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Best plan for my residency 403b?

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  • Best plan for my residency 403b?

    Hey all,

    I'll be completing residency in California and moving to fellowship in Pennsylvania this year. Prior to and during residency, I've been contributing the limit to my Roth IRA annually. During residency I have also been contributing to get the max match from my 403b (contribute 6% to get 3% in match).

    The question is what's the best plan for my 403b. My options seem to be:
    1. Leave it in its current account. Flexibility is somewhat limited as would be expected but they do have Vanguard institutional index and target date funds available, so it's not bad.
    2. Rollover into the next employer retirement plan. (I don't see a reason to do this)
    3. Rollover into an IRA.
    4. Rollover into a Roth IRA.

    Rolling into a Roth IRA seems like the wisest plan. That said, based on my Googling, I'd have to pay federal tax (marginal rate 22-24% - single filer) and CA state tax (9.3%). I've had a co-resident say their financial advisor told them that after crunching the numbers for them, they're best off actually leaving it in the 403b due to all the taxes and to instead pay the taxes at distribution. To me that sounds off (I'd imagine my tax rate now is still lower than retirement), but the information I got was limited. Also she'll be an attending next year rather than a fellow so her calculations are different than mine.

    Further, since I'll be moving to PA soon, the state tax there is 3.07%. So is there a way for me to take advantage of that?
    Can I do this: First, rollover my 403b into an IRA at the end of residency. Then, establish PA resident status. Then, convert IRA to Roth IRA?

    Thank you

  • #2
    you need to look into the PA and CA tax laws, but if you establish residency and pay PA taxes on the conversion I'd do that and convert all to Roth IRA this year. Second choice would be to roll over into your next employer (why would you do this? simplicity so you can keep your 403b/401k accounts all in one place...you'd do this unless the fund options in your PA-based job retirement options stink)

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    • #3
      Agree, I need to get a better understanding of the law. I also need to check with Voya but I believe you're supposed to decide within 30 days of your employment end date what to do with your retirement account, no? So I don't know if I'll be able to establish PA residency in that time. Therefore roll into IRA and then convert into Roth IRA after that.

      Roll to my next employer seems actually more complicated to me. As I understand it they may have both roth and non-roth retirement accounts. In terms of consolidating to "all in one place", I can do that by rolling into the brokerage where I have my Roth IRA.

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      • #4
        I left my residency 403b in that account for almost 5 years after I graduated. Eventually, both my residency program and my current employer were using Fidelity as the custodian for the 403b plans. I just rolled the residency accounts into my current account. I paid zero in taxes and now have all of my accounts consolidated in one place. I would check on doing something like that. Was a phone call that took me about 10 minutes.

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        • #5
          Welcome to the forum.

          I've said it many times before, I just left mine. It is another account to keep track of, but it gives me a warm, fuzzy feeling to check on the balance and remember those lovely days of residency.

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          • #6
            Originally posted by MaxPower View Post
            I left my residency 403b in that account for almost 5 years after I graduated. Eventually, both my residency program and my current employer were using Fidelity as the custodian for the 403b plans. I just rolled the residency accounts into my current account. I paid zero in taxes and now have all of my accounts consolidated in one place. I would check on doing something like that. Was a phone call that took me about 10 minutes.
            Right, even with different custodians there should be no taxes because you didn't convert to Roth and you didn't distribute any funds. My bigger question is whether to convert to Roth or not.
            Originally posted by G View Post
            Welcome to the forum.

            I've said it many times before, I just left mine. It is another account to keep track of, but it gives me a warm, fuzzy feeling to check on the balance and remember those lovely days of residency.
            My concern isn't consolidating vs not. I don't really care that much about having another account to keep track of. But I'm more concerned about the benefits gained by going Roth right now vs not.
            ​​​

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            • #7
              I don't think you're right on that 30-day rule to rollover but hopefully someone more educated on this can chime in. I believe you can roll it over whenever you want

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              • #8
                Originally posted by JBME View Post
                I don't think you're right on that 30-day rule to rollover but hopefully someone more educated on this can chime in. I believe you can roll it over whenever you want
                It looks like generally that's the case except for balances below $5k.

