TDA question
Hi Ed:
Your CD set I purchased on Channel 13 was very eye opening. I have a question. I am a retired N.Y.C teacher with a Tax Deferred Annuity of $200,000 earning an astounding 7 1/4 %. What would converting that to a Roth IRA entail? Is it stupid to even consider removing the funds earning that much interest?
Thanks,
Walter Rubin
Permalink Submitted by Alan Spross on Fri, 2010-10-01 02:54
The conversion decision requires a detailed analysis of several factors, primarily the tax rate you will pay on the conversion vrs the rate you expect to pay over the term of your retirement.
However, I want to be clear about whether you currently hold a non qualified TDA or a 403b plan from your teaching jobs. Please confirm which because these are very different products.
Permalink Submitted by Walter Rubin on Mon, 2010-10-11 15:29
I believe it’s a 403b plan.
Permalink Submitted by Alan Spross on Mon, 2010-10-11 20:25
OK, that makes sense since many 403b plans are TSAs rather than TDAs. Assuming that an analysis indicates that a Roth conversion would be beneficial, then you need to talk to the plan administrator to see what your options are for preserving the investment yielding the 7.5% interest, ie if it can be transferred to a Roth IRA or most be liquidated first and your Roth reinvested in something different.
But just in the last two weeks, the President signed a jobs stimulus bill that includes for the first time the option to convert WITHIN your employer plan. To do that your 403b would have to adopt a designated Roth option and then you would convert into a Roth 403b rather than a Roth IRA. While these “in plan conversions” have some rules that are not as broad as Roth IRAs, it might be that you could use this tool temporarily to preserve the investment if the custodian can just transfer it into the Roth. The chances are much better for that to happen if you stick with the same plan provider. After the investment matures you could then transfer the Roth 403b to a Roth IRA in a tax free transfer. Your plan administrator is not likely to be up to speed on this yet, and you may have to wait a few weeks. One challenge for these plans is to get them amended so process these conversions before 2010 ends and you can no longer split conversion income between 2011 and 2012.
Chances are that converting the entire amount would inflate your tax bracket, so it might be wiser to consider a partial conversion that is not so large that it inflates your tax bracket. And if you cannot do this until 2011, the amount would be even less because you would have to report a 2011 conversion fully in 2011.