When you leave a job, you need to make sure you take your retirement funds in your 403b account with you. It sounds logical but many people become distracted by the recent changes in the life and forget about the retirement funds they have with their previous employer.

Once you have left an employer, you have several options for rolling over your 403b funds into another type of retirement account (like a traditional IRA or converting to a Roth IRA). A great way to keep the money you have saved to date growing in a tax-deferred account is by rolling over your assets into a traditional IRA (Individual Retirement Agreement).

What is 403b?

When you are talking to someone who has a 403(b), they usually don’t know as that. They will usually refer to it their “tax sheltered annuity”. This is primarily when 403(b)’s were initially adopted, insurance companies were the first ones to get their foot in the door. So most people who had a 403(b), had an annuity that was tax sheltered. Do you see the connection yet? Good. More common now is that you will find other investment companies also available within 403(b) plans.

How To Rollover 403b Funds

If you do a direct rollover of funds into the IRA account, you will avoid the mandatory 20% federal income tax withholdings assessed on retirement funds withdrawal. You can open an IRA account at any financial institution offering this type of account. You will need to complete the 403b rollover by the 60th day following the day distribution is received. The IRS does allow for two exceptions to the 60-day rollover rule. In the cases of financial hardships or unforeseen circumstances, you may be allowed an exemption. Exemptions are not guaranteed and the IRS will require proof of financial hardships, such as hospitalization or other kind of crisis. Unforeseen circumstances typically including when your funds are frozen in an account.

Typically, you only need to complete a signed contribution form which is required by the IRA trustee in order to rollover the funds into the IRA account. You will need to check with the specific financial institution regarding its rollover policies prior to conducting the transaction to avoid delays in processing.

You will also need to consult with the plan administrator of your 403b account to complete the appropriate paperwork. Some will require a distribution request for to be completed before assets can be rolled over. Some administrators will also need a letter of acceptance from the IRA trustee/financial institution. These documents will provide proof that funds are being transferred to a legitimate retirement plan account.

Pros and Cons of Rolling Your 403b into an IRA

photo credit: mag3737

The advantages of rolling over a 403b account into an IRA include greater flexibility for investing. You can then use the funds in the IRA account for other investment options including mutual funds and individual stocks. While there are advantages there may also be some disadvantages. An IRA may cost more money to maintain than the original 403b account because you likely did not have to pay for transaction costs. In the event you ever file for bankruptcy or are on the receiving end of a lawsuit, your funds in an IRA are not protected by the Employee Retirement Income Security Act established to ensure invested monies are designated especially for retirement and can not be used for debt purposes.

Note: Regarding the ERISA ruling and your IRA  at least $1 million in IRA assets would be protected if you filed a bankruptcy claim. With lawsuits, it’s a different story.  Depending on the suit and, most importantly, it depends on the state in which you reside.

403b to Roth IRA Conversions

If you don’t want to roll your 403b into a traditional IRA, you also have the option to convert it to a Roth IRA. You will have to pay the appropriate tax when you do convert so seek counsel from a tax professional before doing so. If you plan on doing it before year-end, be sure to check out my article on Roth IRA Conversion Rules.

photo credit: alancleaver_2000

My firm LPL Financial is changing its policies on 403b accounts. This change is in accordance with the new IRS regulations on 403b plans. Whether a client of LPL Financial or not, your 403b may fall under the same policy. You may want to double check with your employer or 403b provider to see how this affects you.

Statement from LPL Financial:

Effective January 1, 2009 all withdrawals from every PTC custodial 403(b)(7) account will require an employer signature.  This requirement is due to the IRS issuance of the finalized 403(b)(7) regulations meant to increase the amount of employer involvement in 403(b)(7) plans.  Note that this requirement is currently effective for ERISA 403(b)(7) plans.

