Can You Roll a 403B Into a Roth?
A 403(b) is a specific type of retirement plan only available to employees of nonprofit organizations, hospitals and educational systems. Also known as Tax Sheltered Annuities or TSAs, employees normally contribute to these plans through payroll deductions, which may be matched, in full or in part, by the employer.
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Features
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403(b) plans are funded with pre-tax contributions and investment income grows tax-deferred until funds are withdrawn. When you begin taking distributions from your 403(b) at retirement, you must pay regular income taxes on those distributions. If you take distributions before retirement, you will have to pay an early withdrawal penalty of 10 percent plus the regular income taxes owed on the amount withdrawn.
A Roth IRA is a retirement plan where you contribute after-tax dollars. While investments in the plan also grow tax-free, because you paid taxes on your contributions, you do not pay any taxes on your distributions provided you are at least 59 1/2 and have owned the plan for at least five years.
Taxation
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Because you did not pay any taxes on amounts accumulated in your 403(b), if you roll a 403(b) into a Roth IRA, you need to include the amount being rolled over on your tax return, as if you had received it as income. If any portion of the 403(b) happens to be a return of an after-tax contribution to the plan, that amount does not need to be included as income. The IRS cautions that you may need to increase the amount of taxes withheld in your pay or make estimated payments to avoid incurring a penalty at the end of the year.
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Rollover Methods
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A standard rollover is where you receive the money from your 403(b), or have it deposited directly into your bank account, before putting it into your Roth IRA. You will receive the distribution with 20 percent withheld for taxes. When you deposit the distribution into the Roth IRA, you will need to deposit the full amount, including the portion withheld, within 60 days.
The other alternative is a direct transfer. With this, the distribution from the 403(b) is made directly into your Roth IRA. You do not receive the distribution, and you do not have to worry about making up the 20 percent that is withheld with a regular rollover.
Reporting Rollovers
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Rollovers to a Roth IRA are reported on your Form 1040, 1040A or 1040NR. You will enter the full amount of the distribution from the 403(b) and then subtract any after-tax contributions. While converting a traditional IRA to a Roth IRA requires a reporting on Form 8606, it is not required when you are converting an employer retirement plan to a Roth IRA. If you did a regular rollover and 20 percent was withheld for taxes, that amount will be reported on your 1099 that you receive. This amount should also be entered as a tax withheld on your income tax forms in order to recover that amount.
New Conversion Rules
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Beginning in 2010, the adjusted gross income limit for conversions and rollovers to Roth IRAs of $100,000 is eliminated. Married taxpayers who file separate returns can both rollover amounts to Roth IRAs. For rollovers done in 2010, the rollover amount can either be included entirely in your 2010 income or split equally and added to your income for 2011 and 2012.
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