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403b to Backdoor Roth IRA, what to do with the excess?

Home Retirement Accounts 403b to Backdoor Roth IRA, what to do with the excess?

  • Avatar Sometimes a Doctor 
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    Status: Physician
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    Joined: 04/15/2019

    I’m transitioning from being a W-2 employment to purely independent contractor at a new job. With my old job I’ll have about 15k in a 403b that I’d like to move to Roth IRA. Since the contribution limit is 6K, what should I do with the remainder? Leave it in the 403b and move 6K per year until it’s all moved? I’m assuming that I will not be able to move the full amount into any type of IRA due to the contribution limits.

    #206503 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 01/09/2016

    Welcome to the forum!

    A contribution and a conversion are 2 different procedures. The amount you can convert in any year is limited only by the size of the account you are converting. In addition to that, you are eligible to contribute $6k to your backdoor Roth in 2019.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #206508 Reply
    Liked by Tim
    Avatar Peds 
    Participant
    Status: Physician
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    Joined: 01/08/2016
    With my old job I’ll have about 15k in a 403b that I’d like to move to Roth IRA

    Click to expand…

    why?

    what is your marginal tax bracket? state taxes?

    Since the contribution limit is 6K, what should I do with the remainder?

    Click to expand…

    well since you contribute the max, there is no remainder…..

     

    but to your problem:

    you have mistaken that conversions do not affect contributions. aka your 403 has no effect on it.

     

     

    #206522 Reply
    Avatar Sometimes a Doctor 
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    Status: Physician
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    Joined: 04/15/2019

    Thank you both for your replies.

     

    @peds, I’m not sure the relevance of marginal tax bracket on the conversion but I think I’d be in the 35% bracket. The reason for moving is I like the broadened investment options available to IRAs that are not available in the current 403b (very limited options).

    Maybe I didn’t make it clear:

    Step 1) I rollover 15k from 403b to Traditional IRA.

    Step 2) From the 15k in Traditional IRA, move 6K to Roth IRA but then I think the Pro-Rata Rule would get me. …So perhaps for better investment options I should move the 403b to an Individual 401k (more investment options) and then only move 6K from there to a Traditional IRA to go to a backdoor Roth IRA?

    #206524 Reply
    Avatar JBME 
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    Joined: 03/26/2018

    most people on this forum would argue you should NOT convert the 403b amount to a roth because your marginal tax bracket is quite high…35%. the fact that you don’t understand the relevance suggests you should do more homework on this subject before you just go and convert. You mention your 403b has limited options. post them here, along with the expense ratios, and you’ll certainly get an informed opinion of if your options in your 403b are truly terrible

    #206529 Reply
    Avatar Sometimes a Doctor 
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    Status: Physician
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    Joined: 04/15/2019

    Thank you @jbme, you helped me understand it much better. What you’re saying is I’d quite likely be in a lower bracket in retirement so it makes sense to keep funds in a pre-taxed state.

    #206533 Reply
    jfoxcpacfp jfoxcpacfp 
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    Status: Financial Advisor, Accountant, Small Business Owner
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    Thank you @jbme, you helped me understand it much better. What you’re saying is I’d quite likely be in a lower bracket in retirement so it makes sense to keep funds in a pre-taxed state.

    Click to expand…

    Agreed – definitely wasn’t expecting the 35% bracket in your situation!

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #206534 Reply
    Avatar JBME 
    Participant
    Status: Spouse
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    exactly, yes. I re-read your post….if you have an i401k open, I assume it’s not at vanguard b/c they don’t accept rollovers, then yes roll the 403b money into that instead of an IRA because of the pro-rata rules you cite. Otherwise, honestly I’m not convinced your 403b is *that* bad, but do feel free to post the options in there if you want.

    contribute $6k to your Roth IRA this year. keep the $15k in your 403b or roll that over to an i401k, which avoid the pro rata issue

    #206536 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3988
    Joined: 01/08/2016
    I’m not sure the relevance of marginal tax bracket

    Click to expand…

    its literally one of the only things that does matter….

    The reason for moving is I like the broadened investment options available to IRAs that are not available in the current 403b (very limited options).

    Click to expand…

    so you should move it to your new solo 401k that will also have broad excellent options….

    Maybe I didn’t make it clear: Step 1) I rollover 15k from 403b to Traditional IRA. Step 2) From the 15k in Traditional IRA, move 6K to Roth IRA but then I think the Pro-Rata Rule would get me. …So perhaps for better investment options I should move the 403b to an Individual 401k (more investment options) and then only move 6K from there to a Traditional IRA to go to a backdoor Roth IRA?

    Click to expand…

    you are still misunderstanding.

    you can contribute 6K to a rIRA every year. that comes from your bank account.

    you can convert an unlimited amount to a rIRA every year. so you could convert $1 and pay prorata on 14999, or just convert 15K and pay no pro rata but full tax.

    contributions have nothing to do with conversions.

    #206538 Reply
    Liked by Hank, spiritrider
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2126
    Joined: 06/24/2016

    I’m transitioning from being a W-2 employment to purely independent contractor at a new job. With my old job I’ll have about 15k in a 403b that I’d like to move to Roth IRA. Since the contribution limit is 6K, what should I do with the remainder? Leave it in the 403b and move 6K per year until it’s all moved? I’m assuming that I will not be able to move the full amount into any type of IRA due to the contribution limits.

    Click to expand…

    This has nothing to do with “backdoor” Roth IRA.  This is a plain old taxable conversion.  “Backdoor” specifically refers to a non-deductible Traditional IRA contribution which is then converted to Roth IRA without tax.

    The IRA contribution limit is *only* for new contributions, such as cash from outside a retirement account.  It does *not* apply to rollovers.  There is no limit for how much can be rollover’d or converted.  You could rollover a million dollars and still contribute another $6,000.

    If you want to pay taxes on the conversion, go ahead, but it’s not a good idea in a high tax bracket.

    You need to establish your own one-participant 401(k) which would allow for incoming rollovers.  Go with Fidelity, Schwab, TDA, or E*Trade.  Vanguard does not allow incoming rollovers.  You can then invest in whatever you like, p much.  If you want a “self-directed” 401(k) in which to hold non-publicly-traded investments like real estate or businesses, you can even do that.

    Max your qualified plans every year, also max backdoor Roth IRA every year (Fidelity is still letting me select 2018 even at 1900 EDT), also max HSA every year.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #206640 Reply
    Liked by spiritrider

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