Part or all of the funds in a 403(b) plan can be rolled into an eligible retirement plan. Rollovers into a traditional IRA or non-Roth retirement plan are generally tax free. Funds can go into a Roth IRA by direct rollover, subject to income tax, but not the early distribution penalty.
Required minimum distributions (RMD), hardship distributions, corrective distributions and any payments spread over the plan participant’s life, or 10 years, are not eligible to be rolled over.
If the 403(b) account has both pre-tax and after-tax contributions in it, a distribution is considered to come from the pre-tax money, contributions and taxable earnings first. Any nontaxable portion of the distribution, including after-tax contributions, can be rolled into a traditional or Roth IRA or to another eligible plan that accounts separately for taxable and nontaxable contributions.
For example, Bill’s 403(b) consists solely of pre-tax contributions and earnings. Bill can request a direct rollover of some or all of the account into a traditional IRA, a 401(k), another 403(b) or a government-eligible 457 plan with no tax consequences. The transaction does have to be reported on his next income tax return. If he rolls it into a Roth IRA, the distribution will be taxable income to him.
Direct rollovers, trustee to trustee, are not subject to withholding. Indirect rollovers, where a check is distributed to the plan participant, are subject to 20% withholding. For an indirect rollover to remain completely untaxed, the participant has to make up the withheld amount.
For example, Bill has decided to request an indirect rollover of $10,000 from his 403(b). His plan trustee withholds 20%. Bill gets a check for $8,000. He has to come up with $2,000 from other sources, or his rollover will only be $8,000. The $2,000 will be taxable income to him, subject to an early distribution penalty if Bill is under age 59.5.