The 403b rollover rules are not that complicated or even difficult to remember, but being aware of them helps people avoid costly mistakes. The costs are incurred through paying unnecessary taxes. If everything is done correctly and you are not switching from a standard to a Roth plan, there’s nothing to worry about.
Doing everything correctly starts with the selecting the appropriate transaction. If you have already found a new account custodian, you can contact them and ask them to initiate a transfer. When the fund is transferred from one approved custodian to another, the IRS is not contacted.
If you have yet to find a new custodian, then you can leave the fund where it is, if you choose to. You own the account. Moving from one employer to another does not change that. Typically, when you move from one employer to another, you want to transfer the fund, in order to earn the most interest or dividends possible.
But, you may be taking a sabbatical or considering opening your own business, so you might not have a new custodian. That’s when the 403b rollover rules come into play. Rollovers are always reported to the IRS.
The first step to initiate a rollover is to contact the current account custodian. The custodian’s job is to liquidate the assets, in order to make it possible to write you a check. The amount of time that it takes to liquidate the account varies. If there are a lot of stock holdings, selling them all off can take a week or two.
A good custodian will also tell you about the 60-day rule, but they might think that you are already aware of that rule. Basically, you have 60 days to deposit the check with a new custodial company. If you cannot make that deadline for some reason, you will need to contact the IRS and ask for an extension.
The 403b rollover rules do not cover what you can or cannot do with the money during the 60 days. If you needed some extra money for moving expenses, a short-term investment or other purpose, it’s your money. You can do whatever you want with it. But, any portion that is not re-deposited within 60 days must be added to your income for that year.
The new custodian is required to provide the necessary paperwork for your year-end taxes. In short, the 403b rollover rules require the old custodian to contact the IRS and the new custodian to provide you with the necessary paperwork that allows you to avoid being taxed.
You can transfer the fund from one custodian to another, as many times as you like, although some custodians may charge a penalty for paperwork or early withdrawal. You are only allowed to take one rollover during any 12 month period, without incurring taxes for the applicable tax year.
So, the 403b rollover rules are a little different than those regarding a transfer.
Here’s a final bit of advice, in case you are looking for a new custodian. You might want to consider a self-directed provider. It could increase your earnings.