I am an avid reader of your column and find your advice to be sound. I am a 51-year-old retired Police Sergeant. I have a 403(b) deferred compensation plan and my only investment choices are limited to mutual funds. I like picking stocks and investing in stocks with stable dividends. Can I rollover my 403(b) fund to a traditional or Roth IRA without incurring any penalties or having it count towards my income? Thank you!
Hi Sgt. P.,
First, thanks for your service to your community. We have a great respect for our friends, family, and neighbors that choose to make their living by using their skills and talents to help make our communities a better place.
The quick answer to your question is, it depends on which type of account you roll the money into. A 403(b) to IRA rollover is a very simple process, especially if the money goes directly from one institution to the other. The account is still “qualified” and you never took what’s known as “constructive receipt” of the money, so it’s not a taxable event, nor are there any penalties to be levied. Once the money is inside the IRA, it continues to grow tax-deferred until you begin taking distributions. As long as those distributions occur after you reach the age of 59 ½, you will pay income tax on the entire distribution amount. If you happen to dip into the IRA before age 59 ½, you will be subject to an additional 10% early withdrawal penalty on top of the income tax due.
If you choose to move your 403(b) into a Roth IRA, the situation changes a bit. You’re moving money that has never been taxed (403(b) into an account that is for money that has been taxed (Roth). As you can probably guess, Uncle Sam is going to want what’s due to him, so you’ll pay income tax on the amount that’s moved into the Roth IRA. Once the income tax has been paid and the money is safely inside the Roth IRA, you won’t have to worry about paying taxes on it again.
What else should you be aware of while you’re evaluating your options? First, if you think the tax rate you will pay in the future will be higher than what you’re paying now, a 403(b) to Roth conversion might still be a prudent move for you. None of us really know what’s going to happen with future tax rates, so you’ll need to make your best guess on this one. If you think your Social Security benefit and pension benefit (I’m assuming you have one) will cover your month to month expenses in retirement, and don’t like the idea of the government forcing you to take Required Minimum Distributions from a traditional IRA after age 70 ½ because you don’t need the money, then a Roth conversion might make sense for you. Alternatively, if you have a substantial balance in your 403(b), converting to a Roth may push you into a tax bracket considerably higher than you’re normally in forcing you to pay more in taxes now.
If you haven’t already consulted with a CPA or Certified Financial Planner®, I encourage you to do so. With some additional information that you can provide them, they’ll be able to give you specific guidance to help you decide what type of account you should roll the money into. These professionals will take into consideration your desired retirement age, income streams, expected Social Security benefits, any other investments, and projected expenses in retirement in order to determine the right course of action. Once everything is evaluated, you’ll learn the pros and cons of each option and be prepared to make a well-considered decision.
Good luck in retirement, Sgt., and thanks again for your service to your community!
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.