The first thing you should consider is whether or not you can rollover money to or from your 403b.  The general rule to keep in mind when it comes to any IRA rollover is that like can accept like – meaning that you’ll have little trouble rolling money from a old 403b into a new one.  As the funds in a 403b are typically tax-deferred, it’s also relatively little trouble to perform a 403b IRA rollover to any other type of tax-deferred IRA.  In addition, there have been some relatively recent additions to the tax code that allow you to perform a 403b rollover to a Roth IRA.  Always check with your friendly neighborhood financial professional about the specifics of 403b rollovers before initiating your transfer.

Generally speaking, you’ll want to rollover money from your 403b when it’s most advantageous for you and your long term investment goals.  These kinds of changes in a financial strategy usually come about after there’s been some change in your life.  A new job it is the most common reason to perform a 403b rollover, but it could be something as simple as growing older.  In any event, rolling over money is something that should never be taken lightly.

Let’s say you do have a new job and your new employer has a much better retirement account, with stronger management and an investment strategy that’s more in line with your retirement goals.  This is a perfect reason to do a 403b rollover.  On the other hand, let’s say you’ve grown older and your retirement date looms large.  You’re going to want to make changes to your investment strategy in order to minimize risk and ensure that your savings will still be around when you need them.  After all, at this point, the money invested is going to be in the accounts for a smaller time frame than when you first began your career.  You’ll want an investment account that reflects this reality.

Even if you aren’t starting a job or nearing retirement age, there are still several compelling reasons to perform a 403b IRA rollover on any funds you have sitting around from old employers.  Are your accounts earning the best possible rate of return?  If not, consider a privately held IRA, which typically offers many more investment options than employer-sponsored 403b accounts.  Or are you comfortable managing funds that are stored in many different accounts?  If not, a 403b rollover can be a great way to consolidate your retirement savings.

The main thing to consider is that 403b rollovers have to support your overall retirement investment strategy.  It is your money, after all, and it should be handled in the way that best serves both your intentions and your needs.  Keeping this in mind, along with a basic familiarity of the IRS rules regarding 403b rollovers, you’ll be able to play an active role in the management of each of your investments.

When you begin taking withdrawals form your 403b IRA Rollover assets, consider tapping into the taxable rollover accounts first. Here’s why:

• Your tax-sheltered 403b rollover should remain tax sheltered as long as possible to continue reaping the benefits of 403b IRA rollover interest compounding on a tax-deferred basis.
• Money that’s withdrawn from a retirement plan such as your 403b IRA, regular IRA, or IRA rollover is taxed as ordinary income. The rate could be as much as 39.6 percent, depending on your tax bracket rollover.
• Taxable IRA investments are taxed at a long-term capital gains rate of only 20 percent. That can add up to considerable savings, depending on the tax bracket you’re in.

Withdraw from your IRA investments will have only 7 percent buying power compared to today’s dollars. The reality of economics is that you have to continue to grow your money during retirement by keeping some of it invested in equity funds. These funds may have more volatility in the short run, but in the long run stock funds have consistently outpaced inflation.

Retirement Strategy Summary

1. Review your retirement portfolio periodically, taking into account any changes in goals, lifestyle, or personal financial situations. A frequent assessment will help determine if you’re still on track, based on your original projections, or if you need to make modifications.
2. Make sure that your portfolio is adjusted for protection along with continued growth. That means it must be diversified with bond funds, cash instruments, and conservative growth funds.

In case of emergency, keep cash reserves that can be immediately liquidated such as bank savings accounts, money market accounts, or short-term CD’s. Having a separate supply of cash means you won’t have to tap into retirement money thereby threaten the balance of your current asset allocation plan.

If you’re looking to complete a 403b rollover to a different IRA plan, there are several things that you’ll want to consider before initiating the transfer.  This is because the 403b plan is one that’s only available to people who are members of a specific tax exempt status.  This can include some health care providers, ministers, public education organizations, and some employers who have a non-profit status.  Because of this, 403b accounts aren’t technically considered to be qualified plans, and may be handled differently in some cases.  For this reason, you’ll want to discuss the implications of the rollover with your financial advisor before moving.

