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Wife's Retirement Account Rollover

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  • WorkingToFish WorkingToFish 
    Participant
    Status: Resident
    Posts: 53
    Joined: 08/28/2018

    Hey guys, I have a scenario I would like to propose with the following conditions:

    1. My wife switched jobs from one institution to another. We are young, and she has about 28k in a 403b at the job that she left. She is now a school nurse and her retirement goes into a state sponsored 401a program. I am having trouble finding any decent information regarding how this is invested, so I am skeptical about rolling the money into this 401a.

    2. I am currently a resident and my wife is planning on transitioning to a stay-at-home mom (we currently have a 2 year old son, she is 35 weeks pregnant, and we have plans for more kids in the future) once I graduate from residency, which will be in roughly 2.5 years.

    So my question is, what are my best options for the pre-existing 403b at her prior employer? Given that she is planning on leaving the traditional workforce in 2.5 years, is it even worth rolling it over into her current 401a? Or would it be possible for me to open an individual 401k for the both of us given that I myself have 1099 income but she does not, and roll her 403b into said individual 401k?

    We are already maxing out yearly rIRAs, FYI.

    Looking forward to everyone’s input. I honestly have no idea how to best proceed.

    I have never been lost, but I will admit to being confused for several weeks. - Daniel Boone

    #195546 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016

    You will not be able to open a solo-k for your wife based upon your IC income. In this situation, I’d probably just leave the 403b where it is. Given her career path, I can imagine an option to do so IC work in the future and then set up a solo-k and roll it in.

    Of course, she can also r/o to an IRA and you can start converting to a Roth while you’re in a low tax bracket. Actually, now that I think about it, I think that would be my top recommendation.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #195555 Reply
    Liked by Dreamgiver
    WorkingToFish WorkingToFish 
    Participant
    Status: Resident
    Posts: 53
    Joined: 08/28/2018

    Of course, she can also r/o to an IRA and you can start converting to a Roth while you’re in a low tax bracket. Actually, now that I think about it, I think that would be my top recommendation.

    Click to expand…

    Okay, let me see if I am understanding things correctly here.

    1. Open a Traditional IRA in her name.

    2. Roll over all of her 403b from prior employer into the tIRA.

    3. Convert Traditional IRA to rIRA while we are in a lower tax bracket.

    We made roughly 90k between the two of us last year, so would I expect to pay 22% in taxes on the conversion from tIRA to rIRA?

    I have never been lost, but I will admit to being confused for several weeks. - Daniel Boone

    #195572 Reply
    jfoxcpacfp jfoxcpacfp 
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    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 01/09/2016
    Earnest refinancing bonus

    Of course, she can also r/o to an IRA and you can start converting to a Roth while you’re in a low tax bracket. Actually, now that I think about it, I think that would be my top recommendation.

    Click to expand…

    Okay, let me see if I am understanding things correctly here.

    1. Open a Traditional IRA in her name.

    2. Roll over all of her 403b from prior employer into the tIRA.

    3. Convert Traditional IRA to rIRA while we are in a lower tax bracket.

    We made roughly 90k between the two of us last year, so would I expect to pay 22% in taxes on the conversion from tIRA to rIRA?

    Click to expand…

    You have the steps right.

    You will pay taxes on the year that you convert so I don’t know what your marginal tax bracket will be this year. You d/n/h to convert all in one year, though. If you make $90k this year, you can stay in the 12% bracket by converting $10k, for example. If you are contributing to an HSA and/or pre-tax 401k, you can probably convert the whole thing and stay in 12%. Or just convert the rest in 2020. You may or may not have to pay state taxes, depending where you live.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #195574 Reply
    WorkingToFish WorkingToFish 
    Participant
    Status: Resident
    Posts: 53
    Joined: 08/28/2018

    Of course, she can also r/o to an IRA and you can start converting to a Roth while you’re in a low tax bracket. Actually, now that I think about it, I think that would be my top recommendation.

    Click to expand…

    Okay, let me see if I am understanding things correctly here.

    1. Open a Traditional IRA in her name.

    2. Roll over all of her 403b from prior employer into the tIRA.

    3. Convert Traditional IRA to rIRA while we are in a lower tax bracket.

    We made roughly 90k between the two of us last year, so would I expect to pay 22% in taxes on the conversion from tIRA to rIRA?

    Click to expand…

    You have the steps right.

    You will pay taxes on the year that you convert so I don’t know what your marginal tax bracket will be this year. You d/n/h to convert all in one year, though. If you make $90k this year, you can stay in the 12% bracket by converting $10k, for example. If you are contributing to an HSA and/or pre-tax 401k, you can probably convert the whole thing and stay in 12%. Or just convert the rest in 2020. You may or may not have to pay state taxes, depending where you live.

    Click to expand…

    We should be in the same bracket this upcoming year. Our gross earnings may be closer to 100k but will not be anywhere near the lower limit of the next bracket. Where is the 12% figure coming from that I have bolded above? Either I am not understanding something or I should have been more clear and said that I file jointly with my wife, which would put us in the 22% tax bracket.

    We do not contribute to either an HSA (no employer plans with such an option, unfortunately) or a pre-tax 401k at the time.

