pay taxes on the Roth rollover, since otherwise I would be getting tax-exempt pre-tax savings; would this be at the rate I should have paid when I was contributing to the 403(b), or the rate I pay now?

If you did the 403b-IRA-Roth conversion, you would indeed be taxed on the money converted to the Roth, at your current tax rate.

And, finally, what advantage would I be gaining from rolling over to an IRA in the first place? I anticipate my salary increasing enough before retirement to make the change from tax-deferred to tax-exempt post-tax savings worth it, but in terms of accessibility of funds, etc., is there any reason to switch? (That is, did the person who originally told me to roll the funds over to an IRA, not knowing that I would have to go to a Roth, know what they were talking about?)

Again, you do not "have to" go to a Roth, and in view of the taxes you would pay, it doesn't sound advisable to me that you do so. The advantage of rolling over to an IRA would be for greater flexibility of investment options if you aren't happy with the TIAA-CREF funds.

The main thing I am not certain about is the IRA-to-Roth conversion, i.e. whether there are any penalties incurred as there would be for taking an IRA distribution before age 59 1/2.
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I want to wade in with a couple of clarifications to the basically correct information you've already been given.

1. There is no income limit for traditional IRA contributions. If you have $2,000 in compensation you can contribute $2,000 to a traditional IRA. AGI-based phaseouts apply to the DEDUCTIBILITY of those contributions if you or your spouse are covered by a retirement plan.

2. In case you missed it, properly conducted rollovers do not affect your taxes or your current year IRA contribution limit.

3. There is no early distribution penalty when you convert from traditional to Roth IRA.

I suggest you do some reading in All About IRAs, accessible through the Quick Find dropdown menue at the upper right of this screen.

TMF ExRO
Phil Marti
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Greetings, Sweth, and welcome. You wrote in part:

<<I worked for an educational institution for a few years, and while there contributed a few thousand dollars to a TIAA-CREF 403(b). When I left that job a year ago and went to work in the private sector, I left the money in that account, since I was told that I could not roll it over into the 401(k) my new employer provided. I was recently told that what I should have done instead was roll the funds in that account into an IRA, instead. >>

Others have given you an excellent response to all your queries. I'll just point out that you may find your ability to transfer your 403b plan money to an IRA somewhat limited. As an example, money invested in CREF vehicles can be moved to an IRA only over a 10-year period, not all at once. Thus, don't be surprised if your 403b custodian tells you some restrictions may apply.

Regards..Pixy
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I left the money in that account, since I was told that I could not roll it over into the 401(k) my new employer provided.

This is correct. 403b money cannot be transferred to a 401k, but it can be rolled over to an IRA.

Money disbursed from a retirement plan, put into an IRA, and not commingled with regular money, however, can be rolled back into a retirement plan, right? So (assuming I wanted to), couldn't I move the funds into the 401(k) as a two-step process?

You do not "have to" go to a Roth IRA to roll over your 403b account. The salary limit prohibits you from contributing new money to an IRA, but the money you've already put into the 403b in the past can be put into an IRA without tax consequences.

OK, I misunderstood the way this worked, then.

403b money cannot be rolled directly into a Roth IRA in any case--you would have to first roll it to an IRA, then convert that to a Roth, paying taxes (at your current rate) on the conversion.

That's what I was planning on doing.

Also, my current employer is not matching contributions to my 401(k) yet, so I was planning on contributing to a Roth this year; would the rollover affect my ability to contribute?

Your ability to contribute to a Roth is not affected by 401k participation one way or another. The determining factor is the income limits.

The 401(k) matching reference was more to explain why I'm planning on contributing to a Roth this year in addition to the 401(k). (On a related note, I'm planning on maxing out the 401(k) contribution this year. I've got some large home improvement projects coming up, however, which might limit my ability to do so; if that turns out to be the case, would it make more sense to contribute to the Roth first and then to the 401(k)? I'm in my early 20s, and anticipate being in a significantly higher tax bracket by the time I retire; paying the lower tax now on the Roth is thus better than paying the higher tax later on the 401(k), right?)

The rollover, if you did it, would not be included in your income since it is money you had put away in prior years.

Would it count towards the total allowable contribution to Roth/Traditional IRAs, however?

