Should I Roll My 403(b) Into a Traditional IRA, or Convert It to a Roth IRA?

How bad will the taxes be?

Photo credit: James, CC BY 2.0.

If you’ve been following The Billfold over the past week, you know that I am trying to figure out if I should roll my 403(b) into an IRA, convert it to a Roth IRA, or leave it alone.

Today, let’s look at the big fork in the road: traditional IRA vs. Roth IRA.

I know that with a traditional IRA, my contributions are tax deductible now and my withdrawals are taxed at retirement. With a Roth IRA, I pay taxes on my contributions now but my withdrawals (at retirement) are tax-free.

What happens when a 403(b) gets involved? When do I pay taxes, how much will I end up paying, and how is it affected by the IRA vs. Roth IRA decision?

I’ll start by seeing what info I can dig up on

Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.

Okay, that makes sense. But—spoiler alert—then it starts getting really confusing.

Here’s what the IRS says about converting an employer retirement plan into a Roth IRA:

Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.

And, if you follow that link:

Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.

If I understand that correctly, part or all of the distribution from my 403(b) may be subject to income tax. Okay, so… how much? And will I be paying just regular income tax, or will I also be paying self-employment tax on this income? (I know that sounds like a ridiculous question—this wouldn’t be income I’ve earned as a freelancer, after all—but I still want to know the answer.)

It seems like following the fork down this particular road will lead me to “talk to your CPA.”

What about if I take the traditional IRA path? What does have to say about that?

Treatment of rollovers. You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and Reporting rollovers from employer plans .

Great. Let’s open some new tabs.

Reporting rollovers from employer plans. Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Also, enter “Rollover” next to line 16b on Form 1040; line 12b of Form 1040A; or line 17b of Form 1040NR.

No. This is not the answer I was looking for. It might be the correct answer, but it is definitely not the easy-to-understand summary I was hoping to find.

Let’s head over to Capital One Investing, which… appears to be strongly advocating for the traditional IRA path:

Tip: Qualified retirement accounts can generally only be rolled over into a Rollover IRA (Traditional IRA). However, some rollovers can go into a Roth IRA. For more details, please contact a Retirement Specialist by calling toll-free 877–464–0292.

Capital One Investing states that rollovers into traditional IRAs are free. A quick check of the rest of the internet confirms they’re tax-free as well (if you do a direct rollover; otherwise it gets complicated). Interestingly, Vanguard states that a Rollover IRA is its own separate thing and I might not be able to make future contributions:

Please note: There may be special tax considerations when you combine rollover assets with new contributions in one account, otherwise known as commingling.

It does look like I should choose a Rollover IRA (Traditional IRA) for my 403(b) assets. I will be taxed on my withdrawals at retirement, but I would have been taxed on my withdrawals anyway—and, honestly, who knows what might happen to the rules in the next 30 years, so I might as well pick the one that doesn’t charge me a gob of taxes right now.

So now we know the answer to that question, which means that tomorrow, I’ll try to answer this question: “What’s the deal with employer retirement accounts potentially being protected from creditors, and will I give that protection up if I rollover into an IRA?”

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