"Recharacterize" 403(b) contribution as 457(b)?

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Topic Author
dannyboy
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Joined: Tue May 17, 2016 10:51 pm

"Recharacterize" 403(b) contribution as 457(b)?

Post by dannyboy »

Hi BH! Earlier this year I worked for a large university system. They offered a 403(b) and a 457(b), and I arbitrarily elected to contribute to the former but not the latter. Fast forward three months (but still the same tax year) and I'm now working at a company that only offers a 401(k). Since 403(b) and 401(k) contributions share the same $19,500 limit, I am now quite limited in the amount of money I can contribute to my 401(k) this year. Had I decided to contribute to the university 457(b) instead of the 403(b) earlier this year, I would still have $19,500 of open space in my 401(k).

My question is: have any of you ever "recharacterized" a 403(b) contribution as a 457(b) contribution in the same tax year? And before someone says "why don't you ask your custodian," yes, I will, but they're extremely bureaucratic so I don't want to go down that path if it's a non-starter. Thanks in advance!

danny
go2run
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by go2run »

dannyboy wrote: Wed Jul 28, 2021 12:21 pm Hi BH! Earlier this year I worked for a large university system. They offered a 403(b) and a 457(b), and I arbitrarily elected to contribute to the former but not the latter. Fast forward three months (but still the same tax year) and I'm now working at a company that only offers a 401(k). Since 403(b) and 401(k) contributions share the same $19,500 limit, I am now quite limited in the amount of money I can contribute to my 401(k) this year. Had I decided to contribute to the university 457(b) instead of the 403(b) earlier this year, I would still have $19,500 of open space in my 401(k).

My question is: have any of you ever "recharacterized" a 403(b) contribution as a 457(b) contribution in the same tax year? And before someone says "why don't you ask your custodian," yes, I will, but they're extremely bureaucratic so I don't want to go down that path if it's a non-starter. Thanks in advance!

danny
Let's see if I have this straight....

1. At your prior employer, you had available a 403(b) and 457 and you contributed only to a 403(b).
2. You are now with a new employer that offers a 401(k) and you are contributing to that.
3. What you are wanting to do is transfer the funds from the 403(b) to a 457? You are no longer employed there and can not contribute to either.

Why not roll-over the the 403(b) to a roll-over IRA or if your current employer accepts incoming roll-overs, you can transfer the 403(b) account balance to the 401(k)? To me, this is what I would do.
lakpr
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by lakpr »

dannyboy wrote: Wed Jul 28, 2021 12:21 pm Hi BH! Earlier this year I worked for a large university system. They offered a 403(b) and a 457(b), and I arbitrarily elected to contribute to the former but not the latter. Fast forward three months (but still the same tax year) and I'm now working at a company that only offers a 401(k). Since 403(b) and 401(k) contributions share the same $19,500 limit, I am now quite limited in the amount of money I can contribute to my 401(k) this year. Had I decided to contribute to the university 457(b) instead of the 403(b) earlier this year, I would still have $19,500 of open space in my 401(k).

My question is: have any of you ever "recharacterized" a 403(b) contribution as a 457(b) contribution in the same tax year? And before someone says "why don't you ask your custodian," yes, I will, but they're extremely bureaucratic so I don't want to go down that path if it's a non-starter. Thanks in advance!

danny
I do believe it is a non-starter, I do not think you can retroactively recharacterize a 403(b) contribution to be a 457(b) contribution. The rules governing the two plans are completely different.

What I do advise is that, in the new job, go ahead and contribute to the 401(k) plan up to the company match for this year. The consequence of doing so is that, you will get taxed on YOUR contribution both going in, and coming out. Say you are in the 22% tax bracket, you will be essentially paying 44% tax. But possibly your employer is matching at least dollar-for-dollar, so you still win by the 56% difference.

No, by contributing in excess of the $19,500 (or $26,000) limit you are not going to jail. Your only consequence is double taxation. If the employer match makes up more than the double taxation, I say go ahead ...

