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TSA/403(b)
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Important Changes for 2004
Limit on elective deferrals. For 2004, the limit
on elective deferrals has been increased from $12,000 to $13,000.
Catch-up contributions for persons age 50 or over. If
you will be age 50 or over by the end of 2004, you may be permitted to
make additional catch-up contributions
of up to $3,000 to your 403(b) plan for 2004.
Limit on annual additions. For 2004, the limit on
annual additions has been increased from $40,000 to $41,000.
Limit on elective deferrals. For
2005, the limit on elective deferrals has been increased from $13,000
to $14,000.
Limit on annual additions. For
2005, the limit on annual additions has been increased from $41,000 to
$42,000.
Catch-up contributions for persons
age 50 or over. If you will be age 50 or
over by the end of 2004, you may be permitted to make additional
catch-up contributions of up to $4,000 to your 403(b) plan for 2005.
Proposed Income Tax
Regulations pertaining to tax-sheltered annuities within the meaning
of section 403(b) of the Internal Revenue Code were issued on November
16, 2004. Generally, when finalized, these regulations will be
effective for taxable years beginning after December 31, 2005. The
Proposed Regulations, REG-155608-02, 2004-49 I.R.B 924 are available
at
www.irs.gov.
INDEX
403(b) Basics, FAQ's, and Important Changes
The limit on the amount that can be contributed to
your 403(b) account for any year is referred to as your maximum
amount contributable (MAC).
Catch-up contribution requirements.
General Information on prevention and correction of excess
contributions
to your 403(b) account.
General Information on Distributions and Rollovers
|
|
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a
retirement plan for certain employees of public schools, employees of
certain tax-exempt organizations, and certain ministers.
Individual accounts in a 403(b) plan can be any of the following types.
 | An annuity contract, which is a contract provided through an
insurance company, |
| A custodial account, which is an account invested in mutual funds,
or |
| A retirement income account set up for church employees.
Generally, retirement income accounts can invest in either annuities
or mutual funds. |
What are the Benefits of Contributing to a
403(b) Plan?
There are three benefits to contributing to a 403(b) plan.
| The first benefit is that you do not pay tax on allowable
contributions in the year they are made. You do not pay tax on
allowable contributions until you begin making withdrawals from the
plan, usually after you retire. Allowable contributions to a 403(b)
plan are either excluded or deducted from your income. |
| The second benefit is that earnings and gains on amounts in your
403(b) account are not taxed until you withdraw them. |
| The third benefit is that you may be eligible to take a credit for
elective deferrals contributed to your 403(b) account. |
Excluded. If an amount is excluded from your income, it is
not included in your total wages on your Form W-2. This means that you
do not report the excluded amount on your tax return.
Deducted. If an amount is deducted
from your income, it is included with your other wages on your Form
W-2. You report this amount on your tax return, but you are allowed
to subtract it when figuring the amount of income on which you must
pay tax.
Back to Index
Who Can Participate in
a 403(b) Plan?
Any eligible employee can participate in a 403(b) plan.
Eligible employees. The following employees are
eligible to participate in a 403(b) plan.
| Employees of tax-exempt organizations established under
section 501(c)(3) of the Internal Revenue Code. These
organizations are usually referred to as
section 501(c)(3) organizations or simply
501(c)(3) organizations.
|
| Employees of public school systems who are involved in the
day-to-day operations of a school. |
| Employees of cooperative hospital service organizations.
|
| Civilian faculty and staff of the Uniformed Services
University of the Health Sciences (USUHS). |
| Employees of public school systems organized by Indian tribal
governments. |
| Certain ministers (explained next). |
Ministers. The following ministers
are eligible employees for whom a 403(b) account can be established.
- Ministers employed by section 501(c)(3) organizations.
- Self-employed ministers. A self-employed minister is treated
as employed by a tax-exempt organization that is a qualified
employer.
- Ministers (chaplains) who meet both of the following
requirements.
- They are employed by organizations that are not section
501(c)(3) organizations.
- They function as ministers in their day-to-day
professional responsibilities with their employers.
Example.