If you’re thinking about completing a 403b rollover, you’ll need to consider the tax implications of different types of transactions available so that you can make an informed decision.  For example, the monies in the 403b account haven’t yet been taxed.  If you were to have the money rolled into a Roth IRA, you’d need to make sure that the taxes were taken out and applied to the transfer.  Alternatively, if you did a direct 403b IRA rollover into a new traditional IRA account, you wouldn’t have to worry about taxes being withheld, as the money would simply be transferred between banks.

Another option that some people use to complete a 403b rollover is what’s known as an indirect transfer.  This is a transfer in which the money is taken out of the 403b account and given directly to you.  When this happens, a 20% fee will be automatically withheld for tax purposes.  You then have 60 days to deposit the full amount of the check into a new IRA account.  When you do this and provide the documentation to the new account provider, the remaining 20% will then be released into the new IRA account.

If a 403b rollover sounds right for you, be sure to go over all of the available options and make an informed decision on your new IRA account based on your retirement plans and current lifestyle options. The best way to do this is to review all of your different plan choices with your financial advisor before deciding on the 403b rollover plan that will best meet your needs.  Once you do this, arrange for a direct rollover to have the money directly transferred into the new account with a minimum of hassle.

Inadequate Preparation

One common mistake people make when attempting to roll over money from a 403b IRA rollover into a new IRA is that the new IRA isn’t yet in a position to receive the money.  It’s common to think that if an IRA is offered to you as part of a benefits package from a new employer that the new account is ready to receive funds as soon as you begin employment.  This isn’t necessarily the case.

In fact, the specific definition as to when you have an eligible IRA for a 403b rollover can vary greatly by company.  Before you begin to initiate any rollover, it’s good practice to call the manager of the new account and ask specifically if your account is eligible to receive a rollover.  This term of activation can occur in a relatively short time or over a relatively long time, and will depend entirely on the rules of the individual account.

If the new IRA account isn’t yet ready to receive the funds from your 403b IRA rollover and you begin the rollover process, the manager of your existing account will have little choice but to send the funds to you.  This will mean that the money is considered to have been distributed – not rolled over – and is consequently subject to withholding, penalties and taxes.  This can greatly reduce the overall value of the funds transferred and may create a personal tax burden for that fiscal period.

Poorly Defined 403b Rollover

The next most common mistake is to be unclear as to the kind of rollover that you want.  If you request a 403b IRA rollover and don’t specify that you want a direct rollover, many of the same penalties involved in a distribution of funds may occur, largely negating the advantages of a rollover.  In addition, if you want to salvage any of the tax deferred status of your money, you’ll have a limited window of opportunity in which you can deposit the funds into a retirement account.  Choosing an appropriate retirement savings vehicle can be difficult enough without the added pressure of a time limit.

How to Protect Yourself

The best way to avoid many of these concerns is to follow two simple steps.  First, be sure to contact the manager of the new target IRA (not the manager of your old 403b account or your employee benefits manager) before establishing your 403b rollover.  Second, be sure to use the phrase “direct rollover” when talking to the new account manager.  This will bind the managers of both the new and old accounts to the procedure of directly transferring the money between the accounts, protecting you from any federal tax or penalty liability.

The good news is that completing a 403b IRA rollover process is a direct rollover rather straightforward – contact the manager of the account into which the rollover funds will be received (sometimes called the target IRA) and complete the paperwork they give you. The target IRA rollover account manager contacts the manager of your existing IRA, and between the two of them, they complete the 403b IRA rollover. This may take the form of an electronic funds transfer or a check issued to the new account manager; either way, this will be determined between the account managers – you won’t need to be involved in the decision making.

