If you’ve ever wondered how to make your old 403B retirement plan grow tax-free, converting your account to a Roth IRA might make your day. In a Roth IRA, funds grow tax-free for retirement and tax- deferred for other purposes, such as a child’s education or first home purchase. Converting your 403B to a Roth IRA is more compelling now than in the past because the old income limitations have been removed. Now anyone can perform a conversion.
Call your 403B provider and confirm that your employment status is listed as “terminated” on the account. You cannot convert a current 403B to a Roth IRA, so find out if the process can proceed smoothly before filling out rollover paperwork. If you aren’t listed as “terminated,” work with your employer and 403B provider to correct this before embarking on the conversion process.
Compare Roth IRA providers. If you like working alone researching investments and making buy-or-sell decisions, choose an online or discount brokerage house to save some money on trading fees. If you’d prefer professional help, ask friends to recommend advisors and explore full-service brokerage firms that can handle much of the details on your behalf. Before deciding on a broker or advisor, check his record on the Financial Industry Regulatory Authority BrokerCheck website.
Complete rollover paperwork to convert your 403B to a Roth IRA. If you're working with an advisor or broker, his team will usually direct you to the correct forms and "quarterback" the process for you. With online brokerage firms, check the website for 403B rollover forms. Often, this is the same form as the 401(k) rollover agreement. Calling your 403B provider may expedite the process because the firm often has its own paperwork, which you need to complete to release the funds.
Create a separate tax fund. If you convert in 2010, you’ll be allowed to defer the tax, paying in 2010 half the tax on your conversion, and the remainder in 2012. If you convert in any year after 2010, you’ll be required to pay income tax on the entire amount the same year, so keep enough cash on hand outside your retirement plan to pay the bill. These dollars must come from sources outside of the 403B because funds must remain in the account for at least five years to avoid taxes and IRS penalties.
File tax forms to complete the conversion process. You’ll find a 1099-R in your mailbox from your 403B provider in January of the year following your conversion. According to the IRS, write the amount in box 1 of the 1099-R on line 16a of Form 1040, and on line 12a of Form 1040A. From that amount, subtract any after-tax contributions and enter the remaining amount, even if zero, on Form 1040, line 16b, or Form 1040A, line 12b.
As a former financial advisor to companies and individuals for 16 years, Joe Andrews knows financial planning and marketing from start-ups to personal budgets. He also writes on motor racing, board games and travel. Andrews received his B.A. from Michigan State University in English. He is currently working on a young adult novel.