A minister employed as a chaplain by a state-run prison and a
chaplain in the United States Armed Forces are eligible employees
because their employers are not section 501(c)(3) organizations and
they are employed as ministers.
Back to Index
Who Can Set Up a 403(b)
Account?
You cannot set up your own 403(b) account. Only employers can set up
403(b) accounts. A self-employed minister cannot set up a 403(b) account
for his or her benefit. If you are a self-employed minister, only the
organization (denomination) with which you are associated can set up an
account for your benefit.
Back to Index
How Can Contributions Be
Made to My 403(b) Account?
Generally, only your employer can make contributions to your 403(b)
account. However, some plans will allow you to make after-tax
contributions (defined later).
The following types of contributions can be made to 403(b) accounts.
- Elective deferrals
. These are
contributions made under a salary reduction agreement. This
agreement allows your employer to withhold money from your paycheck
to be contributed directly into a 403(b) account for your benefit.
You do not pay tax on these contributions until you withdraw them
from the account.
- Nonelective contributions
.
These are employer contributions that are not made under a salary
reduction agreement. Nonelective contributions include matching
contributions, discretionary contributions, and mandatory
contributions from your employer. You do not pay tax on these
contributions until you withdraw them from the account.
- After-tax contributions
. These
are contributions you make with funds that you must include in
income on your tax return. A salary payment on which income tax has
been withheld is a source of these contributions. If your plan
allows you to make after-tax contributions, they are not excluded
from income and you cannot deduct them on your tax return.
- A combination of any of the
three contribution types listed above.
Self-employed minister. If you are a self-employed minister, you
are considered both an employee and an employer, and you can
contribute to a retirement income account for your own benefit.
Back to Index
Do I Report Contributions
on My Tax Return?
Generally, you do not report contributions to your 403(b) account on
your tax return. Your employer will report contributions on your Form
W-2. Elective deferrals will be shown in box 12 and the
Retirement plan box will be checked. If
you are a self-employed minister or chaplain, see the discussions below.
Self-employed ministers. If you are a
self-employed minister, you must report the total contributions as a
deduction on your tax return. Deduct your contributions on line 30 of
Form 1040.
Chaplains. If you are a chaplain and your
employer does not exclude contributions made to your 403(b) account
from your earned income, you may be able to take a deduction for those
contributions on your tax return.
However, if your employer has agreed to exclude the
contributions from your earned income, you will not be allowed a
deduction on your tax return.
If you can take a deduction, enter your contributions on line 33
of Form 1040. Write 403(b) on the
dotted line next to line 33.
Back to Index
How Much Can Be
Contributed to My 403(b) Account?
There are limits on the amount of contributions that can be made to
your 403(b) account each year. If contributions made to your 403(b)
account are more than these contribution limits, penalties may apply.
Back to Index
|
Generally, before you can determine your MAC, you must first figure
the components of your MAC. The components of your MAC are:
| The limit on annual additions, and |
| The limit on elective deferrals. |
Generally, contributions to your 403(b) account are limited to the
lesser of:
| The limit on annual additions, or |
| The limit on elective deferrals. |
Depending upon the type of contributions made to your 403(b) account,
only one of the limits may apply to you.
Which limit applies. Whether you must apply one
or both of the limits depends on the type of contributions made to
your 403(b) account during the year.
Elective deferrals only. If the
only contributions made to your 403(b) account during the year were
elective deferrals made under a salary reduction agreement, you will
need to figure both of the limits. Your MAC is the lesser of the two
limits.
Nonelective contributions only.
If
the only contributions made to your 403(b) account during the year
were nonelective contributions (employer contributions not made under
a salary reduction agreement), you will only need to figure the limit
on annual additions. Your MAC is the limit on annual additions.
Elective deferrals and nonelective
contributions. If the contributions made to your 403(b)
account were a combination of both elective deferrals made under a
salary reduction agreement and nonelective contributions (employer
contributions not made under a salary reduction agreement), you will
need to figure both the limits. Your MAC is the limit on the annual
additions.
You need to figure the limit on elective deferrals to determine
if you have excess elective deferrals.
Back to Index
When Should I Figure My
MAC?