Once the 403b IRA rollover has been completed, you can expect to receive a notice that your funds have been transferred; a copy of this notice is also sent to the IRS.  Please note that 403b rollovers are reportable events, although they aren’t considered to be taxable events.  This means that the IRS will receive a record that the transaction took place, but that you won’t be required to pay taxes on the funds that were moved from one IRA to another.

If completing a direct rollover is rather straightforward, completing an indirect rollover is just the opposite.  First you have to request an indirect rollover from the manager of your existing 403b IRA.  One of the first things to happen when you place an indirect rollover request is that the fund manager will calculate 20 percent of the value of the amount requested and withhold that money to be delivered to the IRS.  You will receive the rest of the amount requested as a check.

As soon as you receive the requested amount, the clock starts ticking.  You have 60 days to put part or all of that money into a new IRA.  Unless you have an extension in writing from the IRS, expect to pay significant taxes and penalties on that money if you still have it on day 61.  When you deposit the money into a new IRA, there will be forms for you to complete, and the usual notices will go out to all involved parties, including the IRS.  The greater the amount of your money you keep from this withdrawal, the greater your tax burden will be.  For this reason, you should seriously consider the consequences before choosing to keep any of these funds rather than depositing them into a new IRA.

As you can see, the process of completing an indirect rollover is much more involved and fraught with the potential for an increased tax burden – not to mention the money you’ll lose to withholding.  While it’s true that all of the money remains yours, having a direct transfer of funds through a 403b rollover maximizes your tax deferment strategy by working with the rules established by the IRS.  Unless there’s a compelling reason against it, be sure to choose a direct rollover for your 403b IRA rollover.

First, has there been a change in your employment status?  One of the most common reasons to consider a 403b IRA rollover is that you have access to a new IRA that’s a better fit for your investments.  Perhaps you have a new job that offers a more advantageous retirement savings plan or one which will match any contributions you rollover into the new account.  Or perhaps you’re eligible to open a private IRA with a brokerage firm that offers a greater number of investment opportunities or a higher rate of return.  You’ll need to carefully assess the performance of both your existing 403b account and the potential target account before initiating a 403b IRA rollover.

Next, you should consider your long term investment goals.  Would it be a good idea to have all your money in one account, or is having parallel investments a better choice for you?   A good way to approach this decision is to think about how close you are to cashing out your accounts.  If that possibility is relatively far away, then having more than one account may be fine for you.  But if you’re within, say five years of retirement, then consolidating the money into your best performing account may be a better choice for you.

Of course, you also need to consider what kind of IRA your potential target IRA is and whether or not it can accept your 403b IRA rollover.  For example, there are a few different types of accounts that cannot accept rollovers from a 403b, including a Simple IRA or a Designated Roth IRA.  If you have one of those, then these considerations become a moot point.  If, on the other hand, your new account can accept the rollover, then you can move on to the final point – the performance of both accounts.

Take some time to compare the performance of both the new IRA and the existing 403b.  How do the rates of return measure up?  Of course, return on investments alone isn’t enough to choose one account over the other, as performance is more complex than that.  You should also consider whether their investment strategies are in line with what you want for your money.  Higher risk investments may be fine if you’re just starting to save for retirement, but you’ll want to take a more modest approach if you’re nearing retirement.  If the new account seems to outshine your existing 403b, it may be time to perform a 403b IRA rollover.

Finally, don’t forget customer service.  This is an important part of what you’re paying for, after all.  Have the managers of your old 403b been hard to contact and slow to fulfill your orders?  If so, a 403b rollover may be a good choice for you.  Ask around about the how the new account has treated its account holders.  Satisfied clients will be more than happy to provide you with references upon request.

In all rollover matters, know that like can accept money from like.  In short, moving money between two 403b IRAs is the easiest course of action, although you’ll have to have two separate accounts in order to complete the transaction.  In addition, traditional IRAs, 457(b) plans and SEP IRAs can receive funds from a 403b rollover without penalty.  Check with the manager of the target IRA to get all the details you need about how to setup these accounts.

