How to Transfer a Tax Sheltered Annuity 403(b) to a Traditional IRA
Since your 403(b) is a tax sheltered annuity, rolling it into another tax sheltered plan -- a traditional Individual Retirement Account -- is fairly simple. It can also make good sense since IRAs can allow for a wide array of investment options usually not available with 403(b)s. Done properly, the transfer is not considered a taxable event. Done improperly, you will not only pay taxes on the transfer, but you may also be penalized an additional 10 percent if you haven't reached age 59 1/2.
Set up your traditional IRA before beginning any transfer procedures from your 403(b). Many different financial institutions provide the service. Look into the investment options available and the fees charged when making your choice. The institution will send you paperwork to complete. Make copies before returning it.Step 2
Contact your 403(b) plan administrator to learn the technicalities for transferring funds. You have two options: transfer funds directly from one trustee to another, or do an indirect rollover in which you receive a check. Most plans will do both, but a direct transfer is easier and less risky.Step 3
Complete any forms required by your 403(b) plan administrator. If you choose a direct transfer, follow up with your new IRA plan custodian in a few weeks to make sure the transfer took place. If you chose an indirect transfer, make sure to deposit the funds in your new traditional IRA within 60 days of receipt. Include holidays and weekends.Step 4
Report the transfer on your federal income tax for that year. Even though you will not be taxed on the transfer, you still have to report it. Your 403(b) administrator will send you a 1099-R with the amount of the distribution. In addition, if it was an indirect rollover, 20 percent of the transfer amount will have been withheld, and this will also be reported on your 1099-R.Step 5
Include the amount on your 1040 or 1040A. Since this is considered a plan distribution, you cannot file 1040EZ. List the total transfer amount on line 16a or 12a of form 1040 or 1040A, respectively. Notate it as a "rollover" to avoid confusion. On lines 16b or 12b, enter "0" for the taxable amount.Step 6
Add any amounts withheld for an indirect rollover to your other withholding. You will receive a refund if, overall, you paid more in taxes than you owe.
- A direct transfer will usually save you time and eliminate the risk of penalty. However, if you have a reason to use the money that will allow you to get it back within 60 days, you might want to do an indirect rollover.
- With an indirect rollover, you need to deposit the full amount withdrawn to avoid taxes and penalties. If your 403(b) administrator withheld 20 percent for taxes, that means you will have to make up that amount out of pocket. This can be a substantial amount if your 403(b) was large.
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).