The Internal Revenue Service (IRS) says you can roll a 403(b) plan into a 401(k) plan if you work for an employer that offers a 401(k). You can also roll a 403(b) plan into a solo or independent 401(k) plan if you are self-employed.

However, if you work for an employer that does not offer a 401(k) plan, then you cannot roll a 403(b) plan into any type of 401(k) plan.

Key Takeaways

  • The Internal Revenue Service (IRS) says you can roll a 403(b) plan into a 401(k) plan if you work for an employer that offers a 401(k).
  • You can also roll a 403(b) plan into a solo or independent 401(k) plan if you are self-employed.
  • However, if you work for an employer that does not offer a 401(k) plan, then you cannot roll a 403(b) plan into any type of 401(k) plan.

Understanding A Conversion from a 403(b) to a 401(k)

The 403(b) plan and 401(k) retirement plans are fairly similar in their design and features. Both are tax-deferred plans that allow your earnings to grow tax-free, but you’re taxed on the distributions or withdrawals in retirement. Both plans require participants to reach age 59½ before withdrawing funds; otherwise, they’ll face an early withdrawal penalty of 10% of the distribution and face income taxes on the distribution total. However, 403(b) plans are reserved for government employees such as teachers, while 401(k)s are reserved for the private sector.

Contribution Limits for 403(b) and 401(k) Plans

Both the 403(b) plan and 401(k) plans have the same contribution limits for 2020 and 2021, which is $19,500 per year, meaning that is the maximum amount you can contribute annually. However, for those aged 50 and older, they can contribute an additional $6,500 per year as a catch-up contribution in 2020 and 2021.

Also, the total contribution limit to the plan for both the employee and employer must be the lesser of $58,000 in 2021 (up from $57,000 in 2020) or 100% of the employee's most recent yearly salary.

However, it's important to note that a rollover from one plan to another is not a contribution but merely a transfer from one type of retirement plan to another.

Eligible Accounts for Rollovers

The funds within your 403(b) plan can be rolled over into a 401(k) plan that is with your current employer. You can also roll or transfer the funds into a SEP plan or 457 plan if your employer offers one of them.

The rollover also works in reverse: If you had a 401(k) at the old job and the new employer offers only a 403(b), you can roll over part or all of those funds, too.

Of course, you can always roll a 403(b) or other qualified plan offered by a previous employer into a traditional individual retirement account (IRA) or Roth IRA. Current rules allow you to then roll that money over into a 401(k) plan if you are hired by an employer that offers this plan in the future, as long as the money from the 403(b) plan has not been commingled with contributory funds that you deposited into the IRA.

Special Considerations

While the IRS regulations allow the rollover of assets between 401(k) plans and 403(b) plans, employers are not required to allow rollovers into the plans they maintain. Whichever transfer you're thinking of, your employer must permit it.

Rollover Details

Rollovers into a traditional or non-Roth retirement plan are generally tax-free. Funds can go into a Roth IRA by direct rollover, subject to income tax but not the early withdrawal penalty.

Required minimum distributions (RMD), hardship distributions, corrective distributions, and any payments spread over the plan participant's life, or for 10 years, are not eligible to be rolled over.

Mixed Contributions

If the 403(b) account has both pre-tax and after-tax contributions in it, a distribution is considered to come from the pre-tax money, contributions, and taxable earnings first. Any non-taxable portion of the distribution, including after-tax contributions, can be rolled into a traditional or Roth IRA or to another eligible plan that accounts separately for taxable and non-taxable contributions.

For example, Bill's 403(b) consists solely of pre-tax contributions and earnings. Bill can request a direct rollover of some or all of the account into a traditional IRA, a 401(k), another 403(b), or a government-eligible 457 plan with no tax consequences. The transaction does have to be reported on his next income tax return. If he rolls it into a Roth IRA, the distribution will be considered taxable income because Roth IRAs don't provide a tax deduction for contributions, meaning they use after-tax dollars. However, Roth IRAs don't have any taxes on withdrawals in retirement, unlike other IRAs that offer pre-tax contributions.

Direct and Indirect Rollovers

Direct rollovers, trustee to trustee, are not subject to withholding. Indirect rollovers, in which a check is sent directly to the plan participant, are subject to 20% withholding. For an indirect rollover to remain completely untaxed, the participant has to make up the withheld amount.

For example, Bill has decided to request an indirect rollover of $10,000 from his 403(b). His plan trustee withholds 20%. Bill gets a check for $8,000. He has to come up with $2,000 from other sources, or his rollover will only be $8,000. The $2,000 will be taxable income to him, subject to an early distribution penalty if Bill is under age 59½.