How to roll over a 403(b) to an IRA
What is a 403(b) Plan and a 403(b) rollover?
A 403(b) is a type of retirement plan that is offered to public school employees, ministers, and employees of non-profit companies. Another name for this type of plan was a tax-sheltered annuity plan or TSA but the restriction to invest only in annuities was lifted in 1974.
A 403(b) Plan rollover is the transfer of funds from a 403(b) Plan in your name to an individual retirement account that you own, To roll over a 403(b) to an IRA you must transfer money from one retirement account to an individual retirement account. For a rollover to happen, a possession of the funds needs to take place.
403(b) plans are similar to 401(k) plans, but they can often offer more limited investment choices. Investors in a 403(b) plan can invest in annuity contracts and mutual funds. Anyone with a 403(b), such as church employees, can contribute to annuities or mutual funds in their 403(b) accounts.
Why roll over a 403(b) to an IRA?
There are several reasons why you might want to roll over a 403(b) to an IRA, including the following:
- If you have left a job and your new employer offers a 401(k) and not a 403(b) retirement plan.
- Rolling multiple plans to a single IRA gives you one statement
- There can be greater investment options with an IRA through a brokerage
- Lower fees or no fees
- Potential tax benefits ongoing
IRAs offer you a much broader selection of investments and can have low or no account fees, depending on where you open your account. A 403(b) rollover to an IRA shouldn’t cause any tax issues, as long as it is done correctly and you will need to report your 403(b) rollover to the IRS.
Statistics on 403(b) and IRA plans
403(b) plans currently have around $1.8 trillion in assets under management. Among health care organizations that have 403(b) plans, only 50% use consultants to help them to design their plans and to make certain that they remain compliant.
According to the National Tax-Deferred Savings Association (NTSA), in 2018 among eligible employees, the participation rate in 403(b) plans is only 27%. The average monthly amount that is contributed by participants is $322, and the average 403(b) account has a balance of $42,885.
Considerations for a 403(b) rollover
When you compare a 403(b) vs a 401(k) or a 403(b) vs. an IRA, you will see that 401(k) plans and IRAs offer greater investment choices. People who work in government or at nonprofits may have 403(b) plans offered at their jobs. However, they will be limited to investing only in annuities and mutual funds.
That said, 401(k) plans generally offer a greater selection of mutual funds. However, 401(k) plans are much more limited than IRA investment options. In an IRA, investors can invest their funds in stocks, exchange-traded funds, CDs, bonds, cash, and other securities.
You should also consider the fees and expenses of any investment, but especially any that you might have to pay when you request a 403(b) rollover and when you open a new IRA account. If you completely roll over a 403(b) to an IRA correctly, you should not have to pay any fees. Many brokerages charge very low fees, and some companies charge no fees to open an IRA account.
Other things to consider are the investment services that are offered. Traditional brokerages may offer more robust services but may charge high fees. Robo-advisors may be available to help you with investment choices after you roll over your 403(b) plan assets to an IRA. Many robo-advisors and online brokerages charge very low fees, and some do not charge anything to manage your account.
Most people want to avoid the potential tax penalties when money is withdrawn. When you complete a direct 403(b) rollover into a new IRA account, you should not have to pay any taxes or penalties at the time of the rollover, but you’re encouraged to speak with your personal tax and legal advisors about your specific tax situation.
If the plan administrator sends a check to you, this is known as an indirect rollover and you must deposit the funds into your new IRA account no later than 60 days from the date the money was taken from your 403(b) plan. If you fail to deposit the amount and are younger than age 59 ½ , the amount that was withdrawn will be taxed at your ordinary-income tax rate, and you will also have to pay a 10% early withdrawal penalty.
403(b) accounts are protected against creditors and judgments. 403(b) accounts, 401(k) accounts, and SEP-, SIMPLE, and traditional IRAs all have required minimum distributions beginning the year after you turn age 70 ½ .
Make certain that you understand the RMD rules. If you fail to take the required amount, you will face a 50% tax penalty on the total that should have been withdrawn. By contrast, Roth IRAs do not have required minimum distributions. Since Roth IRA contributions are made using post-tax dollars, your distributions in retirement from your Roth IRA will also be tax-free.
