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Rolling a 403(b) into an IRA   by Vincent D. Tate
Leaving your job? If you're a typical American, chances are you'll have to roll over a retirement account at least once in your lifetime. Last year some 5.5 million Americans — with more than $220 billion in retirement plan assets — retired or changed jobs.
 
  Wondering what to do with your 403(b) when you leave your old job to take a new one may leave you babbling unintelligibly to yourself. Hopefully, this article will help. We'll explore some alternatives for managing your retirement assets upon leaving your employer, and provide some guidance on what may be one of the most important financial decisions you'll ever make concerning your retirement assets.
 
Maintaining Tax Deferral
If you'd like to continue to defer taxes on your plan investments when you leave your job — the most beneficial choice for many investors — you have three options:
 
1. Roll over the money directly to an Individual Retirement Account (IRA)
One excellent way to keep your retirement plan assets growing tax-deferred when you change jobs is through a direct rollover of the assets to a traditional Individual Retirement Account (IRA). A direct IRA rollover allows you to avoid the mandatory 20% federal income tax withholding on withdrawals from tax-deferred retirement plans. You'll also be able to direct your assets to the financial institution of your choice. This will give you many more investment options because not only will you be able to invest in the mutual funds of your choice, but within an IRA you are permitted to invest in individual stocks. Remember, if you take cash from a qualified retirement plan account, you must roll over cash into an IRA, rather than some other asset of equal value.
 
There are certain advantages to rolling over your 403(b) into an IRA. Greater investment flexibility is chief among them. But there also may be a couple of distinct disadvantages. Administratively, it may cost you more to maintain an IRA. That's because in a 403(b) you often don't have to pay transaction costs. Also, money in an IRA is more vulnerable to claims made by creditors if you file for bankruptcy or are sued. That's because IRAs, unlike some 403(b)'s or other employer-sponsored pension plans, are not protected by the Employee Retirement Income Security Act (ERISA) which insures that money currently invested in a plan for the explicit purpose of your retirement is protected from people to whom you are indebted.
 
Here's something else to think about. To maintain your future flexibility, if you wish to eventually put the assets from your retirement into a new 403(b) plan, it's best to roll over assets to a new IRA, called a "Conduit IRA," to avoid "commingling." If the assets from your retirement plan are mingled with other assets in an existing IRA, you will be unable to roll over those assets into another employer-sponsored plan, should you wish to do so. With a Conduit IRA you have a temporary parking space for your money between 403(b) plans.
 
2. Roll over the money into your new employer's 403(b) plan
Fortunately for many employees, the trend in 403(b) plans is toward more options. So if you are moving to a new job with a better 403(b) plan, one that offers greater variety and sounder investment choices, you might be better off rolling your money directly into that plan. Remember to do a "direct rollover" which is described below. Also, check if your new 403(b) plan offers a brokerage window. This allows you to invest your money outside the plan itself which levels the playing field with concern to IRA investment options. Don't forget to check out the fees and costs associated with that. You may have to pay a yearly account fee in addition to any commission costs and loads.

Note: as of 2002 a 403(b) can be rolled into a 401(k) and vice versa. Not all plans allow such transfers, so check with your employer and plan provider.
 
3. Leave the money in your previous employer's plan
Your other choice, of course, is to leave your money where it is if you're satisfied with the plan and its selections. Keep in mind that a plan may require you to move balances under $5,000.
 
The Rollover to an IRA
For the remainder of our discussion let's assume that you want to roll over your 403(b) assets into an IRA. So, you ask, "Is it easy to do a rollover?" Does Bill Gates have a little money? Does a bear sh... You get the picture. Doing a rollover is a cinch as long as you use a little common sense.
 
Once you decide to roll your 403(b) money over, you must then decide whether the rollover will be a direct rollover (also known as a trustee-to-trustee transfer) or an indirect rollover.
 
Direct Rollover
A direct rollover is the direct sponsor-to-sponsor (or trustee to trustee) transfer of a qualified distribution from your employer's qualified retirement plan to your IRA or new employer's retirement plan (if you're simply changing jobs). You do not touch the money! You let the two employers or the two financial institutions transfer the money for you. Let's say you want to transfer your 403(b) funds from one financial institution to an IRA with a different financial institution. Simply call up the new institution and let them contact your old institution to handle the transfer.
 
According to the IRS, a direct rollover may be accomplished by any reasonable means of direct payment, including a wire transfer or the mailing of a check to the eligible retirement plan. If the payment is made by wire transfer, the wire transfer must be directed only to the trustee of the eligible retirement plan. If payment is made by check, the distribution check from the retirement plan at your old company must be made out in the name of the trustee or custodian of the IRA account that you want to receive the rolled-over funds. Ask the bank or brokerage house that will function as the IRA trustee or custodian for specific written instructions on how the check should be made out. It will be something like, Pay to the order of Major Financial Corporation, for the benefit of Joe B. Wise. If the plan is not an IRA, the payee line of the check need not identify the trustee by name and may read Trustee of the 403(b) plan for benefit of Joe.B. Wise. Your institution of choice will provide guidance on this.
 
