Convert 403b to Roth 403b

I've gone on a bit about how Roth accounts and Roth conversions are beneficial to a select few people, or limited circumstances.

For you, it may be ideal. The simple reason it doesn't benefit most working people is that it takes quite a bit of savings, pretax to put you back in the same or higher tax bracket as when you were working. But I do offer that those who have a great defined benefit plan are among those who may be candidates for Roth accounts.

I suggest looking at

and understanding the tax bracket you are now in. That's a fact, your current tax rate. The rest is forecasting, your employer (will you stay there? will they continue to offer the plan?) your income and savings level, and future tax rates. As your pension gets closer to replacing final income by a larger percent, the numbers favor Roth. Do you see why? If the pension replaced your income 100%, any additional income is taxed at the same or higher rate. Of course, this doesn't address your wife's income, 401(k), or other savings. If you post some numbers, many will be happy to offer more advice.

Joe

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With my 403b contributions, mortgage deduction, etc., I have been in the 15% bracket. My wife has not been working so the 401k on her part has not been an issue. I would expect she would go back to work part- time in a couple of years once my second child is in first grade. I don't imagine she will be making a ton at that point either. I have about 30K in my 403b at present and as noted have been putting 11% of my pre-tax income into it yearly as well as fully funding both my and my wife's Roth IRAs. Also putting about 5K yearly into two 529 plans. Not sure what other numbers you might need.

Thanks,

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There are several pros to the Roth 403b, each depending on what kind of changes to the tax code we see between now and when you withdraw the money.

But an immediate negative will be increased taxes now. What were traditional 403b contributions will now be taxable income to you. And I believe the same is true of the employer match. Bottom line: More taxes, without more income to pay those taxes. This may or may not be a problem for you, but it is important to be aware of it.

-HW "Skip" Weldon Columbia, SC

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My company does not match any contributions to the 403b plan so that's not an issue. Taxes would probably go up somewhat. Basically, I think that the final decision would be made on whether I anticipate more income in retirement than now, correct?

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I think you are on the right track with Roth. This is not a black and white issue, there is a huge gray area. What I try to help people avoid is this scenario; Couple in 28% bracket is so fixated on Roth that upon retiring doesn't have enough pretax saving to come close to 'filling' the 15% bracket. i.e. a huge missed opportunity, and wasted taxes. Remember one thing - there is a zero percent bracket. Right now, it's $17,900 for you and your wife. When you project your pension income, it may be more than this, so you'll start in the 10% bracket. For those with no pension, that $17,900 of income would require $447K of (pretax) savings to generate, assuming a 4% withdrawal rate. If the missus goes back to work and bops you into the 25% bracket, I'd suggest tracking your income closely and using regular IRAs to shelter any money that would be taxed at 25%. For someone retiring today, my goal would be to keep them in the 15% bracket. If you can manage the numbers to that while working and then again at retirement, you'll have done well tax-wise. (Those who disagree with me will point out that I cannot really know what the tax structure will be in 2 years let alone 20, and they are right. I take no offense to that. I offer my opinion given the current laws and your ability to predict your own income and retirement needs.) Joe

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