403b Distributions and Transfers

With such an uncertain future for Social Security, individuals look to the safety of supplemental retirement savings such as 403b plans.  But there comes a time when you need to take a distribution, or make a transfer, from your 403b account, and the rules you need to follow can be quite complex.  We're going to help you avoid tax penalties by explaining the allowable 403b distributions you can take, as well as the most efficient way to make a 403b transfer.

403b Distributions

To discourage the early use of money earmarked for retirement, there are some strict rules around taking a 403b distribution.  In general, a distribution cannot be made until you:

• Reach Age 59 1/2
• Become Disabled
• Pass Away
• Are Severed from Employment
• Experience a Financial Hardship (applies to salary reduction contributions)

As is the situation with other retirement plans, if you put this money away on a pre-tax basis, or earnings grew without paying taxes, then you're going to owe income taxes on any early distribution you take from a 403b plan.  If you plan to take an early distribution, then you should also plan to pay any state and federal income taxes due on that distribution.  Early distributions may also be subject to an additional 10% tax penalty.

Minimum Required Distributions from 403b Plans

One of the big benefits of Roth IRAs is that there are no minimum required distributions - that's not the case with 403b plans.  You're going to need help from your plan administrator if you started your plan before 1986.  But in general, there are two minimum required distribution rules that apply to 403b accounts:

• You must take a certain amount, or possibly all, of your interest accruing after 1986 in your 403b account by April 1st of the calendar year in which you become age 70 1/2 or the year you retire, whichever is later.
• A minimum amount of the pre-1987 accruals must be distributed in the calendar year in which you reach age 75, or April 1st of the calendar year following retirement, whichever is later.  In each subsequent year, there is a minimum distribution that must be taken from your 403b account by the last calendar day of the year.

As mentioned, only your plan administrator can tell you the exact rules to follow since these rules depend on how your plan was established.  Just be aware, that if you do not take the required minimum distribution, then you are subject to a non-deductible 50% excise tax on the difference between the required minimum distribution and the amount actually distributed.  That can be a very expensive penalty to pay.

403b Transfers

It is possible to transfer either all, or part, of your interest from one 403b account to another on at tax-free basis.  This is sometimes referred to as a transfer of interest contract, or a 90-24 transfer.  You can get this tax-free treatment if the transferred interest is subject to the same, or stricter, distribution rules.

This transfer rule applies to current employees, former employees, and the beneficiaries of former employees.  If a transfer does not satisfy the rule mentioned above, then the distribution will likely be viewed as ordinary income and therefore it is taxable.

Cash Transfers

If an insurance company is in rehabilitation or insolvency, then you can make a cash transfer to your 403b account and receive tax-free treatment.  To make this cash transfer without incurring a penalty, you must take the following steps:

1. Withdraw all cash to which you're entitled, or the maximum permitted by the state if that is less than the full amount.
2. Reinvest this cash distribution into a single policy issued by another insurance company, or a custodial account that is subject to the same or stricter distribution rules.  This reinvestment must take place no more than 60 days after receiving the cash distribution.
3. Assign all future distribution rights to the new account if you did not receive the full amount due to the state restrictions mention in step 2.

Transfer Information to Insurer

When you make this type of cash transfer, you will need to provide the new insurer with a written statement that contains the following information:

• Amount of cash reinvested in the new contract.
• The amount you had invested in the old contract on the date you received your first distribution.

Transfer Information on Income Taxes

In addition to the information sent to your insurer, your income tax return for the year you first received a cash distribution must have attached to it:

• A copy of the statement you provided to your new insurer.
• A statement that includes the words:
  • ELECTION UNDER REV. PROC. 92-44
  • The name of the company issuing the new contract, as well as your new policy number.

Trustee to Trustee Transfers

Finally, you can make a direct trustee-to-trustee transfer of your 403b account to another defined governmental benefit plan, and it does not have to be included in your gross income.  Two scenarios that apply to this non-includable transfer include:

• To purchase permissive service credits.
• To repay contributions or earnings that was previously refunded under a forfeiture of service credit under your plan, or another plan maintained by a government employer within the same state.

Once again, these trustee transfers can be complex, so you should always check with your plan administrator as to the type, and the extent, of service that may be purchased by this type of transfer.  Getting your plan administrator involved will help you complete transactions in a timely manner, and avoid unnecessary tax penalties.

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