Can I Rollover My 403(b) to an IRA While Still Employed?

A 403(b) plan is a retirement savings account primarily offered to employees of public schools, certain non-profit organizations, and ministers. Contributions and earnings typically grow tax-deferred until withdrawal. An Individual Retirement Account (IRA) is a personal retirement savings vehicle with a broader range of investment options than many employer-sponsored plans. It is often possible to roll over a 403(b) to an IRA while still employed, but specific conditions and plan rules apply.

Eligibility and Conditions for In-Service Rollovers

An in-service rollover moves funds from a 403(b) to an IRA while you are still employed by the sponsoring organization. The ability to do this depends on your 403(b) plan’s specific rules. Review your plan’s Summary Plan Description or contact your plan administrator to understand the provisions.

Many 403(b) plans allow penalty-free in-service withdrawals, which can then be rolled over, once the employee reaches age 59½. Some plans may also permit earlier rollovers for certain contribution types, such as after-tax contributions.

An in-service rollover differs from a hardship withdrawal. Hardship withdrawals are for immediate financial needs and are subject to different rules and potential penalties, including a 10% early withdrawal penalty if you are under age 59½. An in-service rollover is a transfer of funds to another retirement account without triggering immediate taxes or penalties.

Understanding Rollover Types and Tax Implications

The method chosen for rolling over funds from a 403(b) to an IRA impacts tax consequences. A direct rollover, also known as a trustee-to-trustee transfer, moves funds directly from your 403(b) plan administrator to your IRA custodian. This method is not considered a taxable event.

An indirect rollover involves the 403(b) plan distributing funds directly to you. You have 60 days from receipt to deposit them into an eligible IRA to avoid tax consequences and potential penalties. The plan administrator is generally required to withhold 20% of the distribution for federal income tax. To complete a tax-free rollover of the entire amount, you must deposit the full gross amount (including the 20% withheld) into your IRA within the 60-day window, meaning you would need to use other funds to cover the withheld portion. If the rollover is not completed within 60 days, or if you fail to deposit the full amount, the distribution becomes taxable income and may be subject to a 10% early withdrawal penalty if you are under age 59½.

Tax treatment also depends on the type of contributions in your 403(b). Rolling over pre-tax contributions from a traditional 403(b) to a traditional IRA is typically a tax-free transfer. If your 403(b) includes after-tax contributions and you roll them into a Roth IRA, this is a Roth conversion. Any earnings on those after-tax contributions will be taxable income in the year of the conversion.

For tax reporting purposes, you will typically receive IRS Form 1099-R from your 403(b) plan provider, which reports the distribution, even if it was a direct rollover. Subsequently, your IRA custodian will issue Form 5498 to the IRS and to you, reporting the contributions and rollovers into your IRA.

Executing the Rollover Process

Executing the rollover process involves several practical steps. First, contact your current 403(b) plan administrator or human resources department. They will provide information on your plan’s specific in-service rollover procedures and any necessary forms required to initiate the transfer.

Before initiating the transfer, you will need to establish an Individual Retirement Account if you do not already have one. This could be a Traditional IRA or a Roth IRA, depending on your financial goals and the tax characteristics of the funds you are rolling over. Many financial institutions offer various IRA options and can assist with the account opening process.

You will then need to complete the rollover request forms provided by your 403(b) plan administrator and potentially forms from your IRA custodian. When filling out these documents, it is important to clearly indicate that you are requesting a direct rollover to ensure the funds are transferred directly between institutions.

After completing all required paperwork, submit the forms according to the instructions provided by both your 403(b) plan and your IRA custodian. It is advisable to keep copies of all submitted documents for your records. Following submission, monitor the transfer of funds and confirm with your IRA custodian that the funds have been successfully received and allocated to your new account.