Just make sure you file for an extension next year, and file your taxes AFTER the April 15th deadline. Technically, the IRS can ask for you to work with either of your employers to return your contributions prior to that deadline. After that date, that avenue is closed -- to your advantage.
tashnewbie
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by tashnewbie »

go2run wrote: Wed Jul 28, 2021 12:45 pm 3. What you are wanting to do is transfer the funds from the 403(b) to a 457? You are no longer employed there and can not contribute to either.
I think what he wants to do is make it as if he had contributed to the 457 instead of the 403b at the former employer, so that he can contribute more money to the new employer 401k.

OP, I assume you're trying to maximize an employer match in the 401k.

I've never heard of this as a possibility. Maybe it is, but I haven't seen anyone mention such a thing here on the forum. I've never heard of a recharacterization of money in employer-sponsored plans, only money in IRAs.

I don't know how your former employer's plan administrator would handle this. There was no excess contribution.
lakpr
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by lakpr »

go2run wrote: Wed Jul 28, 2021 12:45 pm Why not roll-over the the 403(b) to a roll-over IRA or if your current employer accepts incoming roll-overs, you can transfer the 403(b) account balance to the 401(k)? To me, this is what I would do.
I think you misunderstood the question. I do not have the numbers, but the situation is like this:

- At the previous job, he contributed $16k to the 403(b)
- As a result, he can only contribute $3.5k in the new job
- OP wishes that had he contributed that $16k to 457(b), he could contribute $19.5k to the 401(k) at the new job.
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David Jay
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by David Jay »

dannyboy wrote: Wed Jul 28, 2021 12:21 pmMy question is: have any of you ever "recharacterized" a 403(b) contribution as a 457(b) contribution in the same tax year? And before someone says "why don't you ask your custodian," yes, I will, but they're extremely bureaucratic so I don't want to go down that path if it's a non-starter.
Yeah, it's pretty much a non-starter
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
dannyboy
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by dannyboy »

lakpr wrote: Wed Jul 28, 2021 12:50 pm
dannyboy wrote: Wed Jul 28, 2021 12:21 pm Hi BH! Earlier this year I worked for a large university system. They offered a 403(b) and a 457(b), and I arbitrarily elected to contribute to the former but not the latter. Fast forward three months (but still the same tax year) and I'm now working at a company that only offers a 401(k). Since 403(b) and 401(k) contributions share the same $19,500 limit, I am now quite limited in the amount of money I can contribute to my 401(k) this year. Had I decided to contribute to the university 457(b) instead of the 403(b) earlier this year, I would still have $19,500 of open space in my 401(k).

My question is: have any of you ever "recharacterized" a 403(b) contribution as a 457(b) contribution in the same tax year? And before someone says "why don't you ask your custodian," yes, I will, but they're extremely bureaucratic so I don't want to go down that path if it's a non-starter. Thanks in advance!

danny
I do believe it is a non-starter, I do not think you can retroactively recharacterize a 403(b) contribution to be a 457(b) contribution. The rules governing the two plans are completely different.

What I do advise is that, in the new job, go ahead and contribute to the 401(k) plan up to the company match for this year. The consequence of doing so is that, you will get taxed on YOUR contribution both going in, and coming out. Say you are in the 22% tax bracket, you will be essentially paying 44% tax. But possibly your employer is matching at least dollar-for-dollar, so you still win by the 56% difference.

No, by contributing in excess of the $19,500 (or $26,000) limit you are not going to jail. Your only consequence is double taxation. If the employer match makes up more than the double taxation, I say go ahead ...

Just make sure you file for an extension next year, and file your taxes AFTER the April 15th deadline. Technically, the IRS can ask for you to work with either of your employers to return your contributions prior to that deadline. After that date, that avenue is closed -- to your advantage.
This is an interesting option, but my employer has a profit sharing system that is independent of 401(k) contributions; you could think of it as an automatic 6% match regardless of how much I contribute. Thus the only thing I care about is the amount I'm able to put away myself.
tashnewbie wrote: Wed Jul 28, 2021 12:51 pm
go2run wrote: Wed Jul 28, 2021 12:45 pm 3. What you are wanting to do is transfer the funds from the 403(b) to a 457? You are no longer employed there and can not contribute to either.
I think what he wants to do is make it as if he had contributed to the 457 instead of the 403b at the former employer, so that he can contribute more money to the new employer 401k.