Benefits and risks of a 403(b) Plan
403(b) plans offer several benefits and carry some risks. The benefits of contributing to your 403(b) plan include the following:
- Some employers offer matching contributions
- May be able to claim a credit for the elective deferrals that you contribute to your 403(b) account
- No income tax on allowed contributions until you start making withdrawals unless the contribution is to a Roth plan
- In emergencies, loans can be taken from the 403(b) balance that must be paid back or will face tax penalties
Some of the risks of a 403(b) plan include the following:
- There is an early withdrawal penalty of 10% for withdrawals made before you reach age 59 ½ unless that withdrawal meets an exception, including leaving the employer when you reach age 55, when you have qualified medical expenses, or when you die or become disabled. Read more information
- Similarly, Withdrawals will face a 20% federal income tax withholding if you do not transfer the total held in a 403(b) plan to another retirement plan or an IRA
- For plans that feature an annuity, If you want to dissolve your annuity investment, you will have to pay a surrender charge of up to 8% of your investment
Contributions to a 403(b)
Employers make the contributions to the 403(b) plan. You might be able to make additional contributions on an after-tax basis under certain plans. Elective deferrals are agreements under which you allow your employer to take money from your paycheck to contribute to your 403(b) plan at some future date on your behalf.
Your maximum amount contributable to an 403(b) plan is referred to as the contribution limit. The 403(b) contribution limits for employees is $19,000 each year for people who are under the age of 40. The total amount that is contributed by an employee and an employer cannot be more than $56,000 each year or more than 100% of the employee’s salary. In 2019, the 403(b) contribution limit is $25,000 per year for employees who are over the age of 50.
Some employers offer matching contributions for a portion of their employee’s contributions. Nonelective contributions include any contributions that your employer makes through matching, mandatory, or discretionary contributions. You can find a 403(b)calculator here.
Distributions from a 403(b)
In order to take penalty-free distributions or withdrawals from your 403(b) plan, the one of the following must be true:
- The account owner has reached age 59 ½
- They leave employment and want to roll the funds over
- They pass away
- They become disabled
- They make elective deferrals
- They undergo qualifying financial hardships
- They have qualified reservist distributions
All other distributions from a 403(b) before reaching age 59 ½ will be subject to a 10% penalty. When you turn 70 ½, you will have RMDs. These require you to receive all or a minimum of the interest that has accrued in your 403(b) plan by April 1 following when you turn age 70 ½ or the calendar year in which you retire.
403(b) vs IRA
Traditional and Roth IRAs offer different tax advantages to people for retirement. You fund a traditional IRA with pre-tax dollars, which allows you to enjoy tax savings on your contributions. When you roll the 403(b) balance into a traditional IRA, your tax-deferral will remain and will allow the money to continue growing without tax until you make withdrawals.
You fund a Roth IRA with post-tax dollars. Since you already paid taxes on the contributions, there is no tax benefit similar to a pre-tax traditional IRA. However, your withdrawals are tax-free when they are done correctly. You have to be 59 ½ years of age, and the Roth IRA account must have been held for at least five years. However, some other exceptions apply. When you are comparing a 403(b) vs. a traditional IRA, you’ll find that it is easier to withdraw funds from an IRA. An IRA may offer protection against bankruptcy proceedings. You can rollover a 403(b) into a traditional or Roth IRA, SEP-IRA, 401(k) or another 403(b). You can also roll over a 403(b) into a SIMPLE IRA as long as you wait for at least two years.
Tax implications of a 403(b) rollover
When you roll over a 403(b) to a traditional IRA and follow the requirements, it will be tax-free. If you roll it over to a Roth IRA, you will have to pay income taxes on the amount that you roll over because the money is being transferred to an after-tax account. This is called a conversion.
Rollover distributions are money that an employer-sponsored plan pays to you. When you are sent a check by a plan administrator, the administrator must withhold 20% for taxes. If you want to defer your taxes, you will have to add money from different sources in an equal amount to what was withheld.
A direct rollover occurs when the distribution is transferred directly to another eligible retirement plan instead of being paid to you. With direct rollovers, the plan administrator will not have to withhold anything.
If you’re younger than 59 ½, any taxable portion that you fail to roll over may have a 10% early withdrawal penalty applied unless it meets an exception.