Qualifying Events For Rolling Over Your 403b

If a qualifying triggering event has occurred, clients may want to consider rolling their non-ERISA 403(b)(7)* account balances into an IRA during 2008 to avoid the need of obtaining an employer signature for future withdrawals.  Qualifying triggering events are defined by the 403(b)(7) plan document or 403(b)(7) custodial agreement.  Common triggering events include:
• Separation from Service
• Death
• Disability
• Attainment of age 59 ½

Before 1987? Consider this:

Clients in 403(b)(7) accounts with pre-1987 contributions may wish to maintain the assets in a 403(b)(7) account and not roll into an IRA.  Pre-1987 balances receive favorable tax treatment on distributions of after-tax contributions.  Pre-1987 balances may also have the Required Minimum Distribution (RMD) deferred to age 75 instead of 70 ½.  Additionally, 403(b)(7) clients who are over age 70 ½ and still working may wish to maintain the assets in a 403(b)(7) account and not roll into an IRA since RMDs may be postponed beyond age 70 ½ if the participant is still working for the employer that sponsors the 403(b)(7) plan.  Lastly, clients who separate from service after age 55 but have not yet attained age 59 ½ may wish to maintain the assets in a 403(b)(7) account since penalty free withdrawals are permitted in this circumstance.  Clients should consult with a qualified tax-advisor if the above situations apply to them.

See Also:

My Journey To Millions: IRS Backs Off 403b Regulations

Are you currently contributing to your 403(b) plan at your employer? Have you recently received a letter from your employer in regards to the changing regulations that are occurring in the New Year for 403(b) providers? Did you receive this letter and are now even more confused in regards to your 403(b) going forward? If this is the case for you, don’t worry, you’re not alone. Due to recent change to 403(b) plans facing new regulations, employers are currently scrambling to review their 403(b) options and have until the end of the 2007 calendar year to make these choices.

403b Changes Are Coming

Currently as it stands, the current provider that you are using to defer portions of your salary into your 403(b) may not be available come the New Year. Here recently I had a teacher that was utilizing AIG Valic for her 403(b) provider for the last 20 years. Currently that insurance carrier has come under scrutiny amongst the recent market bailout, and the client no longer feels comfortable keeping her investments with them. Do you blame her? Trying to find a solution for her to transfer out the money from her current provider to a new one was a daunting one.

Transferring a 403b? Not like It Used to be

 
The way it worked in the past was if you wanted to switch 403b providers, you would just fill out the forms and initiate a 90-24 transfer. It was almost simple as doing a 401k rollover. Unfortunately, today that was not the case. First, I started with the current providers that were approved through the school district (each school district has their own providers that they have allowed into the system). Of those, I only found a few that would even accept transfers. Many of the others were getting out of the 403b business.

Confused yet? I was

This is where it got really confusing. To transfer to the new company, they either had to be on the approved list or have an information sharing agreement signed. What made things even more difficult is that the school district still had not made a decision on what direction they were going for the new year, so they had little help in offering what their employee could do. Upon several phone calls and many conflicting answers, we finally were able to make transfer complete.

5 Steps to Transfer Your 403b

If you are in the current situation with your 403b provider and are looking to transfer out follow these steps:

1. Contact your school district head office and get a list of the current 403b providers.
2. Contact those providers and see if they will accept 90-24 transfers.
3. Double check with the school district that they will be using that provider going forward
4. Fill out paperwork properly (Double check this because one mistake will delay the transfer for weeks)
5. Make a copy of the paperwork for your records.

Good Luck! You will need it.

In a previous post, I had talked about what the basics of a  403(b) Tax Sheltered Annuity. As a recap, a 403(b) is a type of retirement account that’s only offered to a certain type of employees. To these types of employees, it is the equivalent of their 401(k). What makes 403(b)’s unique is that they have a component that’s called the maximum allowable contribution. If you qualify, it may be something you should look into.

