Annuity Rollover Rules


Tax-exempt organizations can offer their employees tax-sheltered annuities as a retirement plan vehicle. When employment status is terminated for whatever reason, an employee has the option to roll the 403b annuity into an IRA account. However, certain rules do apply.

Automatic Withholding

A rollover can be done in one of two ways: as a direct or indirect rollover. A direct rollover is transferred from custodian to custodian, and the employee never receives the check. An indirect rollover has the employee physically receiving the check. When this happens, the IRS assumes the employee is taking a distribution until the rollover is complete. Because of this IRS assumption, the custodian is required to withhold 20 percent of the check amount. This amount can be recovered when the employee files taxes and shows the completed rollover, but the employee must complete the rollover with money from an outside source to make the rollover 100 percent.

403b Rollover

When rolling money over from a 403b plan, the employee has the option to roll the assets into a new employer's 403b plan if the new administrator permits this. Some 401k plans also permit a 403b plan to roll into them. The IRS approves these transactions, but they must be permitted by each administrator. Many plans allow this as the higher assets under management may lower expenses for the plan. Employees may want to do this to reduce administrative costs of IRAs and allow more access to employer-based plan loans, something IRAs don't allow.

Sixty Day Rule

The IRS gives employees 60 days to complete a rollover. This means that if you request an indirect rollover, where the money goes from the first trustee to you, you have 60 days to deposit the check into a new qualified plan. The 60 days begins the day you receive the check. If you fail to complete the rollover with 100 percent of the money deposited into the account before the time limit, the amount is considered a distribution which will be taxed and penalized. Remember, there is an automatic withholding of 20 percent for taxes, so you must have enough savings to satisfy the difference to complete the rollover.

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