jcifjr
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Hello. I was hoping someone can give me some good advice on what to do with my wife’s 403b account.
My wife hasn’t worked since we had kids (about 6 years now), and she still has a 403b account worth about $30,000. I believe it is in a general account earning only 1% interest.
We are both 40 years old so we would like to have that money work for us over the next 20 years or so, however we aren’t planning on making any additional contributions to it. This is because I already make significant contributions to my company’s 401k.
I’m considering rolling it over to a Roth IRA, but I’m not sure what our best options are.
We file jointly so is it correct that the 30K would be taxed at our household tax bracket (approx. 30%)?
My wife is very conservative and it’s money she earned so she would like to keep it as safe as possible (hence the 1% general account it’s in), but we would like to get it to grow as much as possible over the next 20 years.
Is there such a thing as a Roth IRA CDs that we could consider?
Thanks in advance for any advice.
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Tue Mar 04, 2008 3:33 pm |
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pf101
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It would be a really, really, really bad idea to keep that money in an account that pays interest only for the next 20 years. All that is doing is guaranteeing that you LOSE money each year, not keeping it safe. Long-term investments need to be in equities if you want them to be worth anything at the end.
I'd suggest that you put the money into a target retirement fund. They're fairly conservative but are appropriately allocated for the person's age and keep getting more conservative as you get older. It's all automatic so you can just put the money in there and leave it alone.
As far as converting it to a Roth goes, yes, the conversion will be taxed at your current income rate. To minimize this hit you can do the conversion a little bit at a time.
As far as no longer contributing, I think that's a bad idea. It is important for both parties in a marriage to have retirement savings and contributing only to a 401k isn't always great, depending on what your investment choices are. I would be maxing out her IRA contribution each year and consider reducing your 401k (if any of your contribution isn't matched) and starting an IRA or your own.
If it were me, my plan of attack would be to get it out of the 403b and the guaranteed loss investment that it's currently in and roll it to a rollover IRA at Vanguard or Fidelity. Put it in a target fund and convert a few thousand a year (run some numbers to see what will work best for you) to a Roth.
Personal Finance 101
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Tue Mar 04, 2008 4:55 pm |
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jcifjr
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Thanks for the advice. I'll look into the the target fund. One question though. Why do you see the current account being a loss situation? Since its still under a 403b, I don't believe any interest earned is counted as taxible income....or am I missing your point.
Thanks again.
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Tue Mar 04, 2008 6:16 pm |
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pf101
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It's a loss because if you're earning 1% a year but inflation is growing at 3-5% a year you're losing a minimum of 2-4% of your spending power each year. Add to that the taxes you'll have to pay eventually on that money and you come out losing even more.
Your balance won't go down, but that's not good enough. To break even you have to at least grow your money at the rate of inflation+taxes. Anything less than that is effectively a loss.
Personal Finance 101
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Tue Mar 04, 2008 6:33 pm |
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jcifjr
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Perfect explaination.......thanks for your help!
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Tue Mar 04, 2008 6:49 pm |
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jcifjr
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One more question reltated to the target fund.
Can it be done as a Roth IRA and if so is this advisable?
Thanks.
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Tue Mar 04, 2008 7:06 pm |
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pf101
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Cash: $ 62.25
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yes and yes. A Target fund can be held in any type of account.
Good luck!
Personal Finance 101
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Tue Mar 04, 2008 7:22 pm |
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efflandt
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A few points. If transferred to an IRA or Roth IRA, it should be a direct trustee to trustee transfer with destination account set up in advance, to avoid withholding. If a rollover passes through her (ie, check in her name) there is manditory 20% withholding, and that withholding would be taxed and penalized 10% if not included (added back in from other sources) with the amount rolled over within 60 days.
If converting it to a Roth IRA would bump your tax bracket, she could either convert a limited amount annually to stay within your marginal tax rate, or put it in an IRA and wait until the 2010 special, when tax for conversion can be spread over 2011 and 2012. Note that assets can be converted from IRA to Roth IRA "in kind" (without cashing them out) if the same investments are available in the Roth IRA. That is easy if IRA and Roth IRA are at the same broker. Just do a W-4 adjustment to cover the tax for Roth conversion(s), and tell them specifically NOT to withhold from the conversion for taxes. I am doing that about $10,000 annually to limit the tax hit and avoid bumping out of my tax bracket.
There are many discount brokers that will hold IRA or Roth IRA for no annual or monthly fees at all. And you can invest in anything from CD's or money market, to mutual funds or ETF's, or even individual stocks/options, depending upon experience and risk tolerance.
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Wed Mar 05, 2008 12:39 am |
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