When you work at a non-profit, you might use a 403b plan to save for retirement instead of a 401k plan. However, you may be interested diversifying your investments from the annuities and mutual funds that 403b plans permit. If so, knowing whether you can move the money to a Roth IRA, and the associated tax consequences, can help you decide if a conversion is right for you.
The IRS permits you to convert money directly from a 403b plan to a Roth IRA. You may have money in a 403b plan if you worked for a non-profit organization, such as a public school system, non-profit hospital or other charity. Moving the funds into a Roth IRA lets you save on an after-tax basis, allows you to avoid minimum required distributions and gives you more investing options for the money in the account.
Only When Distributions Permitted
You can only complete a Roth conversion from a 403b plan if you are otherwise eligible to take a distribution from a 403b plan because you are at least 59 1/2 years old, or if you have left the company. If neither of these situations applies to you, you have to wait until you qualify before converting money from a 403b plan to a Roth IRA. You may also take hardship distributions before age 59 1/2, but you cannot convert a hardship distribution into a Roth IRA.
You can convert your money from a 403b plan to a Roth IRA plan with either a rollover or a transfer. A transfer moves the money directly from the 403b plan to the Roth IRA, so that you never touch it or risk forgetting to redeposit it in time. With a rollover, you take a distribution from the account and then, within 60 days, redeposit it into your Roth IRA. You can use the money however you want during those 60 days, but failing to get the money deposited into the Roth IRA results in the IRS considering the money permanently withdrawn.
A 403b plan offers tax-deferred savings, meaning that when you take money it, it counts as taxable income. A Roth IRA works in reverse, with qualified distributions coming out tax-free. Therefore, the amount of your 403b-to-Roth IRA conversion must be included as part of your taxable income in the year of the conversion. The amount of the conversion is taxed at your marginal tax rate, though if your conversion is large enough, you may be bumped into the next tax bracket.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."