Dear Dr. Don,
I do not know if I should put my old 403(b) plan (a new hospital bought my previous employer) in my current employer's plan or roll it into an IRA. Can I put it in an IRA (traditional or Roth), Coverdell IRA and the remainder into my new employees 403(b) plan? Which would be the wisest choice? I am 49 years old and make $50,000 yearly.
-- Stephanie Selects
The decision to roll the old 403(b) balance into the new employer's 403(b) plan (assuming it's allowed by the new plan) should be based on the investment choices, investing expense and how highly you value the convenience of consolidating the monies into one account.
I like the flexibility of rolling the money into a traditional IRA or Roth IRA account. (A Coverdell Education Savings Account, which used to be known as an education IRA, isn't an option for retirement savings.)
If you converted to a Roth IRA through a direct rollover, the monies are typically subject to income taxes in the tax year the rollover occurs. You no longer have to first roll the monies into a traditional IRA and then convert -- you can simply roll the balance directly into the Roth.
Here's how IRS Publication 571, "Tax-Sheltered Annuity Plans (403(b) Plans," explains the choices:
You may also rollover any part of a distribution from a 403(b) plan by converting it through a direct rollover, described below, to a Roth IRA. Conversion amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. See Publication 590 for more information about conversion into a Roth IRA.
Direct rollovers of 403(b) plan distributions.
You have the option of having your 403(b) plan make the rollover directly to a traditional IRA, Roth IRA or new plan. Before you receive a distribution, your plan will give you information on this. It is generally to your advantage to choose this option because your plan will not withhold tax on the distribution if you choose it.
Deciding between the Roth IRA and the traditional IRA depends on your current tax bracket, your expected tax bracket when you retire and how you'll invest the account. I recommend getting professional tax advice in making that decision.
If you can afford to pay the income taxes due out of other savings when rolling over into a Roth IRA, your retirement savings will get a big bump. Again, you should work with your tax professional in taking this step.