How to convert a 403b to a Roth IRA

If you’re retiring or leaving public sector employment, you may want to know what to do with your 403(b) retirement plan. One option to consider is a Roth IRA conversion, which allows you to move your retirement assets from a pre-tax account to a post-tax account.  Before making the Roth conversion, there are certain considerations you should make.

You can convert a 403(b) plan to a Roth IRA by opening a Roth IRA retirement account with a brokerage. Submit the required Roth conversion paperwork to both retirement plans and request a direct transfer. Be sure to consult the 403(b) plan administrator and Roth IRA custodian about their rollover procedure to avoid unnecessary delays.

What is a 403(b) to Roth IRA Conversion?

Performing a 403(b) to Roth IRA conversion means repositioning financial assets you hold in a 403(b) plan into a Roth IRA. This process is known as a rollover, and it allows you to convert a pre-tax 403(b) retirement plan into a post-tax Roth IRA retirement plan.

403(b) plans are provided by non-profit organizations like schools, libraries, and some medical institutions. They are similar to the 401(k) plans offered by private sector businesses but without in-service withdrawals (withdrawals while still employed). Your contributions are tax-exempt, but you will pay taxes on post-retirement withdrawals.

While the Roth IRA is still a retirement savings vehicle, the tax structure is significantly different. You will pay income taxes on contributions, but when you retire, you can take tax-free withdrawals from the plan. To convert a 403(b) to a Roth IRA, you must have left your current job or be at least age 59 ½ or older when you can start taking penalty-free withdrawals from the account. 

How to Convert Your 403(b) to a Roth IRA

If you are eligible to convert your 403(b) to a Roth IRA, you can begin the rollover process.

The first step is to set up a Roth IRA with a brokerage. Then, contact the plan administrators of both 403(b) and Roth IRA and fill out the paperwork required to move your funds. You may need to provide an acceptance letter from the IRA custodian, confirming that the funds are going to a registered retirement plan.

When conducting the rollover, ensure the 403(b) plan administrator completes the transfer as a direct rollover, where the funds are transferred directly to the Roth IRA custodian. If you opt for the indirect rollover option, the 403(b) balance will be sent to you via check minus a 20% withholding tax. You must deposit the funds in a Roth IRA within 60 days to avoid owing income taxes and a potential penalty if you are below 59 ½. 

The Benefits of a 403(b) to Roth IRA Conversion

You may want to convert a 403(b) plan to a Roth IRA for several reasons. Most notably, you will get access to a broader range of investment options and have greater control over your investments.

Lower fees

Roth IRAs can be self-managed through online brokers or so-called ‘robo-advisors’, which attract lower fees than employer-based retirement plans like the 403(b) and 401(k).

More investment options

Additionally, there’s a broader range of investment options (mutual funds, EFTs, and even selected stocks) under the Roth IRA bracket, giving you greater control over your investments. You can contribute to a Roth IRA for as long as you want, including in your 70s, 80s, or later.  

Tax benefits

For some participants, it makes sense to reduce post-retirement taxes using a Roth IRA. Additionally, using a retirement plan with tax-free withdrawals can help reduce the impact of future tax increases on your retirement savings. When calculating the taxes you owe on retirement incomes like Social Security benefits and 401(k) distributions, qualified Roth IRA distributions are excluded.

No Required Minimum Distributions

Since there are no pre-tax assets in a Roth IRA, there’s no required minimum distribution (RMD). With tax-deferred vehicles like the 403(b), you must begin withdrawing a fixed amount starting from age 73.

Tax Consequences of 403(b) to Roth IRA Conversion

A 403(b) to Roth IRA conversion involves switching an untaxed retirement product on which ‘future tax’ is due into another retirement product funded with after-tax money. Hence, there will be a tax consequence for making the switch.

The rollover amount will be included in your gross income in the year you convert the 403(b) to a Roth IRA. The tax due will depend on your total income and your tax bracket rate.

Before making the Roth conversion, you should weigh the pros and cons of moving funds from 403(b) to a Roth IRA. If you expect to be in a higher tax bracket in retirement, a Roth conversion makes sense. Also, if you have a bulk of your retirement savings in a 403(b) plan, you may want to incrementally convert amounts for better tax management.

When does a 403(b) to Roth IRA conversion make sense?

You will be in a higher tax bracket in retirement

If you expect to be in a higher tax bracket in retirement, you can consider converting your 403(b) into a Roth IRA. A Roth IRA allows you to pay income taxes at your current tax rate so that you can take tax-free withdrawals in the future.

You want to leave a legacy

If you want to pass on your assets to your heirs when you die, a Roth conversion is a good option since you won’t leave your heirs with a tax burden. Any withdrawals taken from a Roth IRA won’t be subject to income taxes as long as they meet the requirements for qualified withdrawals. On the other hand, if your heirs inherit pre-tax assets in a 403(b), they will pay income taxes on withdrawals, which could be at a higher tax bracket if they are high-income earners.

You want to avoid RMDs

If you keep your money in a 403(b), you will be forced to take the required minimum withdrawals (RMDs) once you reach age 73, even if you do not need the money. A 403(b) Roth Conversion eliminates this requirement, and you can let the money keep growing past age 72 until when you need it.

When a 403(b) to Roth IRA conversion does not make sense

You want to donate your assets to charity

If you want to donate your assets to charity, a Roth conversion may not make sense since you will be paying an unnecessary tax bill. You can still leave your 403(b) assets to charity without having to pay income taxes. However, you will owe estate taxes on the charitable gifts. So, if you convert a 403(b) to Roth IRA with the plan to donate the assets to charity, you will have paid needless income taxes.

You expect to be in a lower tax bracket in future

If you anticipate to be in a lower tax bracket in retirement, it won’t make sense to convert 403(b) to Roth IRA. Doing so would mean paying a higher income tax rate than you would when you make withdrawals in retirement.