Are Rollovers From 403(c) Accounts to IRA Taxable?

Are Rollovers From 403(c) Accounts to IRA Taxable?
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Public school employees, church employees and employees of certain tax-exempt organizations may have access to a retirement plan called a 403(b) plan. 403(b) plans can generally be rolled over into an IRA. However, if you have a 403(b) plan, you may also have a separate annuity that is governed by 403(c), which contains funds that can be rolled over, but the rollover is taxable.

So, take the time to select various 403(c) plans, and compare parameters that you can use to determine which specific plan might be right for you.

How 403(b) Plans Work

A 403(b) plan, also known as a tax-sheltered annuity plan, is an employer-sponsored retirement plan available to employees of public schools, churches and tax-exempt organizations. The plan is so named because its requirements are outlined in Section 403(b) of the Tax Code.

403(b) plans take your money and invest it in either an annuity or a mutual fund. Any interest earned on these funds will also not be taxed until you withdraw money from the plan.

Section 403c of the Tax Code generally provides that any excess contributions are not subject to the tax-free benefits of the rest of the funds in your plan. That means that if you go above the contribution caps, you have to pay taxes on those contributions as you do on any other income. Therefore, a 403c retirement account may not give you similar tax benefits that the 403b version does.

2021 Elective Deferrals Limit

If you exceed your amount under the 2021 elective deferrals (​$19,500​), you can request a correcting distribution, and your employer will pay you the amount in excess of the cap and take taxes out as usual. If you exceed the annual addition cap (​$58,000​ or the total of your compensation, as set forth above), the excess amount will be included in your taxable income. You may also be subject to an excise tax if your account is invested in a mutual fund and not an annuity.

Deductions for Contributions

One benefit of a 403(b) plan is that contributions are made pre-tax, thus reducing your taxable income and the amount of tax you pay now. You will be taxed on that money later, after you retire or begin taking withdrawals. Another benefit is that if you meet certain criteria, you may be eligible for a tax credit of up to ​$1,000​ (​$2,000​ if you're married and filing jointly).

A 403(b) plan can be funded through three types of contributions:

  1. Elective deferrals.​ Elective deferrals are amounts you choose to have taken from your gross pay under a salary reduction agreement with your employer. Elective deferrals are capped at ​$19,500​ for the 2021 tax year (​$20,500​ for 2022).
  2. Non-elective contributions.​ Non-elective contributions are contributions that are not made under a salary reduction agreement, and they include matching contributions, mandatory contributions and discretionary contributions.
  3. After-tax contributions.​ Some plans allow beneficiaries to make contributions after the taxes come out of their pay. These are not deducted from your tax return or excluded from your income.

Caps on 403(b) Contributions

The cap on all three types of contributions combined is the lower of ​$58,000​ for the 2021 tax year (it will be ​$61,000​ for 2022), or ​100 percent​ of the "includible compensation" for your most recent year of working at that position ("includible compensation" is the amount of taxable wages and benefits you received from your employer).

For example, if your salary and benefits total $100,000, your cap on all contributions is $58,000 for the 2021 tax year. On the other hand, if your salary and benefits total $35,000, then your cap on all contributions is $35,000.

You may end up contributing more than your cap permits, which will leave you with excess contributions. That's where 403(c) comes into play.

Can You Roll an IRA Into a 403(b)?

When you rollover a 403(b) to an IRA, the rollover is tax-free, and the funds you roll over remain untaxed as they were in your 403(b) plan. However, any portion of the rollover comprised of excess contributions may be subject to the ​six percent​ excise tax, and it may also be capped by the IRA contribution limit, which is $6,000​ in 2021, but goes up to ​$7,000​ if you are 50 years and older.

You can also simply withdraw the excess contributions and pay the taxes rather than including the excess contributions in your rollover.

Filing Your Taxes

IRS Form 1040 can be used to report contributions to an IRA. If your employer is contributing to a 403(b) or 403(c), they will report these contributions on your employee W-2 form.