Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
I'm interested in rolling over my 403b to a Roth IRA, and not getting killed on taxes when I do it. We are a married couple: my wife makes more than $325,000 a year, and I make $0. I am wondering if we can use this fact to our advantage. I posted this question elsewhere, and was instructed to post here. Can anyone help? I'll summarize the key points below, but you can see the previous post and some good discussion here: http://boards.fool.com/take-a-crack-at-this-roth-rollover-ta...

The corollary to this question is whether it would be smarter to simply roll over to a Traditional IRA and pay taxes when I withdraw, vs. now.

Key facts:

* As of a few years ago, 403b plans can be rolled over into Roth IRAs if you pay the tax liability owed. (!) As of a few years ago high income earners are not restricted from rolling over/converting in this way. (!!)

* I have $250,000 in a 403b plan currently administered by Fidelity. I potentially want to roll over/convert this entire amount to a Roth IRA, if that is in our best interests.

* My wife earns more than $325,000 a year. This income is stable and it will increase substantially in coming years.

* I earn $0 and have no interest in returning to work anytime soon. I have not worked or sought work in 3 years.

* We will both reach retirement age in about 25 years.

* My wife is on track for a very good retirement: her workplace has a traditional pension that offers from 50% to 60% of her highest three years of earning. Her workplace also has her enrolled in a traditional IRA that she is maxing out every year. The pension alone should yield her $200,000-$300,000 a year by the time she retires.

* I like investing and am generally successful with it, so I probably would be served by having my $250,000 in a Roth IRA in a brokerage account.

* We will not need premature access to any of my Roth monies now or later. We own various insurance that will defend us against most unforseen disasters.

* We pay income tax to the federal government and the state of California.

* A key advantage of the Roth for high earners (as I understand it) is that withdrawals don't contribute to income in the sense of pushing you into higher marginal rates. Given my wife's probable pension, this seems significant.

I am wondering if some scheme like "Married filing separately" for one year might allow a legal way for me to roll over my 403b to a Roth IRA without getting killed on state and federal taxes. After all, my income is $0.

(and in an unrelated question, I am wondering if the amount of tax we are now paying is unusually high. For last year, I believe we paid 34%+ of our income in income taxes alone.)

Thanks in advance for any help you can offer. Happy to repay the helpful with a bumper crop of heirloom tomato seedlings now, or bushels of tomatoes later. That's my work these days.
Print the post Back To Top
No. of Recommendations: 2
I am wondering if some scheme like "Married filing separately" for one year might allow a legal way for me to roll over my 403b to a Roth IRA without getting killed on state and federal taxes. After all, my income is $0.

That doesn't work for you. California is a community property state. So half of your wife's income is yours on a MFS return. And 1/2 of your Roth conversion would be hers.

If you want to do your own investing, you could move the 403(b) money into a traditional IRA and invest there.

Given your wife's income and state of residence, you're almost certainly paying AMT. That means you've effectively got a flat Federal tax rate of 28%. And CA's tax 9.3%, unless you've got other income pushing you over $500k of income. So you can probably plan on paying those rates if you were to convert to a Roth now.

You've got 25 years until retirement. That's a long time to go without having any break in income. I'd stick it out as-is for now. Unless your wife is a tenured teacher, there's a reasonable chance she will have some break in her employment over the next 2 decades. That would be the time to do the conversion to Roth - in a year when your income is unusually low.

Another strategy would be to convert smaller amounts each year, spreading the tax bite out over multiple years and hopefully paying it out of current cash flow instead of having to dip into the 403(b)/IRA money to pay the taxes.

If your plan is to move to another state after retirement, the CA tax savings might be enough on their own to delay any Roth conversion until you have moved. A conversion after you establish residency in another state would not be taxable to California.

Just some things to chew on.

--Peter
Print the post Back To Top
No. of Recommendations: 0
We pay income tax to the federal government and the state of California.
...
After all, my income is $0.

So - since you pay CA taxes, I assume you live there.
As a resident of CA, your income isn't $0 if you file as Married-filing-separately.
Instead, it's 1/2 the joint income of the two of you.
So it's not really 0 as far as your form 1040 is concerned - it's >$160K from your other statements.
see pub 555
http://www.irs.gov/publications/p555/ar02.html
look at the parts about "community income" and "community property state"
Print the post Back To Top
No. of Recommendations: 1
ptheland: "If you want to do your own investing, you could move the 403(b) money into a traditional IRA and invest there.

. . .

I'd stick it out as-is for now."


I am not peter, but I am sure that the "stick it out as-is for now" was meant only with respect to converting to a Roth IRA, and was not overriding his earlier statement about a transfer to a traditional IRA if you want to control your own investing, and write only for clarification.

Regards, JAFO
Print the post Back To Top
No. of Recommendations: 0
Great ideas, thank you Peter. I had not considered a break in income but it is almost sure to happen: she can take a sabbatical at some point. That would be the time to do the conversion

Can anyone verify that it is allowable (under present law) for me to convert my 403b to an IRA, and then later convert to the Roth IRA?

thanks,
froggies
Print the post Back To Top
No. of Recommendations: 2
Can anyone verify that it is allowable (under present law) for me to convert my 403b to an IRA, and then later convert to the Roth IRA?

Yes, and you should do so. After all, Peter could be an Armenian agent.

IRS Publication 575 for the rollover from the 403(b) to traditional IRA. Special note here. As mentioned in that pub, make sure this is done as a direct transfer from the plan to the IRA without your taking possession of the money.

IRS Publication 590 for conversion from traditional IRA to Roth.

Phil
Rule Your Retirement Home Fool
Print the post Back To Top
No. of Recommendations: 1
After all, Peter could be an Armenian agent.

Be quiet, Phil. You're gonna blow my cover. :-)

--Pyotr
Print the post Back To Top