OP, I assume you're trying to maximize an employer match in the 401k.

I've never heard of this as a possibility. Maybe it is, but I haven't seen anyone mention such a thing here on the forum. I've never heard of a recharacterization of money in employer-sponsored plans, only money in IRAs.

I don't know how your former employer's plan administrator would handle this. There was no excess contribution.
I'm not exactly trying to maximize match (see above), I'm trying to maximize Roth space for the year. This is a particularly low-earning year for me in the context of my future earnings, so I'm missing out on some really cheap Roth space by being unable to fill my 401(k).
lakpr wrote: Wed Jul 28, 2021 12:52 pm
go2run wrote: Wed Jul 28, 2021 12:45 pm Why not roll-over the the 403(b) to a roll-over IRA or if your current employer accepts incoming roll-overs, you can transfer the 403(b) account balance to the 401(k)? To me, this is what I would do.
I think you misunderstood the question. I do not have the numbers, but the situation is like this:

- At the previous job, he contributed $16k to the 403(b)
- As a result, he can only contribute $3.5k in the new job
- OP wishes that had he contributed that $16k to 457(b), he could contribute $19.5k to the 401(k) at the new job.
Yep, this is spot-on.
calwatch
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by calwatch »

For the benefit of those reading this in the future, this is why generally 457 is prioritized over 401(k) and 403(b). In addition to the feature that there is no age 59.5 (or age 55 on retirement) penalty if withdrawn before that age, 457's are generally rarer than 401(k)'s and 403(b)'s, which share the same pot.
tashnewbie
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by tashnewbie »

Do you have access to Mega Backdoor Roth at the new employer? If so, that would be a way to increase Roth space this year. And obviously do regular Roth IRA contribution.
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neurosphere
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by neurosphere »

calwatch wrote: Wed Jul 28, 2021 1:10 pm For the benefit of those reading this in the future, this is why generally 457 is prioritized over 401(k) and 403(b). In addition to the feature that there is no age 59.5 (or age 55 on retirement) penalty if withdrawn before that age, 457's are generally rarer than 401(k)'s and 403(b)'s, which share the same pot.
Clarification, 457b contributions should be prioritized if it's a governmental 457b. This advice is very unlikely to be good advice if one instead has a tax-exempt (aka non-governmental) 457b.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
go2run
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by go2run »

lakpr wrote: Wed Jul 28, 2021 12:52 pm
I think you misunderstood the question. I do not have the numbers, but the situation is like this:

- At the previous job, he contributed $16k to the 403(b)
- As a result, he can only contribute $3.5k in the new job
- OP wishes that had he contributed that $16k to 457(b), he could contribute $19.5k to the 401(k) at the new job.
Yep, you're right. Thanks for the clarification.
Topic Author
dannyboy
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by dannyboy »

calwatch wrote: Wed Jul 28, 2021 1:10 pm For the benefit of those reading this in the future, this is why generally 457 is prioritized over 401(k) and 403(b). In addition to the feature that there is no age 59.5 (or age 55 on retirement) penalty if withdrawn before that age, 457's are generally rarer than 401(k)'s and 403(b)'s, which share the same pot.
Absolutely, thanks for mentioning that outright. I definitely did some cursory digging before my "arbitrary" decision to fill 403(b) first, and it would've been great to have come across this topic.
tashnewbie wrote: Wed Jul 28, 2021 1:13 pm Do you have access to Mega Backdoor Roth at the new employer? If so, that would be a way to increase Roth space this year. And obviously do regular Roth IRA contribution.
Great question, I hadn't thought about that. My assumption is no, but I will definitely ask to make sure.
tashnewbie
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by tashnewbie »

dannyboy wrote: Wed Jul 28, 2021 1:50 pm
tashnewbie wrote: Wed Jul 28, 2021 1:13 pm Do you have access to Mega Backdoor Roth at the new employer? If so, that would be a way to increase Roth space this year. And obviously do regular Roth IRA contribution.
Great question, I hadn't thought about that. My assumption is no, but I will definitely ask to make sure.
Read the wiki on MBDR for more information. Look for key words like "after-tax non-Roth contribution" and "in-plan conversion" or "in-service withdrawal" in the Summary Plan Description. If you don't see anything like those, your 401k probably doesn't allow MBDR. But call the plan administrator to confirm.
JS-Elcano
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by JS-Elcano »

