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 In general, you can roll-over all or any part of a distribution from a 403b plan to a traditional IRA or an eligible retirement plan without paying any taxes. The maximum amount eligible for a 403b rollover is the amount that would be taxable. In other words, if you made an after-tax contribution to your 403b, then you cannot rollover that portion into tax-deferred retirement account.
403b Rollover Rules
If you're thinking about a 403b rollover, then you need to be aware of some of the more important rules - especially if a distribution is made directly to you. That is to say, if you need to make a 403b rollover, then you might as well do it the correct way - or at least understand what's supposed to happen when you do the rollover.
Doing a rollover the wrong way can result in an unnecessary tax penalty, that's why it's so important to follow all the rules the IRS has established. And the first rule we're going to discuss has to do with what is called the 60-day rule.
Sixty-Day Rollover Rule
Generally, a 403b rollover needs to be completed by the 60th day following the day you've received any distribution. If you're planning on rolling over the money into another account, then meeting the requirements of this 60-day rule shouldn't be any problem. If you're planning on holding onto the money for some reason past the 60th day, then you might wind up paying a large tax penalty.
The IRS does allow for two exceptions to the 60-day rule. The first has to do with unforeseen circumstances or hardships.
Hardship Exception for 403b Rollovers
The IRS can waive the 60-day rollover rule for 403b plans if you can provide evidence that you've experienced some kind of hardship. The hardship can take a number of forms, but should be beyond the reasonable control of the individual making the rollover such as a hospitalization or some other kind of disaster.
If you're in need of a hardship exemption, you need to apply to the IRS for a waiver of the 60 day rollover requirement. You'll also be required to pay an application fee of $95.
Keep in mind that exemptions are not granted automatically, the IRS uses some of the following factors to determine whether an exception is granted:
- Errors made by financial institutions or banks
- Delays were due to postal errors, hospitalization, or disability
- Whether or not you used the 403b distribution in any way, including cashing the check itself
- The amount of time that has passed since the distribution
The second exception to the 60 day rollover rule has to do with money being frozen in an account.
Frozen Deposit Exception for 403b Rollovers
The 60-day rule for completing a 403b rollover can be extended for any amount of time that the distribution is frozen in a deposit with a bank or financial institution. In addition, the 60 day period cannot end any earlier than ten days after the account is no longer frozen.
To qualify as a frozen deposit, the account must be with:
- A financial institution that is bankrupt or insolvent, or
- The state in which the bank is located has placed limits on withdrawals because one or more financial institutions of that state are bankrupt or insolvent.
Rollovers to 403b Plans
If you've received a distribution from another 403b plan, or any other eligible retirement plan, then that money can be rolled-over into a 403b plan on a tax-free basis. If the distribution contains both pre-tax and after-tax contributions, then the money that is rolled-over is first treated as pre-tax amounts.
This is an important rule to understand. If you have a mix of pre-tax and after-tax money and only rollover a portion of the distribution, then the money involved in the rollover is treated as the pre-tax portion of the account first.
403b Rollover Example
For example, let's say you decide not to roll over the entire distribution but only an amount equal to the pre-tax dollars. This rule means you would not have to declare the remaining distribution as income, since you've already paid income tax on this portion of the distribution.
403b Rollovers to 401k Plans
In general, you can rollover a 403b account into most qualified retirement plans. This includes traditional IRAs, 401k plans, SEP IRA and even a Roth IRA after December 31, 2007 (although you may be required to include some amounts in taxable income). You cannot rollover a 403b plan into a SIMPLE IRA.
Withholding Rules for 403b Rollovers
There are basically two ways that distributions from a 403b can be made - to you (the individual), or to directly into a another qualifying retirement plan. If you decide to receive a distribution directly, then there is a withholding rule you need to be aware of.
Distributions to Individuals
When distributions that are qualified to be rolled over are made directly to an individual, you'll typically receive only 80% of the distribution because 20% of the distribution needs to be withheld. But in order to avoid a tax penalty, you need to rollover the entire amount.
If you decide to have the distribution made to you directly, then in order to rollover 100% of the distribution you will have to make up the 20% that is withheld with other money. If you cannot make up the 20% that is withheld, then you may have to declare the 20% as income and face additional tax penalties.
After you have satisfactorily rolled over 100% your 403b distribution, the remaining 20% will be released to you. But because of the withholding rule, most individuals roll over their 403b by making what are called direct rollovers.
Direct Rollovers of 403b Plans
You also have the option of having your 403b plan administrator make the rollover directly to an IRA or your new 403b plan. This is the most common way to make a rollover because the 20% withholding rule does not apply to direct rollovers. It's also one of the easiest ways to conduct a rollover since you only need to coordinate the exchange of the distribution.
Unless you have a very good reason for taking possession of the money involved in a 403b rollover, you're best choice is to make a direct, plan-to-plan, deposit.
Non-Qualifying 403b Rollover Distributions
We're going to finish up with a quick list of 403b distributions that do not qualify for a rollover on a tax free basis:
- Minimum distributions (which are usually required beginning at age 70 1/2)
- Distributions taken in substantially equal payments over your life expectancy
- Substantially equal payments taken over the life of a joint beneficiary
- Distributions that are taken in substantially equal payments over a period of 10 years or more
- Qualifying hardship distributions
About the Author - 403b Rollover
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