How to Roll Over a 403(b) Plan to an IRA

If you've left an employer that provided you with a 403(b) tax-sheltered annuity, there can be some advantages to rolling it over into an individual retirement account. While the fees for an IRA may be higher than for your 403(b), you will generally have a wider range of investment options that can benefit you in your retirement planning. You can roll your 403(b) into either a traditional or a Roth IRA. However, as 403(b)s are usually tax-deferred and Roths are not, you will pay taxes on the value of your account when you make the transfer. Rollovers to traditional IRAs, when done correctly, are tax-free.

Direct Transfer

Step 1

Request the necessary paperwork from the trustee with which you will be setting up your new IRA and explain that you want to transfer funds from a 403(b). You can transfer 403(b) funds into an existing IRA, however, once you co-mingle those funds you cannot then put them into another 403(b) with another employer later on. On the other hand, if you are fairly certain you won't be doing that, it may save fees to use an existing IRA.

Step 2

Contact your employer or 403(b) plan custodian and find out what you need to do to arrange a direct transfer. A direct transfer means the check will never pass through your hands. It will either be a wire transfer or a check made out to the new trustee. If the check is made out to you, it is not a direct transfer and could be subject to withholding tax.

Step 3

Watch the mail for a 1099-R as the year draws to a close. If your transfer was to a traditional IRA, you will not have to pay tax on it, but you do need to report the transfer on your income tax return. For a direct transfer the amount in Box 2a on the 1099-R, where it shows the taxable amount of the distribution, should be zero.

Step 4

File form 1040 or 1040A. You can't use the 1040EZ for a year in which you received retirement plan distributions. Even though it's not taxed, you must list the full amount of the distribution on either line 16a or 12a, depending on whether you file form 1040 or 1040A. The taxable amount of "zero" goes on line 16b or 12b. Bankrate says that you should notate this as "rollover" to avoid any confusion with the Internal Revenue Service.

Indirect Rollover

Step 1

Set up a new IRA as you would for a direct transfer and contact your 403(b) plan custodian requesting a check to be made out to you. Direct transfers are safer and easier. However, if you have reason to use the money before depositing it into your IRA -- say settlement on your home sale is in a couple of weeks, and you need the money temporarily for the down payment on your new home -- this is one way to handle it.

Step 2

Deposit the full amount of your IRA distribution into your new IRA account within 60 days of receipt. Weekends and holidays are included, so count carefully. Keep in mind that the plan custodian will most likely withhold 20 percent of the amount distributed from your 403(b) against your not redepositing the funds in time. Since you will be taxed and possibly pay a penalty on any difference between what was distributed from your 403(b) and what was deposited in your IRA, you will need to make up that 20 percent out of your own pocket.

Step 3

Use the information on the 1099-R you receive to report the rollover on your income tax. Again, you must file form 1040 or 1040A. You will report it in the same way as a direct transfer except that Box 4 on your 1099-R will show the withholding amount. You'll add that amount to any other withholding you report, for example, from you W-2.

Tip

  • If your 403(b) account is large, making up that 20 percent withheld for taxes can cost quite a bit. For example, if it's $100,000, you would have to pay $20,000 out of your own funds.

Warning

  • Don't choose an indirect rollover unless you are absolutely sure you can get the full amount into the new account within 60 days (the IRS does make exceptions for things like natural disasters, but you'll have to file for a waiver), or you will have to pay taxes on the full amount plus an additional 10 percent penalty if you are under age 59 1/2.

About the Author

Nancy Cross is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning. In addition to writing and editing, she runs a small business with her husband and is a certified personal trainer with the Aerobics and Fitness Association of America (AFAA).

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