403(B) Rollover Rules

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A 403(b) plan provides retirement options for ministers, certain public school employees and tax-exempt organizations. The plan comes in three forms—tax sheltered and tax deferred annuity accounts provided by insurance companies, custodial accounts limited to regulated investment companies, such as mutual funds, and retirement income accounts that allow annuity or mutual fund investment options. 403(b) accounts can roll over into other investment vehicles, but certain government rules apply. An incorrect rollover will result in government tax penalties.

Sixty-day rule

In most cases a 403(b) rollover must take place by the 60th day from the date the plan participant received the distribution. According to Investopedia, “Distributions from a 403(b) account are subject to a mandatory federal withholding of 20 percent if the distribution exceeds $200 for the year and is an eligible rollover distribution.” (See References 1) An eligible rollover occurs when an employee with a 403(b) plan terminates service with an employer and takes the assets to a new employer. Most times this occurs in the form of a direct rollover managed by the plan administrator.

Hardship exception

According to the IRS, “The IRS may waive the 60-day rollover period if the failure to waive such requirement would be against equity or good conscience, including cases of casualty, disaster, or other events beyond the reasonable control of an individual.” (See References 2) In order to receive this hardship, the plan participant must fill out a hardship form available from the IRS and pay an application fee of $90.

Frozen deposit rule

In the event of a bank or financial institution failure or the state where the bank resides has limited account withdrawals, then the 60-day rule may be extended for any length of time the account remains frozen.

From 403(b) to 403(b)

Rolling over from one 403(b) account to another follows a very specific rule. If the distribution contains pre-tax and after-tax contributions, then the rollover money gets treated as pre-tax amounts. In other words, if a plan participant has both pre- and after-tax contributions and only rolls over a portion of the distribution equal to the pre-tax amount, then the participant does not have to declare the remaining distribution as income because of the previously paid taxes.

From 403(b) to 401(k)

403(b) plans can roll over into traditional Individual Retirement Accounts (IRAs), 401(k) plans, Roth IRAs and Simplified Employee Pensions (SEP) IRA accounts. They cannot roll over into a SIMPLE IRA account. The IRS states, “A SIMPLE IRA plan is an IRA-based plan that gives small employers a simplified method to make contributions toward their employees' retirement and their own retirement.”