Non-profit employers and public education organizations often offer their employees 403b retirement savings accounts, which allow them to make pre-tax contributions with every paycheck to fund their retirement. 403b accounts are very similar to 401k plans that are offered to employees of larger for-profit and private companies.
If you have a 403b plan and you are leaving your employer, you might want to roll the funds in your account over to another type of retirement plan. In general, you are able to do this without paying any taxes on the amount you roll over. However, it is important to follow the 403b rollover rules established by the Internal Revenue Service.
Complete a 403b Rollover Within 60 Days:
Following the 403b rollover rules are critical, particularly if you are getting your distribution paid directly to you instead of executing an automatic rollover. If you do not perform the rollover correctly, you will have to pay tax penalties that are otherwise unnecessary.
Under most circumstances, you need complete your rollover by the 60th day following the date on which you receive your distribution. As long as you roll over your 403b to another qualified account, meeting this deadline should not be a problem.
There are two exceptions to this 60-day rollover rule that have been defined by the IRS. First, if you have experienced a financial hardship that will prevent you from rolling the funds over within the 60 days, you may qualify for a waiver of the deadline. The hardship must be beyond your reasonable control and could include events like hospitalization or another type of unforeseen disaster. Waivers of the 60-day rollover period are not automatically granted. You will need to apply directly to the IRS for an exemption. The IRS will make its determination based on several factors including:
- Whether or not your bank or financial institution made an error while processing your 403b rollover.
- Whether or not you experienced a delay due to postal errors, disability, or hospitalization.
- Whether or not you used your 403b distribution in any way.
- The amount of time that has passed since you received your distribution.
You can also receive an exemption to the 60-day period if your distribution is frozen by your bank or other financial institution. To get a waiver for this reason, your account must be with a financial institution that is insolvent or bankrupt or your state has placed limits on withdrawals because a financial institution within the state is insolvent or bankrupt.
Your 403b Must Be Rolled Over to Another Qualified Account:
Your 403b rollover must be completed to another qualified account in order for you not to face penalties or taxes.
You can usually roll a 403b over to another 403b account, to a 401k account, to a SEP IRA, to a Roth IRA, and even to a SIMPLE IRA. If you decide to handle the rollover yourself, you will probably only receive 80 percent of the funds in your account. This is because 20 percent has to be withheld to cover penalties if the funds are not rolled over. However, since you will need to rollover 100 percent of your account to avoid penalties, you will need to come up with the 20 percent from other sources. If you are unable to make up the 20 percent that is withheld, you might have to take it as income and pay the extra tax penalties associated with an early withdrawal.
Once you rollover the entire distribution, the 20 percent that was withheld will be released directly to you without penalty. The 20 percent withholding is why most people choose to make direct rollovers, which occurs with the 403b plan administrator executes the 403b rollover on your behalf into another qualifying retirement account. This is the easiest way to rollover your account because you do not have to worry about it getting done in the 60 days or about coming up with 20 percent of your balance.
There are some 403b distributions that do not qualify for a rollover on a tax-free basis. First, you cannot roll over any minimum distributions that you take beginning when you are 70 ½ years old. You also cannot roll over distributions that are taken in equal payments over your life expectancy, distributions that are taken in equal payments over the life of a joint beneficiary, distributions that are taken in equal payments over ten years or more, and qualifying hardship distributions.
As long as you follow these basic 403b rollover rules, you will have no problems getting your retirement funds out of one account and into another. If you are unsure whether or not you are following the IRS guidelines, speak to your account administrator to ensure you do everything by the book so you can continue make financial progress toward your retirement goals.
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