Changing from 401k to a 403B

cathyllSeptember 11, 2005

DH's employer is switching to a 403B with a different agency. I have 2 questions.

1.In the memo, it is stated that this will save the employer some money. How is that so?

2. If we learn that we can't roll over the $ into the 403B and we have to roll it over into an IRA, what's the best way to go-a Roth IRA? DH will be retiring in about 10 years or less.

Thanks for your help.

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jlhug

I will give your question a shot and I am sure others will also add their advice.

On question 1 - I suspect that the fees charged to manage the 403B are less that those charged for the 401k Here is info from the IRS website on 403B plans

"IRC 403(b) Plans
Certain employers are allowed to have Internal Revenue Service (IRC) 403(b) Tax-Sheltered Annuity plans. You are allowed to have a 403(b) plan if you are:

A public school, college or university,
A church,
A public hospital, or
A charitable entity tax-exempt under section 501(c)(3) of the Code.
Basically, 403(b) plans are similar to 401(k) plans maintained by for-profit entities. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary. In this case, their deferred money goes to a 403(b) plan sponsored by the employer. This deferred money generally does not get taxed by the federal government or by most state governments until distributed. This is just as it is with 401(k) plans."

I assume that your husband's employer meets the requirements for establishing a 403B plan.

On question 2 - You can roll the money into a traditional IRA without having any tax consequences. You need to set it up as a direct rollover - that is the company that holds the 401K transfers the money directly to the bank/investment company that will have your husband's IRA. You cannot roll the money into a Roth IRA. The money that is contributed to a ROTH IRA has already had the income taxes paid on it. The money in the 401k has not had any taxes paid on it. If the money goes into a traditional IRA, you need to establish a separate IRA for that money. If your husband ever goes to work with a company that has a 401K plan that allows rollovers into the plan and your husband chooses to roll this portion of his IRA into that new employer's plan, it must not be mingled with other retirement funds.

Good luck.

    Bookmark   September 12, 2005 at 8:47PM
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cathyll

Thank you SO much, Jlhug; I very much appreciate your taking the time to answer and to do so in very understandable terms.

    Bookmark   September 12, 2005 at 9:19PM
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BigMac

The followup to the previous email is that once you roll it into a traditional IRA, you can then convert it into a Roth IRA by paying the taxes on it.

Generally, the closer you are to retirement, the less attractive this idea is, and 10 years from retirement is pretty close. Making the decision to convert can depend on if this is the bulk of your retirement savings, meaning you will be drawing on this in retirement, or if you might want to live on other funds in retirement, and save this for your heirs.

There are Roth IRA conversion calculators on the Web. As I was looking, there were other articles that made the point that the conversion calculators are only as good as the underlying assumptions. True.

Here is a link that might be useful: Vanguard's Roth IRA conversion calculator

    Bookmark   October 27, 2005 at 8:51PM
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mikeinsepa

I'm pretty sure he can roll his funds into the 403B. However, there are usually less investment options with this type of plan. This may not be an issue as long as there are some good conservative funds.

    Bookmark   March 4, 2006 at 5:29PM
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itsraining

I listen to Bob Brinkers Money Talk on the radio and have subscribed to his newsletter in past. Coincidentally, he had a caller last weekend discussing the 403B's. I really like Brinker especially since I followed his advice in Jan of 2000 and cashed out stocks before it crashed in March....anyway...I trust him. He is not a fan of 403B's because of their high fees. I'd rollover the 401K money into an IRA with a no load mutual fund family. If your employer only allows 403B's now, I guess there's not a lot you can do about the new investments. The key is to look at the fees.

    Bookmark   April 24, 2006 at 6:35PM
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qdognj

also be aware some states, such as NJ, do not recognize 403b's as tax deffered.you must add back in the $$$ you contribute to your state income..found this out the hard way after being audited , and paid back taxes for 5 years

    Bookmark   May 5, 2006 at 8:36PM
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quiltglo

I hate my 403B accounts. I've tried three different investment fund companies and changed investment strategies several times. I'm looking right now to see how much I can roll to an IRA. I will probably even go with a Roth, since it doesn't appear that our tax rate will be going down after retirment age. Might as well bite the bullet now.

Gloria

    Bookmark   May 12, 2006 at 12:19AM
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dontknow

My wife has a 403B as well. However, I requested a list of investment company options available that her district does business with. Vanguard was on the list. I opened her accounts at Vanguard directly and have her payroll deductions pointed that way.

I think most arrangements for 403 plans are horrible at best. Most push annuities - which is sad.

    Bookmark   May 12, 2006 at 7:43AM
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devorah

My husband's 403 B account is through TIAA-CREF and we have been very satisfied with all the choices we have been offered - and I can change our allocations any time I want to using the internet which gives us a lot of control. This has been a good thing for us.

    Bookmark   May 12, 2006 at 12:46PM
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