403b IRA Rollover

Accomplishing a 403b IRA rollover can be challenging due to numerous IRS regulations governing the distribution and rollover of these retirement funds. One of the most important restrictions on making a 403b rollover to IRA accounts is that the entire process must be accomplished within 60 days. These are calendar days, rather than business days; weekends and holidays do count in the 60 day limit. Failure to complete the 403b rollover to an IRA account during this time can result in significant financial loss due to IRS penalties on the distribution. While waivers can be obtained to allow a longer period of time for the 403b transfer for those who can demonstrate legitimate hardship, these waivers are not automatic and it’s generally best to plan ahead and make advance preparations before beginning a 403b IRA rollover.

Restrictions on 403b transfers

Basically, the tax-deferred portions of a 403b plan must be transferred to similarly tax-deferred IRAs to avoid immediate taxation on the distributed amount. In some cases it may be financially prudent for account holders to take the tax hit and make the transfer from a 403b to Roth IRA accounts; while this means that the entirety of the tax-deferred funds transferred from the 403b are subject to tax, a Roth 403b transfer can provide significant financial advantages when the account holder retires. While 403b plans can be rolled over into most other types of IRAs, they cannot be transferred into a SIMPLE IRA according to IRS regulations.

How 403b IRA rollovers work

Distributions can occur in one of two ways; the distribution can be made to the individual for transfer, or the funds can be directly rolled over into the new IRA without passing through the account holder’s hands. There are advantages to each method, but direct 403b IRA rollovers present a lower risk to investors than the alternative. In some cases, however, the 403b IRA rollover can offer a low-risk method of funding a short-term cash flow shortfall. Because funds that are replaced into a qualifying account within sixty days are not penalized by the IRS, some investors may find it profitable to use these funds to take advantage of a short-term opportunity, assuming they have at least some ready cash at hand. Funds released directly to an individual are subject to 20% withholding, which can present a serious disadvantage to account holders; this sum must be made up by the individual before the funds can be transferred to the new account or a tax penalty will apply. In most cases, a direct 403b IRA rollover is a safer, more convenient choice for the individual investor since it can generally be accomplished more quickly and with minimal risk of negative tax consequences due to the transfer.
Tim Ord
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