If a 403(b) is rolled over to an IRA, is there a tax impact?
If a 403(b) is rolled directly into a traditional IRA, there is no immediate tax liability. You will pay ordinary income taxes when you start taking withdrawals at retirement. However, it is important to set up a traditional rollover IRA and direct your district to roll your 403(b) balance directly into that IRA. If the 403(b) balance is given to you instead, you have 60 days to transfer the money into an IRA. Otherwise, it will be considered a distribution to you and taxes will be due, plus a 10% federal tax penalty if you are under age 55 (if separating from employment) or 59 ½. The 10% penalty does not apply to 457 plans. There will also be California state income taxes due and possibly a California tax penalty (again, the penalty does not apply to 457 plans). Even if you do put the money back into an IRA within the 60-day period, you will have to come up with the 20% in federal taxes that your district is required to withhold when distributing the balance to you, so you are better off with a direct rollover.
If you decide to roll over your 403(b) balance into a Roth IRA, you will have to pay taxes on the transfer. However, once you hold the account for at least five years and are at least 59 ½ years old, you will be eligible for tax-free distributions. To learn more, read "Roll Over Your 403(b) or 457 Plan or Leave It with Your Employer?"
Important Note: CTA does not give tax, legal or investment advice. You should meet with your tax, legal, and/or investment advisor to determine the best fit for your situation.