dannyboy wrote: Wed Jul 28, 2021 12:21 pm Hi BH! Earlier this year I worked for a large university system. They offered a 403(b) and a 457(b), and I arbitrarily elected to contribute to the former but not the latter. Fast forward three months (but still the same tax year) and I'm now working at a company that only offers a 401(k). Since 403(b) and 401(k) contributions share the same $19,500 limit, I am now quite limited in the amount of money I can contribute to my 401(k) this year. Had I decided to contribute to the university 457(b) instead of the 403(b) earlier this year, I would still have $19,500 of open space in my 401(k).

My question is: have any of you ever "recharacterized" a 403(b) contribution as a 457(b) contribution in the same tax year? And before someone says "why don't you ask your custodian," yes, I will, but they're extremely bureaucratic so I don't want to go down that path if it's a non-starter. Thanks in advance!

danny
Where I am you can roll a 403b into a 457b.
02nz
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by 02nz »

dannyboy wrote: Wed Jul 28, 2021 1:07 pm I'm not exactly trying to maximize match (see above), I'm trying to maximize Roth space for the year. This is a particularly low-earning year for me in the context of my future earnings, so I'm missing out on some really cheap Roth space by being unable to fill my 401(k).
If that's the goal, the easiest and most direct way is to convert an existing tax-deferred balance to Roth, however much you want. If you don't already have a rollover IRA, just roll some or all of the 403b out to one. (This is one of the underrated advantages of a tax-deferred balance - you can make your taxable income higher when it's advantageous to do so.)

Having a tax-deferred rollover IRA does interfere with the backdoor Roth, but only if you have a nonzero balance on Dec 31 of the year in which the second step of the backdoor Roth (conversion) is done. So only roll out as much as you want to convert, and convert all of it before Dec 31.
Topic Author
dannyboy
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Re: "Recharacterize" 403(b) contribution as 457(b)?

Post by dannyboy »

tashnewbie wrote: Wed Jul 28, 2021 1:59 pm
dannyboy wrote: Wed Jul 28, 2021 1:50 pm
tashnewbie wrote: Wed Jul 28, 2021 1:13 pm Do you have access to Mega Backdoor Roth at the new employer? If so, that would be a way to increase Roth space this year. And obviously do regular Roth IRA contribution.
Great question, I hadn't thought about that. My assumption is no, but I will definitely ask to make sure.
Read the wiki on MBDR for more information. Look for key words like "after-tax non-Roth contribution" and "in-plan conversion" or "in-service withdrawal" in the Summary Plan Description. If you don't see anything like those, your 401k probably doesn't allow MBDR. But call the plan administrator to confirm.
Yep, I'm all too familiar with the terminology; at my old university job I spent about a month trying to initiate a MBDR before being told I wasn't eligible for after-tax contributions :D
02nz wrote: Wed Jul 28, 2021 2:04 pm
dannyboy wrote: Wed Jul 28, 2021 1:07 pm I'm not exactly trying to maximize match (see above), I'm trying to maximize Roth space for the year. This is a particularly low-earning year for me in the context of my future earnings, so I'm missing out on some really cheap Roth space by being unable to fill my 401(k).
If that's the goal, the easiest and most direct way is to convert an existing tax-deferred balance to Roth, however much you want. If you don't already have a rollover IRA, just roll some or all of the 403b out to one. (This is one of the underrated advantages of a tax-deferred balance - you can make your taxable income higher when it's advantageous to do so.)

Having a tax-deferred rollover IRA does interfere with the backdoor Roth, but only if you have a nonzero balance on Dec 31 of the year in which the second step of the backdoor Roth (conversion) is done. So only roll out as much as you want to convert, and convert all of it before Dec 31.
This is an excellent point. However, I have no tax-deferred balance to roll over. Every year since I started working, I have rolled any tax-deferred balance into a Roth at the end of the year.

(In case it's not clear, I'm a recently-graduated student starting my first "adult" job. Before this year, I made relatively little money and Roth space was very cheap so I never kept anything in tax-deferred for long)
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