Common 403b IRA Rollover Mistakes

Private IRA rollover plans often give you access to more investment opportunities, allowing you to diversify your savings. However, there are a few things you need to be aware of before setting up your 403b rollover. Let’s look at some of the most common mistakes people make at time of rollover 403b to an IRA:

Inadequate Preparation

One common mistake people make when attempting to roll over money from a 403b IRA rollover into a new IRA is that the new IRA isn’t yet in a position to receive the money.  It’s common to think that if an IRA is offered to you as part of a benefits package from a new employer that the new account is ready to receive funds as soon as you begin employment.  This isn’t necessarily the case.

In fact, the specific definition as to when you have an eligible IRA for a 403b rollover can vary greatly by company.  Before you begin to initiate any rollover, it’s good practice to call the manager of the new account and ask specifically if your account is eligible to receive a rollover.  This term of activation can occur in a relatively short time or over a relatively long time, and will depend entirely on the rules of the individual account.

If the new IRA account isn’t yet ready to receive the funds from your 403b IRA rollover and you begin the rollover process, the manager of your existing account will have little choice but to send the funds to you.  This will mean that the money is considered to have been distributed – not rolled over – and is consequently subject to withholding, penalties and taxes.  This can greatly reduce the overall value of the funds transferred and may create a personal tax burden for that fiscal period.

Poorly Defined 403b Rollover

The next most common mistake is to be unclear as to the kind of rollover that you want.  If you request a 403b IRA rollover and don’t specify that you want a direct rollover, many of the same penalties involved in a distribution of funds may occur, largely negating the advantages of a rollover.  In addition, if you want to salvage any of the tax deferred status of your money, you’ll have a limited window of opportunity in which you can deposit the funds into a retirement account.  Choosing an appropriate retirement savings vehicle can be difficult enough without the added pressure of a time limit.

How to Protect Yourself

The best way to avoid many of these concerns is to follow two simple steps.  First, be sure to contact the manager of the new target IRA (not the manager of your old 403b account or your employee benefits manager) before establishing your 403b rollover.  Second, be sure to use the phrase “direct rollover” when talking to the new account manager.  This will bind the managers of both the new and old accounts to the procedure of directly transferring the money between the accounts, protecting you from any federal tax or penalty liability.


Donna Morgan

Donna Morgan

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