    I have never been lost, but I will admit to being confused for several weeks. - Daniel Boone

    #195579 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 426
    Joined: 06/18/2018

    Sure, you’ll make $100k, but some of that will get deducted pretax for retirement account, then you’ve got the 24.4k standard deduction, plus child tax credit x2. So, your taxable incomes will be more like 70k, so you could convert part to roth @12% marginal, up to the 78950 AGI threshold.

    #195582 Reply
    WorkingToFish WorkingToFish 
    Participant
    Status: Resident
    Posts: 53
    Joined: 08/28/2018

    Another question:

    Even though the maximum yearly contribution to a tIRA is $6,000 for someone our age in 2019, I can still perform a direct rollover from my wife’s 403b (approximately 28k) into a tIRA all at once even though this far exceeds the 6k yearly limit, correct?

    I have never been lost, but I will admit to being confused for several weeks. - Daniel Boone

    #195583 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3618
    Joined: 01/08/2016

    They are separate.

    #195584 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
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    Joined: 01/09/2016

    You were clear and I assumed you would file jointly.

    MFJ:

    $90,000 – $24,000 = $66,000 (12% bracket)

    22% bracket starts at $79,850

    $24,000 is the standard deduction.

    You’ll also get a $2k child tax credit and can contribute to a SEP based on your 1099 income. You then need to set up a solo-k and transfer the SEP balance. Had you set up a solo-k by 12/31, you w/h/b able to make a full contribution based on net 1099 income less 1/2 SE tax. You will be limited to 20% with the SEP, but you can do a full contribution for 2019.

    See:

     

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #195585 Reply
    Liked by childay
    WorkingToFish WorkingToFish 
    Participant
    Status: Resident
    Posts: 53
    Joined: 08/28/2018

    Sure, you’ll make $100k, but some of that will get deducted pretax for retirement account, then you’ve got the 24.4k standard deduction, plus child tax credit x2. So, your taxable incomes will be more like 70k, so you could convert part to roth @12% marginal, up to the 78950 AGI threshold.

    Click to expand…

    Ah okay, this makes sense. Thanks for the clarification!

    I have never been lost, but I will admit to being confused for several weeks. - Daniel Boone

    #195586 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016

    Another question:

    Even though the maximum yearly contribution to a tIRA is $6,000 for someone our age in 2019, I can still perform a direct rollover from my wife’s 403b (approximately 28k) into a tIRA all at once even though this far exceeds the 6k yearly limit, correct?

    Click to expand…

    Yes, a TIRA is an “individual” account. The 403b is an employer account. Rollovers are unlimited up to the account balance, do not count against contributions.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #195587 Reply
    Avatar JBME 
    Participant
    Status: Spouse
    Posts: 417
    Joined: 03/26/2018
    You’ll also get a $2k child tax credit

    Click to expand…

    OP said wife is 35 weeks pregnant so OP will get a child tax credit of $4k this year instead of just $2k. I personally would convert up to 12% this year and again in 2020. We’re also assuming the OP lives in an income-tax-free state or the state income tax rates are low (5% or lower) on ~$75k of income.

    #195589 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016
    You’ll also get a $2k child tax credit

    Click to expand…

    OP said wife is 35 weeks pregnant so OP will get a child tax credit of $4k this year instead of just $2k. I personally would convert up to 12% this year and again in 2020. We’re also assuming the OP lives in an income-tax-free state or the state income tax rates are low (5% or lower) on ~$75k of income.

    Click to expand…

    Ah, good catch! As for state, some don’t tax Roth conversions, considering them as retirement income, so worth checking into.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #195590 Reply
    WorkingToFish WorkingToFish 
    Participant
    Status: Resident
    Posts: 53
    Joined: 08/28/2018

    Okay, it’s all starting to make sense. Now, if you will, how does this plan sound?

    1. Convert wife’s 403b to a tIRA. At the very least, this way I will have full control over how I want the amount invested, whereas prior we did not.

    2. Over the next couple years, convert the tIRA to rIRA.

    But now here’s another element to the above plan that I need to consider. I have currently allotted $500 per month to each mine and my wife’s rIRAs over the entirety of the year to get the max contribution for the year for both of us (12k total).

    If I do the above, #1-2, I will have maxed out my wife’s rIRA much sooner than anticipated, and thus will have an extra 500 per month to invest. What would you recommend I do with this? SEP-IRA or individual 401k based on my 1099 income?

    I have never been lost, but I will admit to being confused for several weeks. - Daniel Boone

    #195591 Reply
    WorkingToFish WorkingToFish 
    Participant
    Status: Resident
    Posts: 53
    Joined: 08/28/2018
    You’ll also get a $2k child tax credit 

    Click to expand…

    OP said wife is 35 weeks pregnant so OP will get a child tax credit of $4k this year instead of just $2k. I personally would convert up to 12% this year and again in 2020. We’re also assuming the OP lives in an income-tax-free state or the state income tax rates are low (5% or lower) on ~$75k of income.

    Click to expand…

    Ah, good catch! As for state, some don’t tax Roth conversions, considering them as retirement income, so worth checking into.

    Click to expand…

    Jfox – I live in your state. So you would probably know off-hand if Roth conversions are taxed?

    I have never been lost, but I will admit to being confused for several weeks. - Daniel Boone

    #195592 Reply

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