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JULY 1, 2019

Should I roll over my 403(b) account into an IRA?

Answered by
Bill Hunter
Director, Personal Retirement Strategy and Solutions, Bank of America
When you leave a job where you have an employer-sponsored retirement account like a 401(k) or 403(b) account, you have the option of rolling those retirement assets into an IRA. And there are several reasons to consider moving your funds into an IRA:
"In a rollover IRA, you may have more control over your investments and a wider range of investments to choose from."
— Bill Hunter, Director, Personal Retirement Strategy and Solutions, Bank of America
  • Many people change jobs multiple times over their careers, which can result in a trail of retirement accounts. Consolidating your retirement accounts makes it easier to manage and monitor your progress.
  • When you roll over the assets in your 401(k) or 403(b) account into an IRA (Roth or traditional), your potential tax advantages and growth potential are preserved.
  • Employer-sponsored plans often offer fewer investment options than the number of options made available under an IRA.
In a rollover IRA, you may have more control over your investments and a wider range of investments to choose from.
There's one potential wrinkle, though: If you roll assets from your workplace plan into a traditional IRA, you'll need to begin taking required minimum distributions (RMDs) when you reach the age of 72Footnote 1 even if you're still working. Many employer-sponsored plans, such as your 401(k) or 403(b) account, don't require RMDs, as long as you're working, with some exceptions. You could also choose to roll your assets into a Roth IRA, which doesn't require RMDs, either.
However, you should be aware that not all 403(b) accounts are eligible to be rolled into a Roth IRA and — perhaps more pertinent — that converting pre-tax assets to Roth assets is a taxable event. The pre-tax assets converted to Roth assets will be subject to federal (and possibly state and local) income taxes in the year of conversion, but you can take qualified distributions free from federal income tax with respect to any earnings that accrue after the conversion.Footnote 2 You should consult your legal and/or tax advisor before making any financial decisions.
A Rollover IRA isn't right for everybody. Consider all of your choices in consultation with your legal and/or tax advisors and decide whether rolling over may be the right choice for you and your retirement goals.Footnote 3

Do I have to pay taxes when I roll over my funds?

To avoid mandatory federal income tax withholding on the distribution, be sure to have your former employer send the money directly to the IRA custodian. If you don't, your former employer must withhold 20% for federal income taxes. When the money is sent directly to you, you have 60 days to put the funds into an IRA — including the 20% that was withheld, which must be made up with other assets — or it will count as a distribution and could be subject to federal income taxes and a 10% additional federal tax, if you're under age 59½ and no exception applies.

What if I decided not to roll over my 403(b) or 401(k) account?

Other choices for your employer-sponsored retirement accounts include:
  • Leaving your money in the existing plan
  • Transferring it to your new employer's plan
  • Cashing out (which may trigger taxes and the early withdrawal additional 10% tax, unless an exception applies, as well as eliminating the potential for your investment to grow)
Ready to get started?
Footnote 1 If you were over age 70½ or older as of 12/31/2019, you would be required to take a required minimum distribution ("RMD") for 2019. Effective after 1/1/2020, in accordance with new legislation, the required beginning date for RMDs for individuals who turn age 70½ on or after 1/1/20 is age 72. You may defer your first RMD until April 1st in the year after you turn age 70½ or 72, as applicable, but then you'd be required to take two distributions in that year.

Footnote 2 Additionally, if you complete the Roth conversion before reaching age 59½, a 10% additional federal tax on the converted assets may apply if you take a distribution within five years of the first day of the year in which the conversion occurred, unless an exception applies.

Footnote 3

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
You have choices about what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. Visit our Rollover IRA page or call a Merrill rollover specialist at 888.637.3343 for more information about your choices.
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