8.   Distributions and Rollovers

Distributions

Permissible distributions.   Generally, a distribution cannot be made from a 403(b) account until the employee:
  • Reaches age 59½,

  • Has a severance from employment,

  • Dies,

  • Becomes disabled,

  • In the case of elective deferrals, encounters financial hardship, or

  • Has a qualified reservist distribution.

In most cases, the payments you receive or that are made available to you under your 403(b) account are taxable in full as ordinary income. In general, the same tax rules apply to distributions from 403(b) plans that apply to distributions from other retirement plans. These rules are explained in Publication 575. Publication 575 also discusses the additional tax on early distributions from retirement plans.

Retired public safety officers.   If you are an eligible retired public safety officer, distributions of up to $3,000, made directly from your 403(b) plan to pay accident, health, or long-term care insurance, are not included in your taxable income. The premiums can be for you, your spouse, or your dependents.

  A public safety officer is a law enforcement officer, fire fighter, chaplain, or member of a rescue squad or ambulance crew.

  For additional information, see Publication 575.

Distribution for active reservist.   The 10% penalty for early withdrawals will not apply to a qualified reservist distribution attributable to elective deferrals from a 403(b) plan. A qualified reservist distribution is a distribution that is made:
  • To an individual who is a reservist or national guardsman and who was ordered or called to active duty for a period in excess of 179 days or for an indefinite period; and

  • During the period beginning on the date of the order or call to duty and ending at the close of the active duty period.

Minimum Required Distributions

You must receive all, or at least a certain minimum, of your interest accruing after 1986 in the 403(b) plan by April 1 of the calendar year following the later of the calendar year in which you become age 70½, or the calendar year in which you retire.

Check with your employer, plan administrator, or provider to find out whether this rule also applies to pre-1987 accruals. If not, a minimum amount of these accruals must begin to be distributed by the later of the end of the calendar year in which you reach age 75 or April 1 of the calendar year following retirement. For each year thereafter, the minimum distribution must be made by the last day of the year. If you do not receive the required minimum distribution, you are subject to a nondeductible 50% excise tax on the difference between the required minimum distribution and the amount actually distributed.

No Special 10-Year Tax Option

A distribution from a 403(b) plan does not qualify as a lump-sum distribution. This means you cannot use the special 10-year tax option to calculate the taxable portion of a 403(b) distribution. For more information, see Publication 575.

Transfer of Interest in 403(b) Contract

Contract exchanges.   If you transfer all or part of your interest from a 403(b) contract to another 403(b) contract (held in the same plan), the transfer is tax free, and is referred to as a contract exchange. This was previously known as a 90-24 transfer. A contract exchange is similar to a 90-24 transfer with one major difference. Previously, you were able to accomplish the transfer without your employer’s involvement. After September 24, 2007, all such transfers are accomplished through a contract exchange requiring your employer’s involvement. In addition, the plan must provide for the exchange and the transferred interest must be subject to the same or stricter distribution restrictions. Finally, your accumulated benefit after the exchange must be equal to what it was before the exchange.

  Transfers that do not satisfy this rule are plan distributions and are generally taxable as ordinary income.

Plan-to-plan transfers.   You may also transfer part or all of your interest from a 403(b) plan to another 403(b) plan if you are an employee of (or were formerly employed by) the employer of the plan to which you would like to transfer. Both the initial plan and the receiving plan must provide for transfers. Your accumulated benefit after the transfer must be at least equal to what it was before the transfer. The new plan’s restrictions on distributions must be the same or stricter than those of the original plan.

Tax-free transfers for certain cash distributions.   A tax-free transfer may also apply to a cash distribution of your 403(b) account from an insurance company that is subject to a rehabilitation, conservatorship, insolvency, or similar state proceeding. To receive tax-free treatment, you must do all of the following:
  • Withdraw all the cash to which you are entitled in full settlement of your contract rights or, if less, the maximum permitted by the state.

  • Reinvest the cash distribution in a single policy or contract issued by another insurance company or in a single custodial account subject to the same or stricter distribution restrictions as the original contract not later than 60 days after you receive the cash distribution.

  • Assign all future distribution rights to the new contract or account for investment in that contract or account if you received an amount that is less than what you are entitled to because of state restrictions.

  In addition to the preceding requirements, you must provide the new insurer with a written statement containing all of the following information:
  • The gross amount of cash distributed under the old contract.

  • The amount of cash reinvested in the new contract.

  • Your investment in the old contract on the date you receive your first cash distribution.

  Also, you must attach the following items to your timely filed income tax return in the year you receive the first distribution of cash.
  1. A copy of the statement you gave the new insurer.