Again, you do not "have to" go to a Roth, and in view of the taxes you would pay, it doesn't sound advisable to me that you do so. The advantage of rolling over to an IRA would be for greater flexibility of investment options if you aren't happy with the TIAA-CREF funds.

Well, right now the 403(b) money is ithe CREF Equity Index Fund (which watches the Russell 3000), so I'm pretty happy with it. But wouldn't the taxes paid now be worth it in light of the savings against higher taxes later?

Thanks for the comments,

Sweth.

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Others have given you an excellent response to all your queries. I'll just point out that you may find your ability to transfer your 403b plan money to an IRA somewhat limited. As an example, money invested in CREF vehicles can be moved to an IRA only over a 10-year period, not all at once. Thus, don't be surprised if your 403b custodian tells you some restrictions may apply.

Hmmm... I spoke to TIAA-CREF before my first post, and they said that my former employer was somewhat restrictive about transfer of money from the 403(b) if there had been any matching funds contributed, but since that isn't the case for me, that I would have no problem rolling the funds into an IRA. Do you know where I could find specifics of this 10-year limitation?

Thanks,

Sweth.
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1. There is no income limit for traditional IRA contributions. If you have $2,000 in compensation you can contribute $2,000 to a traditional IRA. AGI-based phaseouts apply to the DEDUCTIBILITY of those contributions if you or your spouse are covered by a retirement plan.

Understood. This does bring up another question that has perplexed me for a while, however--why would one contribute to a non-deductible traditional IRA, as opposed to investing those funds on one's own?

2. In case you missed it, properly conducted rollovers do not affect your taxes or your current year IRA contribution limit.
3. There is no early distribution penalty when you convert from traditional to Roth IRA.


OK, I was a little unsure about the early distribution penalty and the current year limit.

I suggest you do some reading in All About IRAs, accessible through the Quick Find dropdown menue at the upper right of this screen.

I had done so before my original post, actually; as far as I could tell, these questions weren't specifically answered there.

One more question--the "All About IRAs" section discusses retroactively changing your deductibility for a Traditional IRA in order to be taxed at a lower rate when rolling funds into a Roth IRA, but it discusses it rather speculatively (presumably because it was written soon after the Roth was created). Does anyone know if the IRS has actually allowed this to be done? And, if I do decide to move the 403(b) to a Roth, is there any reason why I couldn't do the same for those funds?

Thanks again to everyone for their help,

Sweth.
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Sweth asks:

<<Money disbursed from a retirement plan, put into an IRA, and not commingled with regular money, however, can be rolled back into a retirement plan, right? So (assuming I wanted to), couldn't I move the funds into the 401(k) as a two-step process?>>

No, you cannot do that. Money that originated in a 403b plan can only be transferred via a conduit IRA to another 403b plan. It cannot be transferred into a 401k plan.


<<The 401(k) matching reference was more to explain why I'm planning on contributing to a Roth this year in addition to the 401(k). (On a related note, I'm planning on maxing out the 401(k) contribution this year. I've got some large home improvement projects coming up, however, which might limit my ability to do so; if that turns out to be the case, would it make more sense to contribute to the Roth first and then to the 401(k)? I'm in my early 20s, and anticipate being in a significantly higher tax bracket by the time I retire; paying the lower tax now on the Roth is thus better than paying the higher tax later on the 401(k), right?)>>

If you're planning on removing funds from your 401k or IRA to finance those improvements (not something we really suggest around Fooldom), then it might make sense to use the Roth first. You can take your annual contribution money from a Roth at any time without penalty or income taxes.

<<Would it count towards the total allowable contribution to Roth/Traditional IRAs, however?>>

A rollover contribution to an IRA from an employer's qualified retirement plan in no way affects the maximum annual contribution limit of $2K you may make to an IRA.


<<Well, right now the 403(b) money is ithe CREF Equity Index Fund (which watches the Russell 3000), so I'm pretty happy with it. But wouldn't the taxes paid now be worth it in light of the savings against higher taxes later?>>

Maybe, but maybe not. See post 1567 on this board at http://boards.fool.com/Message.asp?id=1040013000441002&sort=postdate for the type of analysis you must do to see if it makes sense in your situation.