It is important for you to know the rollover rules. For a direct transfer, your former employer’s plan administrator will send the money directly to your new institution or brokerage that holds your new retirement plan. Usually, there will be paperwork that you will need to fill out with your former employer and with the new institution that will receive your 403(b) funds. You will not have custody of the money, which helps to minimize the possibility of being taxed and facing penalties for the rollover money.
An indirect rollover occurs when your previous employer mails a check to you. You must deposit the money from your rollover 403(b) into your new retirement account within 60 days. If you don’t, you will be treated as having taken a taxable distribution and may have to pay penalties.
The 60-day rollover rule states that you must deposit funds that you receive in a check from your former plan within 60 days of the distribution date. If you do not do this, you will have to pay a 10% early withdrawal penalty. In cases of casualty or disaster, the IRS may waive the penalty.
You are not required to transfer the entire account balance from one account to another. You are not allowed to roll over minimum required distributions, hardship distributions, substantially equal periodic payments, or corrective distributions of excess deferrals or contributions.
Under a qualified domestic relations order or QDRO, you may be able to roll over all or any of a 403(b) account tax-free. If you are a former spouse who has received a QDRO to receive a portion of your former spouse’s 403(b) in a divorce, all of the rollover rules apply to you as if you were the employee. You can rollover your portion of the plan to a different 403(b) or to a traditional IRA.
If you are a surviving spouse of someone who had a 403(b), you can roll it over to an eligible plan of your choosing. Special rules apply in taking a distribution and for capital gains. If you are a non-spouse beneficiary, you must complete a direct rollover to an IRA that you have established to receive your inheritance.
401(k) vs 403(b)
A 401(k) retirement plan is an employer-sponsored savings plan for employees’ retirement that is available in the private sector. Eligible employees may make tax-deferred contributions from their wages either post-tax (Roth) or pre-tax (Traditional), depending on the plan.
Some employers contribute matching amounts or make other contributions to the plan that are not elective. The plan might also include profit-sharing. Some employers agree to match an employee’s contributions up to a certain amount or percentage. The employer’s contributions in these types of plans will only vest if the worker stays at his or her job for a specific period.
401(k) plan earnings are tax-deferred. If you withdraw money from your 401(k), you will have to pay taxes at your regular income tax rate on the amounts that you withdraw.
If your employer does not fund the contributions, a 403(b) plan will not be considered to be sponsored by your employer. These are investment funds that are offered by certain companies that are covered by the Securities and Exchange Act.
Commonly, insurance companies administer 403(b) plans and offer annuities and limited mutual fund options. By comparison, 401(k) plans do not generally offer annuities, but normally offer a number of different mutual funds as investment options. Some employers offer both types of plans, and their employees may choose to contribute to either one or both.
403(b) rollovers with M1 Finance
You can roll over a 401(k) or roll over a 403(b) to an IRA at M1 Finance. Here are the steps that you must follow to do so:
- Open an M1 Finance IRA account to process the rollover; Note: the IRA account type needs to be the same as the current plan (that is, Traditional 401(k) to Traditional 401(k), 403(b) to 403(b), etc.
- Contact the plan administrator at your current plan;
- Let the administrator know that you want to complete a rollover;
- Instruct the plan administrator to make the check payable to Apex Clearing. The check will need to include your name and your new M1 Finance IRA account number in the memo line for it to be processed by M1 Finance;
- The check should be mailed to Apex Clearing c/o BPO, 20 Gateway Center 16th Floor, 283-299 Market St., Newark, NJ 07102-5005;
- If your plan administrator mails the check to you, send the distribution check at the address that is listed above;
- For questions regarding the rollover process, contact M1’s account team.
When you complete a 403(b) to an IRA rollover, you will be able to enjoy more investment options. M1 Finance can help you to complete the rollover correctly so that you can continue to enjoy its tax-deferred benefits.
The benefits of M1 Finance
M1 Finance is trusted by many investors. It allows you to roll over your IRA account to M1; M1 will not charge any fees associated with the roll over. You can also roll over your 403(b) or 401(k) accounts for free when you choose M1 Finance. With M1 Finance, you will not have to fill out piles of paperwork. The investing process at M1 Finance is seamless. We even help people to roll over their old accounts for free and without any hassle.
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