  2. A statement that includes:

    1. The words ELECTION UNDER REV. PROC. 92-44,

    2. The name of the company that issued the new contract, and

    3. The new policy number.

Direct trustee-to-trustee transfer.   If you make a direct trustee-to-trustee transfer, from your governmental 403(b) account to a defined benefit governmental plan, it may not be includible in gross income.

  The transfer amount is not includible in gross income if it is made to:
  • Purchase permissive service credits, or

  • Repay contributions and earnings that were previously refunded under a forfeiture of service credit under the plan, or under another plan maintained by a state or local government employer within the same state.

After-tax contributions.   For distributions beginning after December 31, 2006, after-tax contributions can be rolled over between a 403(b) plan and a defined benefit plan, IRA, or a defined contribution plan. If the rollover is to or from a 403(b) plan, it must occur through a direct trustee-to-trustee transfer.

Permissive service credit.   A permissive service credit is credit for a period of service recognized by a defined benefit governmental plan only if you voluntarily contribute to the plan an amount that does not exceed the amount necessary to fund the benefit attributable to the period of service and the amount contributed is in addition to the regular employee contribution, if any, under the plan.

  A permissive service credit may also include service credit for up to 5 years where there is no performance of service, or service credited to provide an increased benefit for service credit which a participant is receiving under the plan.

  Check with your plan administrator as to the type and extent of service that may be purchased by this transfer.

Tax-Free Rollovers

You can generally roll over tax free all or any part of a distribution from a 403(b) plan to a traditional IRA or a non-Roth eligible retirement plan, except for any nonqualifying distributions, described later. You may also roll over any part of a distribution from a 403(b) plan by converting it through a direct rollover, described below, to a Roth IRA. Conversion amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. See Publication 590 for more information about conversion into a Roth IRA.

Note.

A participant is required to roll over distribution amounts received within 60 days in order for the amount to be treated as nontaxable. Distribution amounts that are rolled over within the 60 days are not subject to the 10% early distribution penalty.

Rollovers to and from 403(b) plans.   You can generally roll over tax free all or any part of a distribution from an eligible retirement plan to a 403(b) plan. Beginning January 1, 2008, distributions from tax-qualified retirement plans and tax-sheltered annuities can be converted by making a direct rollover into a Roth IRA subject to the restrictions that currently apply to rollovers from a traditional IRA into a Roth IRA. Converted amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. See Publication 590 for more information on conversion into a Roth IRA.

  If a distribution includes both pre-tax contributions and after-tax contributions, the portion of the distribution that is rolled over is treated as consisting first of pre-tax amounts (contributions and earnings that would be includible in income if no rollover occurred). This means that if you roll over an amount that is at least as much as the pre-tax portion of the distribution, you do not have to include any of the distribution in income.

  For more information on rollovers and eligible retirement plans, see Publication 575.

If you roll over money or other property from a 403(b) plan to an eligible retirement plan, see Publication 575 for information about possible effects on later distributions from the eligible retirement plan.

Hardship exception to rollover rules.   The IRS may waive the 60-day rollover period if the failure to waive such requirement would be against equity or good conscience, including cases of casualty, disaster, or other events beyond the reasonable control of an individual.

  To obtain a hardship exception, you must apply to the IRS for a waiver of the 60-day rollover requirement. You apply for the waiver by following the general instructions used in requesting a letter ruling. These instructions are stated in Revenue Procedure 2013-4, 2013-1 I.R.B. 126 available at www.irs.gov/irb/2013-01_IRB/ar09.html, or see the latest annual update. You must also pay a user fee with the application. The user fee for a rollover that is less than $50,000 is $500. For rollovers that are $50,000 or more, see Revenue Procedure 2013-8, 2013-1 I.R.B. 237 available at www.irs.gov/irb/2013-01_IRB/ar13.html, or see the latest annual update.

  In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including:
  1. Whether errors were made by the financial institution;

  2. Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error;

  3. Whether you used the amount distributed (for example, in the case of payment by check, whether you cashed the check); and

  4. How much time has passed since the date of distribution.

  For additional information on rollovers, see Publication 590.

Eligible retirement plans.   The following are considered eligible retirement plans.
  • Individual retirement arrangements.

  • Roth IRA.

  • 403(b) plans.

  • Government eligible 457 plans.

  • Qualified retirement plans.

 
If the distribution is from a designated Roth account, then the only eligible retirement plan is another designated Roth account or a Roth IRA.

Nonqualifying distributions.   You cannot roll over tax free:
  • Minimum required distributions (generally required to begin at age 70½),

  • Substantially equal payments over your life or life expectancy,

  • Substantially equal payments over the joint lives or life expectancies of your beneficiary and you,

  • Substantially equal payments for a period of 10 years or more,

  • Hardship distributions, or

  • Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or excess annual additions and any allocable gains.

