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commanderjon

Roth 403(B) Transfer To Roth Ira Question

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Hi everyone,

 

First time poster here...hoping for some valuable input to help me make the best decision.

 

For the past 10 years, I've had AXA Equivest for both a traditional 403(b) and a roth 403(b) through my school district (I'm a teacher). Recently, I learned about the fees associated with TSAs and I want to transfer these funds into superior options.

 

I plan to transfer my traditional 403(b) balance, around $25k, into a Vanguard 403(b) and pay the surrender fee to do so. So that's good to go.

 

I also want to get out of the roth 403(b) account with AXA, also around $25k. However, since Vanguard doesn't have a roth option to transfer into and the only other options in my school district are other TSAs with similar fees, I decided that rather than paying these fees until retirement (another 30 years), I would rather take a nonqualified withdrawal (since I'm under 59 1/2 years old and still employed at the same school district) and pay the IRS penalty on the earnings portion.

 

When I asked by AXA advisor for the form to do this, he responded by saying that my only option is roll the amount into another Roth 403(b) within my school's offerings, based on an IRS rule.

 

I looked through the IRS rules and I couldn't find anything that said I couldn't do this. The fact that he said the money has to be rolled into another roth 403(b) makes me think he doesn't know the difference between a transfer and a rollover. Can anyone with more expertise provide some guidance on my options here?

 

Thank you so very much in advance!!

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Welcome commanderjon!

You came to the right place for answers - you will get several from highly-qualified members.

If you have access to the Vanguard 403b plan, you are very lucky. AXA might try to stall and give you misleading information, but if you are determined, you'll get it done. It sounds like you are already 403b-wise.

 

Consider making your future Roth contributions in a new Vanguard Roth IRA, separate from your employer Roth 403(b) plan, assuming you don't have good employer choices. You will need to pay into it yourself, either from your bank account on automatic payments, or on your own, on a regular schedule. After that, direct money into your new Vanguard 403b. That does depend though on your age and years to retirement.

 

It's hard to answer your Roth 403b question without knowing your district's options - can you post your options? Will you qualify for a hardship? Tuition bills? buying a house?

 

Perhaps you can share how it came to be that you opened an account with AXA over the other vendor options 10 years ago.

 

Again, welcome to the forum.

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Are you saying that Vanguard is on your district’s list of traditional 403b providors? If that’s the case, then paying the surrender fee on the annuity is probably a smart move.

 

On your Roth 403b with AXA, I wonder if you have a better option than making an unqualified distribution? Using 403bcompare, I see that for the traditional 403b, AXA has a Equi-Path Mutual Fund Program. Have you checked to see if this is available to you with the AXA Roth 403b? If so, I think using it would be much preferred to making an unqualified distribution. You’ve already paid income tax on your Roth contributions and you’ll pay it again plus the 10% penalty (on the earnings). edit

The fees of this AXA mutual fund based 403b are much different from those of their annuity based 403b that you have been contributing to. There’s a Custodial Fee of 0.06%, and a $7.50 per quarter fee. I only looked at a few of the many funds on offer, but did find one that looks worth using: American Funds Investment Company of America R4, RICEX with an ER of 0.65%. https://www.403bcompare.com/Employee/SubProducts/FundingOptions/Detail.aspx?sid=47290&pid=4256

Whether you make any further contributions to the Roth 403b is a separate decision. With a Vanguard traditional 403b available, I'd skip the Roth 403b.

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Thank you for the information. I was under the impression that a non-qualified distribution of Roth 403b funds (also called in-service distribution if still working for the same employer) would only assess tax on the earnings, not the contributions.

 

I'll look into the other options you've mentioned also.

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commanderjon, you're right on paying income tax (and the 10% penalty) on only the earnings part of the distribution, not on the contributions. I'll try and correct my post. How much of the 25k is from your contributions? Do you know the schedule for the surrender fees?

 

Maybe your idea of taking a non-qualified distribution of the Roth 403b isn't as bad as I thought? It is a shame to loose the 25k of tax-advantaged savings, even if you'll convert it to maybe 20k of taxable savings. If you upped your traditional 403b contributions by 20k (over 2 years), you could move the 20k back in to tax-advantaged savings. Maybe that was your plan?

 

Are you one of the lucky ones who has Vanguard or Fidelity on your district's providor list?

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Thanks for confirming. I still have to pay a 3% surrender fee through AXA. The reason the non-qualified (in-service) distribution makes sense now, rather than waiting the full 12 year period to waive the surrender fees is that I would have to pay 3 more years worth of maintenance fees compared to the one-time 3% surrender fee.

 

My AXA advisor tells me that my only other options for my Roth 403B funds in my school district's plans are all tax-sheltered annuities (TSAs), with the exception of the Vanguard traditional 403B, which I plan to transfer my traditional 403B funds into. In order to get out of paying 30 years of AXA's fees on the Roth 403B account, I feel that my only other option is to take an in-service distribution and use some of that money to max out a Roth IRA. I think taking the 10% withdrawal penalty now and paying taxes on the earnings portion is nothing compared to the total fees I will pay to keep the money where it is now.

 

The question remains whether or not my AXA advisor is being truthful when he says that an IRS rule forbids an in-service distribution (non-qualified) from my Roth 403B.

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I don’t think there’s any question that non-qualified distributions can be made from a Roth 403b.

 

 

https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts#distns

What happens if I take a distribution from my designated Roth account before the end of the 5-taxable-year period?

If you take a distribution from your designated Roth account before the end of the 5-taxable-year period, it is a nonqualified distribution. You must include the earnings portion of the nonqualified distribution in gross income. However, the basis (or contributions) portion of the nonqualified distribution is not included in gross income. The basis portion of the distribution is determined by multiplying the amount of the nonqualified distribution by the ratio of designated Roth contributions to the total designated Roth account balance. For example, if a nonqualified distribution of $5,000 is made from your designated Roth account when the account consists of $9,400 of designated Roth contributions and $600 of earnings, the distribution consists of $4,700 of designated Roth contributions (that are not includible in your gross income) and $300 of earnings (that are includible in your gross income).

Have you checked out this AXA website? https://us.axa.com/customer-service/

You can enter your “policy or contract number to get a list of the online services and forms available to you”. In addition, there are numbers to call including: EQUI-VEST, 800-628-6673. I think that you probably need to bypass your AXA “advisor” and talk to the main office. I’ve read that it’s not unusual to find reps who are uninformed and/or misinformed, and that a call to the head office can be helpful.

The IRS has instructions on how to deal with the taxes on a non-qualified Roth 403b distribution, so it's obvious that they don't "forbid" it.

Have you checked out this AXA website? https://us.axa.com/customer-service/

You can enter your “policy or contract number to get a list of the online services and forms available to you”. In addition, there are numbers to call including: EQUI-VEST, 800-628-6673. I think that you probably need to bypass your AXA “advisor” and talk to the main office. I’ve read that it’s not unusual to find reps who are uninformed and/or misinformed, and that a call to the head office can be helpful.

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See if you have CAlSTRS pension 2 listed in your vendor list of eligible plans. They have a ROTH option and Vanguard as well as other funds listed in their ROTH account. Set up is online and pretty quick and easy.

 

You should be able do a plan to plan transfer as long as your TPA (if you have one)services both plans. Especially if it is going from a Roth to Roth account.

AXA does have a ROTH eligible mutual fund so I really can't see what the problem would be to roll the account over to that unless the advisor just doesn't want to.

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