I terminated employment with employer that used TRS I have an account bringing 5% annually but is going to decrease to 2% this coming Sept. Can I roll it into a Roth account in whole or partially ? If so how would it be taxed? Or what might be best way to invest it for best returns?
Mike, If you have a 403(b) account with this previous employer you would be able to convert it to a Roth IRA account. If you did this you would have to pay tax on that conversion. The amount converted would be added to your income in the year it was converted and taxed at your marginal tax rate. Another option would be a rollover to an IRA, which would allow the continued deferral of taxes and continued tax-free growth. The allocation of securities you choose whether within the Roth IRA or rollover IRA would determine the actually return you acheive on this portfolio. Hope this helps. Happy New Year!
Kyle has already addressed the question of conversion to Roth IRA or rollover to IRA. Here are some further thoughts on investment returns and asset allocation....
You mentioned that your TRS return will be dropping from 5% annually to 2%. What you’re describing sounds like what’s commonly called a “fixed account” or a “stable value” investment option. While these don’t typically pay a lot of interest, they’re usually guaranteed by your retirement system, an insurance company, or similar backstop.
IF indeed you are describing a stable value option, then depending on your situation it may make sense to leave some/all in that option for now. Consider the following:
• If interest rates continue to climb (even slowly), the principal value of most types of bond funds will take a hit. A stable value option shouldn’t take a principal hit if interest rates rise.
• In the current environment, cash and money market returns are basically zero. If you plan to allocate any of your retirement assets to a stable asset class such as cash, for now it may make sense to keep it in TRS earning 2% instead of 0%.
• If you move the funds out of the TRS system, pretty much any investment that’s earning better than a “guaranteed” 2% return will come with its own lock-ups: CD (fixed term), fixed annuities (surrender charges), etc.
• Like many investors, if you’re concerned about the likelihood of very low future returns in stocks over the next 7-10 years from current elevated valuations, then you may wish to keep some/all in a stable value option until you can buy back into stocks at better prices than today. While it’s not possible to precisely and consistently “time the markets,” it is important to consider risks due to elevated valuations.
These are strictly investment considerations...you'll want to be sure to factor in your overall retirement goals and the taxation implications that Kyle noted.
Best wishes with your decision and for a prosperous 2014!