Transferring your 403(b) to a Roth IRA recently became much easier. Old rules only allowed persons earning less than a certain income cap to make the move from a tax-deferred 403(b) to a tax-free Roth IRA. Now that the earnings cap is eliminated, all you have to do is follow a few simple rules and choose your Roth IRA. Your funds will be on the tax-free highway to retirement in no time.
Determine how much of your 403(b) you’d like to transfer to a Roth IRA. Some people decide not to transfer their entire account to a Roth IRA because you are going to have to pay the tax due on any pre-tax dollars from a separate account outside of your 403(b). Check your cash accounts to verify that you have ample money to pay additional income taxes and leave some as an emergency fund once the conversion is finished.
Calculate how much tax you’ll owe for your conversion. Subtract any after-tax 403(b) contributions from your current 403(b) total account value. Multiply this dollar value by both your federal tax rate and state tax rates to find how much you’ll owe each entity. Add both of these sums together to determine the amount you’ll need in your tax payment fund.
Open your Roth IRA. If you enjoy working alone making investment decisions and researching Roth opportunities, focus on discount or online brokers to save some commission dollars. If nothing excites you less than calling the shots on your Roth IRA, or you’d prefer to work with a professional, ask friends to refer to you advisers or brokers with a full-service firm. Before deciding to hire anyone, check her record at the Financial Industry Regulatory Authority BrokerCheck website.
Ask your new Roth IRA provider for rollover paperwork to facilitate moving money from your 403(b) to the new firm. This paperwork helps you avoid the IRS penalties for personally holding onto rollover money longer than 60 days. Full-service firms will point out the correct paperwork and direct you on the process. If you’re using a discount broker, refer to its website for 403(b) rollover documents. These will be in the same area as 401k rollover paperwork, and often is the same form.
File the correct tax forms to complete your 403(b) rollover. You’ll receive a 1099-R from your 403(b) company detailing the transfer. If completing your rollover in 2010, download Form 8606 from the IRS.gov website. After completing the top of the form, fill out Part II, Conversions. Enter the total amount of your 403(b) rollover on Form 1040, line 16a or Form 1040A, line 12a. This should be the same amount in box 1 of your 1099-R. Subtract any after-tax 403(b) contributions from this amount 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.