Why Roll Over a 403(b) to an IRA?

Moving your money from a 403(b) to an IRA might avoid early withdrawal penalties.

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Only employees of non-profits such as public hospitals and non-profit schools are allowed to have a 403(b) plan. Whether you're changing jobs or retiring, once you've stopped working for the employer, you're allowed to move your money from a 403(b) plan to a traditional or a Roth individual retirement account. In addition, you're allowed to roll over your 403(b) plan into an IRA after you've reached 59-1/2 years old.

Maintaining Tax-deferred Growth

When you change your job, you may not want to leave the money in your old 403(b) plan because of increased fees or because your old plan requires you to cash out your balance. If so, rolling the money into a traditional IRA maintains your tax-deferral of the money. If you simply took a distribution from the 403(b) plan, it would count as taxable income that year. If you roll it to a traditional IRA, it continues to grow tax-free until you take your distributions.

Roth IRA Conversion

You're also permitted to convert the money into a Roth IRA, but if you do so, you'll pay income taxes on the conversion because you're moving the money to an after-tax account. The good news is that when you take qualified distributions from the Roth IRA, your distributions of both the converted amount, and any additional earnings, are tax-free. Another advantage to converting is that Roth IRAs don't require minimum distributions. Beware, however, that you must wait five years before taking qualified withdrawals of the converted amount. Otherwise, you will pay a 10 percent additional tax on the distributions unless an exception applies.

Combine Retirement Accounts

If you have several retirement accounts, such as 403(b)s, 401(k)s and IRAs, it can be a hassle to keep track of your different accounts. In addition, if you combine your accounts, you may qualify for lower fees. Check your 403(b) plan to make sure you won't pay significant fees for moving the money, though. According to the Securities and Exchange Commission, surrender charges could take a bite out of your savings if you withdraw your money before a certain amount of time passes. For example, a plan might impose an 8 percent surrender charge if you cash out in the first year, but decrease the surrender charge by 1 percent each year thereafter until it is eliminated in the ninth year. In addition, redemption fees -- charged when leave the account -- could run as high as 2 percent.

Expanded Investment Options

Investments in your 403(b) plan may be limited to annuities and mutual funds. If these aren't enough options for you, with an IRA you can choose almost any investment as long it isn't in collectibles, such as artwork, and doesn't personally benefit you, such as buying a vacation home.

Early Withdrawal Exceptions

IRAs offer different early withdrawal penalty exceptions than 403(b) plans, so if you're under 59 1/2, even if you're planning on taking the money out, it might behoove you to roll it to an IRA first. For example, if you take an early distribution for higher education expenses from a 403(b) plan, you'll pay the 10 percent early withdrawal penalty. If you take the money out of a traditional IRA, you won't pay the 10 percent penalty, but you will still owe income taxes. The Internal Revenue Service does not require a waiting period before you can use the IRA early withdrawal exceptions after a rollover from a 403(b) plan. Aside from the five-year period for Roth IRAs in which the early withdrawal penalty applies to the converted amounts, the IRS does not require a waiting period between a rollover and a subsequent withdrawal.

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About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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