Maximum Allowable Contribution

Generally, in a 403(b), you have the same contribution limit as you would in a 401(k). For 2008, you’re allowed to put in $15,500. If you are over the age of 50, you then also are also granted the additional catch up contribution of $5,000 for a total contribution of $20,500. But a unique thing in the 403(b) that is specific only to the 403(b) is that if you have at least 15 years of service with either the public school system, the hospital, a home health service agency, a church or any other type of church association, then the limit on your deferral into your 403(b) can be increased by the least of $3,000 or $15,000 reduced by the sum of:

• The increases to the general limit you were allowed in earlier years because of this rule, plus the aggregate amount of designated Roth contributions for prior tax years.
• Or $5,000 times the number of your years of service for your organization, minus the total elective deferrals made by your employer on your behalf for those years.

15 Year Rule Simply Put

While that is a mouthful, in simpler terms, if you qualify for the 15-year rule, your elected deferrals under this limit can be as high as 18,500 for 2008, plus if you’re over the age of 50, you’re allowed the $5,000 catch up for a total of 23,500.

To determine whether you are eligible, you must first calculate based on certain IRS tables to see if you have the years of service and also determine if you had any prior contributions that would affect how much you can put in. Your tax preparer should aid you in filling out the IRS forms and then should file then in your records for safekeeping.  While some computations are involved, it could be a nifty way of deferring more for a secure retirement.

References: IRS Publication 571

Securities offered through LPL Financial, Member FINRA/SIPC

A 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations, some nonprofit employers (only US Tax Code 501(c)(3) organizations), and self employed ministers in the United States. The tax treatment is very similar to that of a 401k. Most people that I run into that have a 403(b) option are teachers, university employees, pastors, and hospital employees.

photo credit: Leo Reynolds

403b is the Tax Sheltered Annuity

When you are talking to someone who has a 403(b), they usually don’t know as that. They will usually refer to it their “tax sheltered annuity”. This is primarily when 403(b)’s were initially adopted, insurance companies were the first ones to get their foot in the door. So most people who had a 403(b), had an annuity that was tax sheltered. Do you see the connection yet? Good. More common now is that you will find mutual fund companies also available within 403(b) plans. Here soon, the 403(b) market is going to change as the regulators are stepping in to make them function more like 401k’s, but that’s for another day.

So if you have a 403(b), or maybe have access to one, but not using it; this is what you need to know:

What You Need to Know About 403b

Contributions to a 403(b) are taken from your paycheck. You cannot decide one day to wake up and put $5000 into it like you could your Roth IRA. Now I have had clients that will funnel in a majority of their paycheck near the end of the year trying to get in as much as they can. Obviously, you can’t put in more than you make for that pay period.

Three methods that you can contribute to a 403(b) plan:

• Elective Deferrals. Elective deferrals are contributions you make under a salary-reduction agreement. This agreement allows your employer to withhold money from your paycheck to be contributed to your 403b account. Elective deferrals are not taxed until withdrawn from the account.
• Non-Elective Contributions. Non-elective contributions are employer contributions and do not require a salary-reduction agreement. These can include matching contributions, discretionary contributions, and even mandatory contributions to the employee’s account as part of the overall contribution rules or policies established by the plan. As was the case with elective deferrals, non-elective contributions are not taxable until withdrawn.
• After-Tax Contributions. The final way that contributions can be made to a 403b account is via after-tax contributions. If your plan allows this type of contribution, these are salary payments taken from your paycheck on an after-tax basis. You cannot deduct this type of contribution from your federal income taxes, however upon withdrawal the taxed portion of the contribution will not be taxed again (but any appreciation, or growth, of this contribution over time will be taxed).

As far as how much you can put in, the limits are very similar to the 401k. The 403(b) does offer a little thing called MAC (Maximum Allowable Contributions). This includes your regular contributions, catch up contributions if over 50, and if you qualify for the 15 year rule. If you think you qualify for this, you should definitely inquire.

References: IRS Publication 571