Mixing 403b with Roth 403b assets
I have a new client who I recommend make her retirement contributions to a Roth 403b rather than a traditional 403b. She has been contributing to a traditional 403b until now. She wants to move the old account to me and away from teh advisor who is on the account now.
When I establish the new 403b account and direct Roth contributions into it, can I consolidate the old traditional into the account as well or do I need to keep them separate?
Permalink Submitted by Alan - IRA critic on Wed, 2022-09-28 15:53
Who is the employer? The client cannot establish a 403b, and can only contribute to the 403b sponsored by the current employer. If this plan includes a Roth option, client can change the direction of her contributions from pre tax to Roth, subject to how often the plan allows the contribution change to be made. The elective deferral limit of 20,500 is combined between pre tax and Roth contributions. On the other hand, if the prior pre tax contributions were made to a prior employer’s plan, and client is now working elsewhere where a 403b is offered, the former 403b plan might be able to be directly rolled into the current employer’s 403b, if that plan will accept rollovers. Or the old plan could be rolled into a rollover IRA.
Permalink Submitted by Stephen Wershing on Wed, 2022-09-28 16:37
The client works for a school district who offers both traditional and Roth 403b options. My first recommendation is to change her salary deferrals from the traditional to the Roth at the next opportunity offered by the plan.My question is what to do with the existing traditional 403b. She is not a candidate for rollover to an IRA because she is still employed by the district so there is no triggering event. If I need to move it from the current account to one I can service, can I do it into the new account into which Roth contributions will be made or should I keep them separate?The carrier indicates she can have both traditional and Roth deferrals into the same account. I just don’t know if that creates complications down the road when she leaves and I want to roll over the account or start distributions. Is it safer to keep them separate or doesn’t itmatter?
Permalink Submitted by Alan - IRA critic on Wed, 2022-09-28 17:02
This is a single plan of the current employer with both pre tax and Roth sub accounts in that plan. The plan must support accounting within the plan to track the balances of each sub account. When client separates from service, this plan can be left intact or rolled over. This is typically done by a direct rollover of the pre tax balance to a TIRA and the Roth balance to a Roth IRA. This should not create any complications, as it is routine. For now, all client needs to do is direct new contributions to the Roth sub account, knowing that her taxes will immediately increase because Roth contributions are post tax. Any employer match must be made to the pre tax account. Most plans also allow split contributions, with some going to pre tax and some to Roth. This decision should be made based on whether this year’s marginal tax rate is expected to be lower or higher than the marginal rate in retirement. If the district also offers a DB plan and client will collect SS as well, the rate in retirement will be higher than for those without a DB pension. If client thinks the current and retirement rates will be about equal, then she might split contributions between Roth and pre tax. SInce all contributions this year have been pre tax for 9 months, if the change to Roth can be made soon, 2022 will still be 75% pre tax. Next January client may want to re allocate for 2023 to the desired split for the entire year.
Permalink Submitted by Stephen Wershing on Wed, 2022-09-28 20:53
for the comments