When you make a direct rollover, no money is withheld for taxes and you do not have to remember to write a check to reinvest it. (Remember, only a traditional IRA can be used for rollover contributions from employer plans. A Roth IRA is not eligible to receive rollover contributions from employer plans. You can, however, roll over to a traditional IRA, then roll over the traditional IRA to a Roth IRA).
 
Something else to remember. If you don't request a direct rollover, the company is required by law to withhold 20% of the amount distributed for federal taxes. You must roll over the remaining 80% within 60 days or else it becomes subject to tax and may be subject to a 10% early distribution penalty. In addition, you must replace from your own money the 20% withheld by the company and roll it over to an IRA within the same 60 days. If you don't roll it over within this time, it is also subject to tax and may be subject to a 10% early distribution penalty as well. For example, if you have $300,000 to roll over, the amount you receive will only be $240,000 ($300,000 less the 20% withholding of $60,000, which will be sent to the IRS). Thus, you will only have $240,000 to rollover. If you don't happen to have $60,000 lying around and you don't come up with it and put it into the IRA, then that $60,000 will be considered a taxable distribution, even though part of it may be refunded to you when you file your tax return. And, if you received your distribution before you are 59 1/2, it probably will be subject to a 10% early distribution penalty as well. So, to avoid tax hassles and lost investment returns on the withheld amount, always have the institutions transfer your money. Don't ever take possession of retirement money that's intended for a rollover or transfer.
 
The Indirect Rollover to an IRA
If you do request your employer or investment company to issue a check directly to you from your retirement account, and you plan to roll it over to another plan or IRA, it's considered an "indirect rollover." Your investment company will be only too happy to send you a check for the full vested balance of your account. In this situation, you have 60 days to roll over the assets if you want to preserve the tax status of the account. When you get the check, simply deposit it in the rollover IRA within 60 days. To meet the 60-day rule, start counting on the day after you receive the check and include the day you deposit the money into your IRA. For example, if you get the check on Sept. 1, you must get the money into your IRA on or before Oct. 31. There's no extension for weekends or holidays. And, as mentioned earlier, your employer or investment company is required by law to withhold 20% of the amount paid to you as prepayment of federal income tax (you may recoup the 20% withholding when you file a credit on your income taxes for that year). If you want to roll over the entire amount of your distribution, you can make up the difference using money from your other savings.
 
Note: Because a direct rollover is more convenient and there is no danger of missing the IRA deadline, most investors prefer this option. Personally, I prefer to see the trustees handle everything. One trustee makes out the check to the other, and it is sent directly. You don't see the check and there's no need to worry about timing.
 
Advantages of Rolling Over to an IRA
  No Immediate Taxes or Penalties. You owe no taxes or penalties when you roll over your assets to an IRA.
  Wide Range of Investment Choices. You the flexibility to invest your IRA in almost every type of mutual fund or individual security.
  Convenience and Control. Your assets are in an account that you control, allowing you access to your money if you need it (taxes and penalties may apply, however). When you retire, you can select from a variety of flexible payment options.
  Continued Contributions. With an IRA, you can continue to make either deductible or nondeductible contributions, unless you want to avoid commingling.
  Roth IRA Conversion Option. If you are eligible, you can convert to a Roth IRA after completing a rollover to a traditional IRA.
 
  IRA as a Short-Term Borrowing Source
Every so often you may face a temporary cash crunch when you desperately need some extra dough, but just for a short period of time. You will have the necessary cash in a month or so, but that doesn't help right now. A potential solution is "borrowing" from your IRA account, which can be done with no interest charge, virtually zero paperwork, and no delays from stuffy loan officers. I know what you're thinking, "I thought you couldn't borrow against your IRA account balance." Well, technically, you can't. But, there is a little strategy that will free up some money for a short period of time. You simply withdraw the needed funds and make sure you then replace the money within 60 days. You are considered to have made a tax-free IRA rollover. The money can be deposited back into the same IRA account it came from or into a different account, but each account can receive only one of these rollover deposits during any 365-day period. Direct or trustee-to-trustee rollovers from another IRA into the account in question don't count for purposes of the one-year waiting period rule, nor do rollovers of distributions from qualified retirement plans. Remember: If these guidelines are violated, you are considered to have made a taxable IRA withdrawal, and you may owe the 10% premature withdrawal penalty. So, be careful.
 
Well, there you have it. The skinny on a fat way to keep your retirement assets working for you when you change jobs.
 
Note: Always consult a financial professional when you find yourself in doubt. In the long run, you'll come out ahead of the game.
 
Vincent D. Tate holds advanced degrees in marketing and finance. He is a former marketing and finance instructor, and is the author of The Complete Teacher's Guide to Retirement Wealth.
 

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