Rollover of nontaxable amounts.    You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another eligible retirement plan, traditional IRA, or Roth IRA. The transfer must be made either through a direct rollover to an eligible plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional IRA or Roth IRA.

  If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution.

Direct rollovers of 403(b) plan distributions.   You have the option of having your 403(b) plan make the rollover directly to a traditional IRA, Roth IRA, or new plan. Before you receive a distribution, your plan will give you information on this. It is generally to your advantage to choose this option because your plan will not withhold tax on the distribution if you choose it.

Distribution received by you.   If you receive a distribution that qualifies to be rolled over, you can roll over all or any part of the distribution. Generally, you will receive only 80% of the distribution because 20% must be withheld. If you roll over only the 80% you receive, you must pay tax on the 20% you did not roll over. You can replace the 20% that was withheld with other money within the 60-day period to make a 100% rollover.

Voluntary deductible contributions.   For tax years 1982 through 1986, employees could make deductible contributions to a 403(b) plan under the individual retirement arrangement (IRA) rules instead of deducting contributions to a traditional IRA.

  If you made voluntary deductible contributions to a 403(b) plan under these traditional IRA rules, the distribution of all or part of the accumulated deductible contributions may be rolled over if it otherwise qualifies as a distribution you can roll over. Accumulated deductible contributions are the deductible contributions:
  • Plus

    1. Income allocable to the contributions,

    2. Gain allocable to the contributions, and

  • Minus

    1. Expenses and losses allocable to the contributions, and

    2. Distributions from the contributions, income, or gain.

Excess employer contributions.   The portion of a distribution from a 403(b) plan transferred to a traditional IRA that was previously included in income as excess employer contributions (discussed earlier) is not an eligible rollover distribution.

  Its transfer does not affect the rollover treatment of the eligible portion of the transferred amounts. However, the ineligible portion is subject to the traditional IRA contribution limits and may create an excess IRA contribution subject to a 6% excise tax (see chapter 1 of Publication 590).

Qualified domestic relations order.   You may be able to roll over tax free all or any part of an eligible rollover distribution from a 403(b) plan that you receive under a qualified domestic relations order (QDRO). If you receive the interest in the 403(b) plan as an employee's spouse or former spouse under a QDRO, all of the rollover rules apply to you as if you were the employee. You can roll over your interest in the plan to a traditional IRA or another 403(b) plan. For more information on the treatment of an interest received under a QDRO, see Publication 575.

Spouses of deceased employees.   If you are the spouse of a deceased employee, you can roll over the qualifying distribution attributable to the employee. You can make the rollover to any eligible retirement plan.

  After you roll money and other property over from a 403(b) plan to an eligible retirement plan, and you take a distribution from that plan, you will not be eligible to receive the capital gain treatment or the special averaging treatment for the distribution.

Second rollover.   If you roll over a qualifying distribution to a traditional IRA, you can, if certain conditions are satisfied, later roll the distribution into another 403(b) plan. For more information, see IRA as a holding account (conduit IRA) for rollovers to other eligible plans in chapter 1 of Publication 590.

Nonspouse beneficiary.   A nonspouse beneficiary may make a direct rollover of a distribution from a 403(b) plan of a deceased participant if the rollover is a direct transfer to an inherited IRA established to receive the distribution. If the rollover is a direct trustee-to-trustee transfer to an IRA established to receive the distribution:
  • The transfer will be treated as an eligible rollover distribution.

  • The IRA will be considered an inherited account.

  • The required minimum distribution rules that apply in instances where the participant dies before the entire interest is distributed will apply to the transferred IRA.

   For more information on IRAs, see Publication 590.

Frozen deposits.   The 60-day period usually allowed for completing a rollover is extended for any time that the amount distributed is a frozen deposit in a financial institution. The 60-day period cannot end earlier than 10 days after the deposit ceases to be a frozen deposit.

  A frozen deposit is any deposit that on any day during the 60-day period cannot be withdrawn because:
  1. The financial institution is bankrupt or insolvent, or

  2. The state where the institution is located has placed limits on withdrawals because one or more banks in the state are (or are about to be) bankrupt or insolvent.

Gift Tax

If, by choosing or not choosing an election, or option, you provide an annuity for your beneficiary at or after your death, you may have made a taxable gift equal to the value of the annuity.

Joint and survivor annuity.   If the gift is an interest in a joint and survivor annuity where only you and your spouse have the right to receive payments, the gift will generally be treated as qualifying for the unlimited marital deduction.

More information.   For information on the gift tax, see Publication 559, Survivors, Executors, and Administrators.


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