If you're buying a home and need extra cash, your retirement plan might be a tempting target. If only you had the money in a Roth IRA, you could get your contributions out penalty-free and tax-free whenever you wanted and potentially qualify for an early withdrawal exception. Even though the IRS permits rollovers from 403(b) plans to IRAs, avoiding the taxes and penalties isn't that simple.
As much as you might want to roll money from your 403(b) plan to a Roth IRA, you're not allowed to do it whenever you want unless you're over 59 1/2 years old. If not, you're limited to rollovers only after you've become permanently disabled or you've left your job. Though your 403(b) plan might offer a hardship distribution if you need money to purchase a main home, hardship distributions can't be rolled over -- ever.
To move the money from your 403(b) plan to your Roth IRA, you've got two options: a rollover or a transfer. With a rollover, you take a distribution and then put the money into your Roth IRA within 60 days. However, you have to come up with the 20 percent that gets withheld for taxes out of your own pocket, or that 20 percent isn't counted as being successfully rolled over. With a transfer, your financial institution moves the money directly from your 403(b) to your Roth and you don't have to worry about it getting done in time, nor is the transfer subject to withholding.
When you convert from a 403(b) to a Roth IRA, you include the amount of the conversion in your taxable income because you're moving the money from a pretax account to an after-tax account. Since they're both qualified plans, you won't owe an early withdrawal penalty. However, if you immediately take distributions, you'll owe the 10 percent early withdrawal penalty because the money wasn't in your Roth IRA for at least five years unless an exception applies -- which could defeat your purpose for the conversion in the first place.
First-Time Homebuyer Exception
It does make sense to roll the money to a Roth IRA if you qualify as a first-time home buyer because IRAs allow a penalty exception whereas 403(b)s don't. To qualify for the exception, you (and your spouse, if you're married) can't have owned a home in the past two years. Plus, the exception is limited to $10,000 over your lifetime, so if you've already used it up, it's gone. For example, say you take out $15,000 -- the exception only gets you out of the early withdrawal penalty on the first $10,000.
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