Should I convert my two 403(b) accounts into a Roth IRA?
I'm a a single, 38-year-old woman with no kids. I have two 403(b) accounts from previous employers and a friend mentioned it would be good to consolidate them into my existing Roth IRA in order to get maximum growth out of them. Should I follow this advice, or would there be value in keeping these other accounts open?
I'm going to answer your last question first. There is no value to keeping these separate accounts open. In fact, there is a distinct disadvantage to managing two accounts that could easily be combined into one. However, I suspect that neither is really being managed since they remain somewhat abandoned at previous employers. I always advise to roll over retirement accounts upon leaving an employer. Why would you want to leave your money with an organization from which you are separated? Verify that both 403(b) accounts are pre-tax, which is most likely, or after-tax. For the sake of this discussion, let's assume they are both pre-tax. That would mean that moving this money into a Roth IRA would require you to pay taxes on it when you move it. You don't say how much money is involved, but any tax needs serious considertion.
One way to go about this would be to rollover both accounts, if they are pre-tax, into a traditional IRA. That would get them more under your control. If you do this with the assistance of a financial advisor, they could suggest appropriate investments. After that, you need to strategize on timing a possible series of partial conversions to a Roth IRA so as to minimize taxes. This will depend upon your other income and where you fall on the tax rate brackets after all deductions. You can convert only whatever amount each year that allows you to stay at the lowest possible tax rates rather than do one fast total conversion that could push you into higher tax bracket(s) and result in higher overall taxes on this money.
Your comment about "maximum growth" being associated with a Roth IRA is disturbing. The growth you get from any account is subject to the performance of the investments in it, not necessarily the definition of the account which holds those investments. The 403(b), or IRA, or Roth IRA is simply like a basket, or a container, that holds investments. The same investments can be in any one of the three and provide the same growth. That said, the "baskets" have different tax treatments. The 403(b) and IRA are tax deferred, meaning you are paying no taxes on the money in them, nor on the growth, at this time and for all the years until such time that you begin to withdraw funds. Upon withdrawal, taxes will be due on all those funds. On the other hand, any money in a Roth IRA will require that you pay taxes on it now in exchange for no additional taxes on the growth, ever.
Consolidating accounts from former employers is a great idea. This keeps costs down and is a lot easier to manage the investments. Where the money should go depends upon your overall tax picture. If you convert your 403B accounts to a Roth IRA, the total amount converted will be taxed at ordinary income rates. The company holding the 403B accounts will send you 1099s that you will have to add to your tax return. As such, you should add up all of your income and deductions from various sources to determine how much taxes will be owed on the converted amounts.
That being said - getting as much of your retirement savings into a Roth as soon as you can will be hugely beneficial to you since you are young. Because the money that goes into a Roth IRA is after tax - the deposits grow tax free so long as the account has been open 5 years and you wait to withdraw money after you attain the age of 59 and a half. Thus, consider the many years of compounded growth between now and your early 60s. You will want to invest your Roth deposits for long term growth in order to capture as much tax-exempt earnings as possible.
If you keep the money in the 403Bs, any growth over time is taxable when you draw it out of the account in retirement.
If the taxes owed on converting the full amounts to Roth this year turn out to be excessive and too expensive, you can consider converting them in smaller amounts overtime so that the tax burden is reduced. This would be a balanced way to control the tax cost while adding deposits to a vehicle with tax exempt growth.
It may be a wise decision to consolidate your tax deferred 403(b) balances into a ROTH but you should be aware that you will pay income tax on those balances when you re-characterize them. If your balances are relatively large, the move may push you into a higher tax bracket. Your friend implies that the ROTH could grow better than another kind of account. That's not necessarily true. A ROTH IRA doesn't have anything about it that would make it capable of growing any faster than a tax deferred account like a 403(b) or Traditional IRA, given similar investment decisions. The difference is in the tax treatment when you eventually withdraw the tax-free ROTH balance at retirement or beyond.
Similar growth potential, tax obligation...in spite of these concerns, it could still be a good planning decision to convert to the ROTH because, as a young saver, you have many years to benefit from the tax-free accumulation in the ROTH which could probably make up for the tax hit, over time.
Probably not, assuming the 403(b) accounts are made up of pre-tax dollars. Do you have enough money to pay the taxes today? If you do not like the investment options, would like outside help with investing the accounts, or the fees inside the 403(b) plan are very high, then it likely makes more sense to roll the money into a Rollover IRA. This depends a lot on your current financial situation is and what you expect it to look like in the future. These factors include:
- Value of your Cash & After-Tax Investments
- 403(b) account balances
- Current marginal income tax bracket
- Future expected marginal income tax bracket when you will expect to withdrawal the funds
The benefit to consolidating your 403(b) is for simplicity, controlling costs, and more investment options. First, ensure your 403(b)'s are after-tax accounts before rolling into the Roth IRA. If they're not, this becomes a taxable event. This can be a good strategy if you're okay on paying income on the rolled over funds this year. If not, then you would roll them into a traditional IRA.