If the target IRA is a Roth IRA, know that it can accept a 403b IRA rollover, although you’ll be required to pay taxes on any money you move into the new account.  This is because contributions made to 403b accounts are made with pre-tax money, but funds in Roth accounts come from after-tax contributions.  If you choose to move your money out of a tax-deferred account (like a 403b), rest assured that the government will want to get its piece of the pie.  In addition, be sure that the new account is not a Designated Roth account; these are very different from Roth accounts and the 403b IRA rollover rules reflect that difference.

Another big exception to your 403b IRA rollover options is a Simple IRA, which cannot accept a rollover from a 403b.  But there is a much more common reason that you – and your account – won’t be eligible for a 403b IRA rollover.  This situation is tied to the reason that most people want to perform retirement account rollovers in the first place – your benefits eligibility at a new job.

When you change jobs, part of your benefits package is often a new IRA.  The management of this new account may have a better track record for customer service or a better yield over the last five years than your current 403b IRA account.  In addition, you may also want to consolidate all your investments under one roof to take advantage of easier management.

Any one – or all – of these reasons is enough for you to consider a 403b IRA rollover.  Just don’t make the mistake of assuming that the new IRA is active and ready to go from the start of your employment.  The rules of each company’s retirement plans are different, and your new account may not be fully active when you think it is.  Fortunately, it’s a simple matter to check on this.  A call to the manager of the new IRA will confirm the status of your new IRA and let you know whether or not it’s ready for a 403b IRA rollover.

If you don’t confirm this eligibility, you run the risk of opening yourself up to withholding, penalties, and taxes for the fiscal period in which the mistaken transfer attempt occurs.  A mistake in the rollover can cause the money to be reclassified as a withdrawal, which negates the whole purpose of the retirement account in the first place.  Take care to ensure that your new account is ready for your 403b IRA rollover and you’ll avoid this nasty situation entirely.

Having decided to rollover your money, take a look at the different target IRA options available to you.  You may have access to different types of IRAs through your employer or you may want to open an account as an individual.  Be aware that money from a 403b IRA can be rolled over to a number of different types of IRAs, with a few exceptions.  Those exceptions include Simple IRAs and Designated Roth accounts.  You can move your money into a standard Roth IRA, but you will be required to pay taxes.  For help sorting through the investment and tax options, you may want to sit down with a financial consultant or tax accountant.

In the case of Roth IRAs, you’ll want to be aware of the distinction that, unlike your 403b IRA, Roth IRAs are funded with after-tax dollars – not pre-tax dollars.  If you’re planning to perform a 403b rollover to a Roth IRA, you’re going to have to pay taxes on that money before it’s contributed to your new account.  Depending on your current tax status, how long you have until you retire, or how much money is involved, this might not be a bad thing.  Again, this is where your financial consultant or tax account can help you choose the best course of action for your retirement goals.

Once you know where your 403b IRA money is going, initiating a rollover is simple – contact the trustee or manager of the new account and ask for a direct rollover.  In the world of 403b IRA rollovers, “direct rollover” is a magic phrase.  It indicates to both the new and old IRA account managers that you’re requesting a transaction that will move your money directly from one account to another, without the money ever passing through your hands.

Because the 403b rollover moves funds directly from one account to another, you avoid the withholding, penalties and taxes that are associated with an indirect rollover.  The trustee or manager of your new account will guide you through the process of initiating the direct rollover.  Usually there will be some documents for you to complete and sign.  And because you initiate your request with the trustee or manager of the new account, you can be assured that the new account is ready to receive the funds.  If it isn’t, the trustee or manager will let you know, and tell you what else has to take place before the rollover can be completed.

When all is said and done, the steps involved in initiating a 403b IRA rollover are fairly simple and straightforward.  First, decide where you want your money to go, and then ask the trustee or the manager of your new account to process a 403b IRA direct rollover.  Once your funds have cleared into the new account, you’re free to invest them however you need to in order to achieve your financial goals.

