Can You Rollover a 401k to a 403b?

It is possible to roll over funds from a 401(k) retirement plan into a 403(b) plan. This financial maneuver is often considered by individuals changing jobs, especially when moving from a private sector employer to one in the public sector or a non-profit organization. Consolidating retirement accounts can simplify financial management and potentially offer access to different investment opportunities or lower administrative fees within the new plan. This type of rollover ensures the continued tax-deferred growth of retirement savings.

Preparing for a 401k to 403b Rollover

Before initiating a 401(k) to 403(b) rollover, certain conditions must be met. A rollover is permissible if an individual has separated from service with the employer sponsoring the 401(k) plan. Some 401(k) plans may also allow in-service distributions. It is also crucial that the receiving 403(b) plan is structured to accept incoming rollovers from other qualified retirement accounts.

There are two primary methods for executing a rollover: a direct rollover and an indirect rollover. A direct rollover involves the funds being transferred directly from the old 401(k) plan administrator to the new 403(b) plan administrator. This means the money never passes through the individual’s hands, which simplifies the process and avoids immediate tax implications. In contrast, an indirect rollover means the funds are first distributed to the individual, typically by check. The individual is then responsible for depositing the money into the new 403(b) account within a strict 60-day window.

Individuals should gather essential documentation and information. This includes recent statements from the current 401(k) account to confirm the balance and account details. Contact information for the 401(k) plan administrator is necessary to initiate the distribution. Similarly, the account number for the new 403(b) plan and the contact details for its administrator are required, as they will be receiving the funds.

Forms for the rollover can be obtained directly from both the 401(k) and 403(b) plan administrators. A rollover request form from the 401(k) provider will authorize the release of funds, while an incoming rollover form for the 403(b) provider will facilitate the acceptance of the transfer.

Executing the Rollover Process

The next step involves initiating the transfer by contacting the 401(k) plan administrator to formally request the distribution or rollover of funds. Both the completed 401(k) distribution forms and the 403(b) incoming rollover forms will need to be submitted to the respective providers.

Submission of these forms can occur through various methods, depending on the plan administrators. Many providers offer online portals where completed forms can be uploaded. Alternatively, physical forms may need to be mailed to the relevant departments.

Once the forms are submitted, tracking the rollover’s progress is advisable. Both the distributing 401(k) provider and the receiving 403(b) provider should offer confirmation of the request and may provide estimated processing timelines. Direct rollovers typically take between 3 to 7 business days to complete, as funds move directly between institutions. Indirect rollovers, where a check is issued to the individual, can take longer due to mailing times and the individual’s need to redeposit the funds.

Should the transfer take longer than expected, or if any discrepancies arise, promptly follow up with both plan administrators. Confirming the successful completion of the rollover with both providers ensures the funds have been correctly transferred and allocated within the new 403(b) account.

Understanding Tax Implications

A direct rollover from a 401(k) to a 403(b) is generally not considered a taxable event. Since the funds are transferred directly between the plan administrators, the money never enters the individual’s personal possession. This direct movement ensures that no income tax is immediately due on the transferred amount, and no early withdrawal penalties are incurred, assuming the rollover is between pre-tax accounts.

For indirect rollovers, the tax rules are more complex. If an individual receives the funds directly, they have 60 days from the date of receipt to deposit the full amount into a new qualified retirement account to avoid taxes and penalties. If the rollover is not completed within this 60-day period, the distributed amount becomes taxable income. If the individual is under age 59½, the taxable portion may also be subject to a 10% early withdrawal penalty, unless an exception applies.

A significant aspect of indirect rollovers from employer-sponsored plans like 401(k)s is the mandatory 20% federal income tax withholding. If an individual chooses an indirect rollover, the 401(k) plan administrator will withhold 20% of the distribution and send it to the IRS. To roll over the full original amount and avoid it being treated as a taxable distribution, the individual must deposit the entire original amount, including the 20% that was withheld, from other personal funds. The withheld 20% can then be recovered as a tax credit when filing federal income taxes for that year.

The Internal Revenue Service (IRS) requires reporting of these transactions. The distributing plan will issue IRS Form 1099-R to report the distribution. This form will indicate the gross distribution and, for direct rollovers, typically show a taxable amount of zero and a distribution code “G” in Box 7. For indirect rollovers, it will show the gross distribution and potentially the amount withheld. The receiving plan, in turn, will issue IRS Form 5498 to report the incoming rollover contribution.