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State pension rollover/backdoor Roth

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  • State pension rollover/backdoor Roth

    Long-time reader and fan, and first time poster.

    My spouse contributes to both a 403b (Fidelity) and a state pension account through her fellowship, which she can either keep or liquidate after July 1st (when she starts as attending).  She has not yet contributed to any IRA this year (has contributed to Roth IRA’s with Vanguard in past years). She will not have any independent contracting work in the foreseeable 1-2 years; thus no individual 401k. The new practice has a profit sharing plan, but she would not favor rolling over into this plan.

    What are the options? Can she rollover state pension and/or 403b into rollover IRA and then convert to Roth this fall AND do backdoor Roth IRA this year as well, all before 12/31? Or should we convert both state pension and 403b to Roth IRA and do backdoor Roth starting in 2018? I’m not exactly clear if pro-rata rule applies for whole year or only on any balance on 12/31.

    Thanks!

  • #2
    Pro rata applies to balances on Dec 31st.  But if she's starting as an attending in July keep in mind that her income will go up and y'all may not be elligible for a typical Roth contribution.  Thus, backdoor would be your only option.  I wouldn't get the money out of the 403b until she can set up a i401k (are you sure she can't do ANY IC work?) and convert it to a Roth because you'll pay a higher marginal tax rate because of her new attending salary.  I'd have to know more specifics about the pension and 403b, but I'd favor leaving it alone until it can be put in a i401k.  She just needs to earn a few dollars doing some sort of IC work to qualify for a i401k.  Sure she can't swing this?

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    • #3


      What are the options? Can she rollover state pension and/or 403b into rollover IRA and then convert to Roth this fall AND do backdoor Roth IRA this year as well, all before 12/31? Or should we convert both state pension and 403b to Roth IRA and do backdoor Roth starting in 2018? I’m not exactly clear if pro-rata rule applies for whole year or only on any balance on 12/31.
      Click to expand...


      Yes, she can r/o state pension and 403b into IRA then convert into Roth. She may be able to r/o directly into a Roth. But, since you're also a physician, you're probably already in a high tax bracket (assuming you're an attending already). Are you willing to pay the taxes? otoh, the balances probably aren't high, so it won't be too much of a tax burden to go ahead and dispense with the pre-tax accounts. She has until 4/15/18 to contribute to a backdoor Roth IRA.

      If the r/o balances are in mid- to high-5 digits, I recommend following ENT Doc's advice and waiting until she can open a solo-k before moving the orphaned accounts.

      A Roth conversion or rollover is totally independent of an IRA (TIRA or Roth) contribution. The annual conversion amount is limited only by your available funds qualifying to convert. A contribution is limited according to age and earned income.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        Thank you both for your input. The balances of 403b and state pension are relatively small (~10k each). Marginal tax rates will move from 28% bracket in 2017 to 33% in 2018 and she would be fine paying the taxes on the conversion, at least on the state pension, since that currently virtually earns nothing and thus she would like to move that money out soon.

        I guess we can either wait with rolling over the 403b and see if she can get some IC work, since the Fidelity investment options are decent with low ERs, or roll that account over as well to post-tax Roth IRA, and pay the taxes.

        Good to hear that we simultaneously can do TIRA->Roth IRA (backdoor) for her for 2017.

         

         

         

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        • #5
          If the money is earning nothing AND it's going to be a while until you can get it out into a i401k I think moving it out and paying taxes makes more sense.  I would strongly advise trying to get some i401k money earlier than predicted to get it in there instead so you don't spend the money in taxes.  You pay 28% marginal tax now, but when you take it out and get taxed at ordinary income levels the tax rate is not likely going to automatically be 28%.  Sure, you'll have dividends from a taxable account that bump you up, but you'll also have deductions/exemptions bumping you down.  Then you fill the sequence of tax bracket buckets.  The effective tax rate of withdrawal is all that matters in comparison to the marginal tax rate now.

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