This is the case because 403b plans – which are only extended to a specific group of people – are treated as qualified plans by the IRS, as the money in the account is contributed before taxes (although, legally, these plans aren’t considered to be qualified under the current tax code).  In a Roth IRA account, the contributions have already been taxed.  If you do a 403b rollover into a Roth IRA, you will have to pay taxes on the amount you roll over.  However, the benefit is that when you need to take money out of the Roth IRA, you won’t have to pay taxes on it, as you will with monies withdrawn from a traditional IRA.

This is just one of the considerations that you need to make when you’re setting up your 403b IRA rollover, and it’s something that you should discuss with your financial advisor.  You’ll also need to decide whether you’re going to do a direct or indirect transfer.  The differences are the way that the money is handled and whether or not taxes are applied.  If you do a direct transfer, the bank takes the money directly from the pre-existing 403b plan and rolls it into a new IRA.  You don’t handle the money and no taxes are imposed (unless you’re going to a Roth plan).

On the other hand, if you decide that you want to do an indirect transfer on your 403b IRA rollover, then the money is taken from the plan and issued to you directly.  However, 20% of the total is withheld from this transfer for taxation purposes.  You have sixty days to deposit the full amount of the check that you received from the 403b plan into a qualified IRA before the IRS considers it to be a withdrawal – not a rollover.  If you do complete the 403b rollover within the appropriate window, the remaining 20% is placed into the account.  Since this usually involves a great deal of hassle, most people opt not to do this when they’re doing an IRA rollover.

Any questions or concerns that you may have about your 403b IRA rollover plan should be taken up with your financial advisor before initiating the transfer so that you can be sure to set up the exact kind of account you want.  When you’re ready to proceed, make sure that you have all of the necessary information in hand so that any problems that arise during the transfer can be resolved easily.

The first paperwork you’ll be faced with is the paperwork needed to set up a new IRA that’s eligible to receive the funds from your 403b account. For most people, this means enrolling in a new plan at a new employer or visiting a financial institution to set up your own privately held IRA.  Be aware that you can’t rollover funds from a 403b IRA into a Simple IRA, and that if you’re going to do a rollover into a Roth IRA, there will be some additional paperwork involved.

Once you’ve enrolled in a new IRA, the next paperwork you’ll be faced with is the paperwork needed to request the rollover.  A 403b rollover can involve you receiving the funds from your old 403b account, usually in the form of a check, which you deposit into the new IRA.  On the other hand, a 403b rollover can also involve a transaction that takes place exclusively between the trustee of the 403b account and the trustee of the new IRA.  This is usually called a direct rollover or a trustee to trustee transfer, and it’s the option that makes the most sense from a tax standpoint.

If you’re performing a trustee to trustee 403b rollover, then you’ll probably have forms to fill out with the help of the trustee of the new IRA.  The trustee will usually provide you with forms and help you to complete them; the important thing to remember is to specify that you want the money to move directly between accounts without coming in to your hands.

Or, if you’re performing a 403b rollover that involves you receiving the funds, there may be a few more pieces of paperwork to complete, and you start that ball rolling, so to speak, with the trustee of the 403b account.  If there are assets in the account, such as stock, those will likely have to be sold or liquidated, which may involve more paperwork on your part.

In the case of an indirect 403b rollover, you will probably also be asked to sign documents stating that you understand the implications of what you’re doing, specifically:

•    That the trustee will be required to withhold 20 percent of your money to be forwarded to the IRS,
•    That you have a limited amount of time (currently 60 days) to get the money contributed to your new IRA without additional penalties and taxes, and
•    That if you’re older than 59.5 and fail to reinvest the money in a qualified IRA that you will have to pay penalties and taxes.

The final piece of paperwork involved in a 403b rollover is a Form 1099-R, which you’ll receive when tax time rolls around.  All rollover transactions must be reported to the IRS, whether or not any taxes are due.  Your accountant or tax advisor can assist you with how the information on this Form should be included on your annual tax return.