                Retirement Topics - Termination of Employment | Internal Revenue Service (irs.gov)

                Honestly, it would probably hinge on what CA would do and if they would try to tax it. If not, I'd be awfully tempted to roll it over into a Roth.

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                • #9
                  https://www.forbes.com/sites/robertw...t-so-fast/amp/
                  https://www.ftb.ca.gov/forms/2020/20...ublication.pdf
                  California residency is not cut and dried.
                  The reality is that it depends. Are you from Ca. and are you ever going back?
                  The state tax plus FIT projected in retirement counts, as compared to your current.
                  If is just FIT, do it. The question is a 6% state tax difference. and can you eliminate Ca claim for taxes.
                  Which plan it is in is a non-issue. .. I would invert before you finished fellowship (FiT).
                  You need to focus on the state tax issue.

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                  • #10
                    CA has a new rule that they can attach income in the future if you have past CA residency (sorry, in between moves and not at computer nor willing to do research as I’m reveling in Nadal’s new record). That said, I would still r/o to an IRA then converting to Roth as a PA resident and let the chips fall.

                    Don’t forget those local PA taxes by the way.
                    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                    • #11
                      Yes, I'm from California and do plan to likely come back after 3-year fellowship. Tim and jfoxcpacfp, the CA residency issue may bite me. I'm a homeowner in CA (will plan to rent it out while gone) and plan to rent in PA. May apparently make it even harder for me to provide PA residency, even though I'll be living there the entirety of 3 years.

                      Thinking about it further, it does seem like Roth makes sense even if I have to pay CA tax, because assuming I'll be in CA at retirement, I'll have to pay then too. Still hopefully I can prove PA residency to not pay CA taxes.

                      Did not realize local PA income tax was a thing. Looks like that's an additional 1.5% unfortunately.

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                      • #12
                        Originally posted by Fifi View Post
                        Yes, I'm from California and do plan to likely come back after 3-year fellowship. Tim and jfoxcpacfp, the CA residency issue may bite me. I'm a homeowner in CA (will plan to rent it out while gone) and plan to rent in PA. May apparently make it even harder for me to provide PA residency, even though I'll be living there the entirety of 3 years.

                        Thinking about it further, it does seem like Roth makes sense even if I have to pay CA tax, because assuming I'll be in CA at retirement, I'll have to pay then too. Still hopefully I can prove PA residency to not pay CA taxes.

                        Did not realize local PA income tax was a thing. Looks like that's an additional 1.5% unfortunately.
                        Still much better than California! If it’s a three year fellowship (i thought you were moving to Pa. to be an attending) then in 2023 I think you should convert it all. Transfer to your IRA this year and then next year convert it all from Ira to Roth. You’ll have a much stronger case against California if you live in PA an entire calendar year

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                        • #13
                          Very good point, I like that idea. Is it risky to wait to 2023 with Roth conversion considering it was almost on the chopping block? I guess I can just hold off and if the writing is on the wall, convert immediately?
                          ​​​​​​

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                          • #14
                            who knows what the future law was. And if you're a fellow, I believe Roth conversions were limited for high income folks ($400k+ single) but someone can correct me if I'm wrong. Still, it's all speculation at this point

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                            • #15
                              Best choice is to do Roth next year, avoiding the CA tax and still being in a low tax bracket.

                              If the law changes you can just use a rollover tIRA because then the backdoor Roth will be gone anyway. Advantage is you can invest in whatever you want.

                              Keeping it in a 403b vs transferring to new 403b: base it off which plan has the better investment choices. Other advantage of not rolling over to a IRA is that in some states (California is one of them) 401ks offer better asset protection than IRAs. So those are all the things to keep in mind.

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