FAQ – Individual Retirement Accounts

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I have a 403(b) and I am substitute teaching. If I withdraw some funds from my 403(b) I want to avoid the tax bite by buying an IRA. Can I purchase the IRA in my name? I was told that I would have to put it in my spouse’s name as he, too, is retired but not working. Also I have employment income where I am paying into Social Security. Can I purchase an IRA in my name rather than my spouse who is retired even though I am eligible to purchase a 403(b)? Also should I buy a Roth instead of a traditional IRA?

Generally, you can roll over a distribution from your 403(b) into an IRA. As long as you instruct your district to do a direct rollover into the IRA, rather than send the money to you, there will be no taxes due on the rollover. Just set up an IRA with a financial institution, such as a bank, credit union or brokerage, to accept the rollover.

If the money is paid to you rather than directly to the rollover IRA, you have 60 days to roll it into an IRA or it will be considered a taxable distribution. However, the district will withhold 20% for taxes, and you will need to make up the difference from other sources. Otherwise, it will be considered a taxable distribution. If you are under age 59 1/2 (or age 55 if leaving your job), you may be subject to a 10% tax penalty in either case. Note that, as long as you complete the rollover within 60 days, when you file your tax return you can get back the 20% tax withheld.

You can open the IRA in your own name as long as you meet the requirements, even though you are also eligible for a 403(b) plan, and regardless of whether you are working at a job where you pay into Social Security. Anyone under age 70 1/2 with earned income, or their non-income-earning spouses, can open a traditional IRA. The age limit does not apply to Roth IRAs. As far as purchasing a Roth IRA rather than a traditional IRA, you may want to consult with a financial advisor to see what would be more advantageous to you, depending on when you need the money and your current and anticipated tax brackets. If you open a traditional IRA, you will be taxed at ordinary income tax rates on the money when you withdraw it from the IRA.

Keep in mind that if you roll the 403(b) money into a Roth IRA, you will owe taxes on the conversion. For 2010 only, you had the choice of reporting the conversion income on your 2010 tax return, or splitting the income between your 2011 and 2012 tax returns. There are potential advantages to these choices. By splitting the income, you delay paying the taxes, plus you don't pay the entire tax bill at once. However, some analysts are predicting a tax increase next year, in which case it may be advantageous to pay the taxes at the current tax rates. After 2010, conversions will still be allowed, but the tax must be paid on the same year's income taxes. You will not be allowed to spread the tax over two years. Talk to a tax advisor for more information.

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