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jebjebitz

Question about 403b transfer/rollover

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A colleague of mine recently opened a Roth 403b using DirectInvest through Security Benefit.  The account is open and he made appropriate changes to have payroll deductions go to this new account.

His original 403b is with AXA and he has funds there ina Traditional account.  It is assumed that he can’t roll that into the new Roth without being taxed.  The value is somewhere around 50,000 and he would like to avoid getting hit with taxes on this.

Question:  What are his options for getting that money out of AXA and into a self directed low cost option?  Are you allowed to open a Roth and Traditional at Security Benefit at the same time?  I looked at a 457 option but it looks like you are not allowed to transfer from 403b to 457 while still employed with same employer.  

 

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Jeb 

It would seem to me that your friend can easily transfer his traditional account from AXA to Direct Invest if both are on his district provider list. But He will need to transfer it as a new Traditional 403b  with Direct Invest and not into a Roth 403b. He can put that 50 grand in a low cost fund or funds of his choice that are available . I think the key here is not to try and combine the traditional with the Roth 403b. Once he establishes the traditional allocation with Direct Invest he can just let it grow there and continue to put new contributions into his current 403b Roth.

He will have to initiate a transfer with AXA which means paperwork. He will also need to fill out paperwork possibly with Direct Invest as well. It can be a slow process but sometimes it can go smoothly if all paperwork is in order. I would not go through the Axa advisor. i would call the AXa corporate offices and ask them how to proceed.

I contributed to both a 403b traditional and a 403b Roth with no problem so I am sure he can do the same.  Did I answer your question or did I miss anything?

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20 minutes ago, tony said:

I contributed to both a 403b traditional and a 403b Roth with no problem so I am sure he can do the same.  Did I answer your question or did I miss anything?

Thanks Tony. I think this was the main question I was aiming for.  Specifically, can he have two 403b accounts, Roth and Traditional, at the same time.  You definitely answered this.

His next step would be to create a Tradional 403b with DirectInvest and then transfer his AXA funds to this to avoid getting hit with taxes.  

I recently went through the transfer process and agree that it is slow moving and frustrating.  Luckily, he will be contributing to the Roth while that process takes place.

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One other thing. AXA may very well charge him surrender fees depending what he is invested in. In that case I would only transfer monies that are free of surrendar fees periodically as that money frees up and not all at once. That may require filing the paperwork more than once.

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1 hour ago, tony said:

One other thing. AXA may very well charge him surrender fees depending what he is invested in. 

Good point.  I don’t know what his investments are, how long he’s had them with AXA or how much.  

I personally paid a surrender fee to leave AXA even though I had an account with them for ten years.  Their surrender charges never seem to go away.  Although, looking back, I’m glad I got it all out at once.  I think it ended up being a little over a grand in surrender fees but, I was free from AXA, my money went to low cost index funds and I only had to go through the frustrating transfer process once.  It’s what I tell myself to feel better about giving up the grand anyway.

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Every surrender fee schedule I’ve studied has been worth paying. This is because the annual fees associated with the account outweighs the surrender fee.

One potential exception is that it might be worth waiting a bit if you’re close to a surrender fee reduction. For example, I’d wait a month or so if the surrender fee was dropped by 1% as a result.

I documented Security Benefit’s NEA DirectInvest plan here if it is useful to anybody.

...also I’d argue strongly that a Roth is a likely mistake for most people. If that decision is up for debate, I could provide some data. 

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1 hour ago, EdLaFave said:

Every surrender fee schedule I’ve studied has been worth paying. This is because the annual fees associated with the account outweighs the surrender fee.

One potential exception is

I agree. When I got out of annuities, I was ready to get out completely. I never regretted it but I don't know  Jeb's friend so I was afraid to tell him not to worry about the surrender fees. He may prefer to avoid them by waiting until money gets freed up. Actually, surrender fees do go away eventually over time if you are no longer adding new money to that account or so it was with my account.

 

1 hour ago, EdLaFave said:

...also I’d argue strongly that a Roth is a likely mistake for most people. If that decision is up for debate, I could provide some data. 

 

This is very much up for debate among experts and may depend on the individual's personal situation. I've seen the argument made both ways so I deduced both sides might be right and invested in both Roth and Taxable.

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One more note on this 403b situation: if your friend is over 59 1/2 years old, or if he is no longer working for the same employer that set up the AXA 403b, he can roll the money into a traditional IRA account at Vanguard (or another provider of his choice).  I'm guessing that neither of those requirements pertain in this case, but when they do, the rollover IRA is usually a better option than a 403b: lower cost, more flexibility in investment choices.  (The IRA creates no conflict with the ability to continue to contribute to 403b and/or 457 accounts with one's current employer).

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On 1/5/2019 at 1:12 PM, EdLaFave said:

 

...also I’d argue strongly that a Roth is a likely mistake for most people. If that decision is up for debate, I could provide some data. 

Not looking to debate interested in the data though

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The biggest point to be made about the superiority of Traditional accounts centers on the nature of our progressive tax code...

Every dollar you contribute to a Roth is taxed at your highest marginal tax bracket. However, when you pull money out of a Traditional, some of your money isn’t taxed at all (standard deduction) and then you get to fill up the lower tax brackets before you hit that top rate. That means your effective tax rate from Traditional withdrawals is likely to be much lower than the tax rate of Roth contributions (i.e. your highest marginal rate).

Most people (or at least most savers that live below their means) have more taxable income when they’re working than they do during retirement because they have expenses they don’t necessarily have in retirement. For example, in retirement you may not be paying for kids, a mortgage on a family home, multiple cars, or income tax on money that you invested in a taxable (or Roth) account. Therefore it isn’t likely that you’ll be in a higher tax bracket during retirement than you were when you were working.

Because of all of this, the vast majority of people will pay less in total tax if they invest in a Traditional, which is demonstrated by the following (rough) equations:

Roth Value = $1 * (1 - HighestMarginalTaxRate) * (1 + InvestmentReturn) ^ NumberOfYears

Traditional Value = $1 * (1 + InvestmentReturn) ^ NumberOfYears * (1 - EffectiveTaxRate)

There are cases where a Roth is superior and the argument above assumes no changes to the tax code because I can’t accurately predict how it’ll change.

For a more detailed argument:

https://thefinancebuff.com/case-against-roth-401k.html

 

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