Regards..Pixy



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Sweth asks:

<<Do you know where I could find specifics of this 10-year limitation?>>

From your plan administrator and from TIAA-CREF.

Regards..Pixy
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Sweth asks:

<<One more question--the "All About IRAs" section discusses retroactively changing your deductibility for a Traditional IRA in order to be taxed at a lower rate when rolling funds into a Roth IRA, but it discusses it rather speculatively (presumably because it was written soon after the Roth was created). Does anyone know if the IRS has actually allowed this to be done? And, if I do decide to move the 403(b) to a Roth, is there any reason why I couldn't do the same for those funds?>>

You're talking about a recharacterization and a reconversion here. For details on those, get and read IRA Publication 590 (Individual Retirement Arrangements) at http://www.irs.ustreas.gov/prod/forms_pubs/index.html.

Regards..Pixy
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As an example, money invested in CREF vehicles can be moved to an IRA only over a 10-year period, not all at once.

The 10-year incremental transfer requirement applies only to funds invested in the TIAA fixed interest investment, not to funds invested in the CREF mutual funds. Money invested in CREF may be moved as a lump sum.

John
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John writes:

<<The 10-year incremental transfer requirement applies only to funds invested in the TIAA fixed interest investment, not to funds invested in the CREF mutual funds. Money invested in CREF may be moved as a lump sum.>>

You are correct. I got them reversed.

Regards..Pixy
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If you're planning on removing funds from your 401k or IRA to finance those improvements (not something we really suggest around Fooldom), then it might make sense to use the Roth first.

I was more concerned with which account I should give priority to for contributions, assuming a limited set of funds to contribute; the home improvements were an example of a limit on the available funds, and not a reason for withdrawal of funds from the accounts. For example, the way I do the math, if I have $15,000 pre-tax to invest in my retirement this year, and am in the 31% bracket, I should max out the 401(k) with $10,500, put $2,000 ($2,760 post-tax) into a Roth IRA, and the invest the remaining $1,740 on my own. If, because I decide to start those home-improvement projects I mentioned, it turns out that I only have $7,500 to invest, should I put $7,500 in the 401(k), or put $2,000 (still $2,760 post-tax) in the Roth and the remaining $4,740 in the 401(k)? (This all assumes that the IRA and 401(k) use the same funds and thus return the same, of course.)

Maybe, but maybe not. See post 1567 on this board at http://boards.fool.com/Message.asp?id=1040013000441002&sort=postdate for the type of analysis you must do to see if it makes sense in your situation.

I knew that rolling the funds over and paying the taxes out of the principal was a bad idea, but that post gave me some specific math to help clear up why that was the case. Given what I read there and my own situation (the funds will remain invested for well over 10 years, I would be paying the rollover taxes out of external funds, and I don't anticipate dropping tax brackets), it seems like the Roth IRA _is_ the right choice. Thanks for the pointer.
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<< Understood. This does bring up another question that has perplexed me for a while, however--why would one contribute to a non-deductible traditional IRA, as opposed to investing those funds on one's own? >>

One can invest IRA money on ones own, through a self-directed IRA. The advantage to doing it there rather than in a taxable account is that the earnings are not taxed until withdrawn from the IRA. This is especially helpful when the assets in the IRA produce current ordinary income, rather than long-term capital gains.

<snip>

<< One more question--the "All About IRAs" section discusses retroactively changing your deductibility for a Traditional IRA in order to be taxed at a lower rate when rolling funds into a Roth IRA, but it discusses it rather speculatively (presumably because it was written soon after the Roth was created). Does anyone know if the IRS has actually allowed this to be done? >>

If you meet the AGI limitations you can elect to treat deductible traditional IRA contributions as nondeductible contributions. This can be done during the period when the return can be amended (usually 3 years from the due date).

<< And, if I do decide to move the 403(b) to a Roth, is there any reason why I couldn't do the same for those funds? >>

Yes, there is. The 403(b) does not have a comparable election to make the contributions post-tax. When you roll the 403(b) into a traditional IRA the funds remain untaxed. Conversion of the traditional to Roth is the first time the funds become taxable.

TMF ExRO
Phil Marti
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