At the beginning of 2005, you should refigure your 2003 MAC based on
your actual compensation for 2004. This will allow you to determine if
the amount that has been contributed to your 403(b) account for 2003 has
exceeded the allowable limits. In some cases, this will allow you to
avoid penalties and additional taxes.
Generally, you should figure your MAC for the current year at the
beginning of each tax year using a conservative estimate of your
compensation. If your compensation changes during the year, you should
refigure your MAC based on a revised conservative estimate. By doing
this, you will be able to determine if contributions to your 403(b)
account can be increased or should be decreased for the year.
Back to Index |
Limit on Annual Additions
The first component of MAC is the limit on annual additions. This is a
limit on the total contributions (elective deferrals, nonelective
contributions and after-tax contributions) that can be made to your 403(b)
account. The limit on annual additions generally is the lesser of:
| $41,000, ($42,000 for 2005) or |
| 100% of your includible compensation for your most recent year of
service.
|
More than one 403(b) account.
If you
contributed to more than one 403(b) account, you must combine the
contributions made to all 403(b) accounts on your behalf by your employer.
Participation in a qualified plan.
If
you participated in a 403(b) plan and a qualified plan, you must combine
contributions made to your 403(b) account with contributions to a
qualified plan and simplified employee pensions of all corporations,
partnerships, and sole proprietorships in which you have more than 50%
control.
Ministers and church employees. If you
are a minister or a church employee, you may be able to increase your
limit on annual additions or use different rules when figuring your
limit on annual additions. For more information, see chapter 5.
Includible Compensation for Your Most Recent
Year of Service
Definition. Generally, includible compensation
for your most recent year of service is the amount of taxable wages
and benefits you received from the employer that maintained a 403(b)
account for your benefit during your most recent year of service.
When figuring your includible compensation for your most recent year
of service, keep in mind that your most recent year of service may not
be the same as your employer's most recent annual work period. This can
happen if your tax year is not the same as your employer's annual work
period.
When figuring includible compensation for your most recent year of
service, do not mix compensation or service of one employer with
compensation or service of another employer.
Most Recent Year of Service
Your most recent year of service is your last full year of service,
ending on the last day of your tax year that you worked for the
employer that maintains a 403(b) account on your behalf.
Tax year different from employer's annual work
period. If your tax year is not the same as your employer's
annual work period, your most recent year of service is made up of
parts of at least two of your employer's annual work periods.
Figuring Your Most Recent Year of Service
To figure your most recent year of service, begin by determining what
constitutes a full year of service for your position. A full year of
service is equal to full-time employment for your employer's annual work
period.
After identifying a full year of service, begin counting the service
you have provided for your employer starting with the service provided in
the current year.
Part-time or employed only part of year. If you
are a part-time employee, or a full-time employee who is employed for
only part of the year, your most recent year of service consists of your
service this year and your service for as many previous years as is
necessary to total one full year of service. You add up your most recent
periods of service to determine your most recent year of service. First,
take into account your service during the year for which you are
figuring the limit on annual additions. Then add your service during
your next preceding tax year, and years before that, until either your
total service equals 1 year of service or you have taken into account
all of your service with the employer.
Not yet employed for 1 year. If, at the close of the year, you
have not yet worked for your employer for 1 year (including time you
worked for the same employer in all earlier years), use the period
of time you have worked for the employer as your most recent year of
service.
After identifying your most recent year of service, the next step is
to identify the includible compensation associated with that full year
of service.
Includible compensation is not the same as income included on your
tax return. Compensation is a combination of income and benefits
received in exchange for services provided to your employer.
Generally, includible compensation is the amount of income and
benefits:
| Received from the employer who maintains your 403(b) account,
and |
| Must be included in your income. |
You determine the amount you must include in income without taking
into account the foreign earned income exclusion.
Includible compensation does include
the following amounts.
| Elective deferrals (employer's contributions made on your behalf
under a salary reduction agreement). |
| Amounts contributed or deferred by your employer under a section
125 cafeteria plan. |
| Amounts contributed or deferred, at the election of the
employee, under an eligible section 457 nonqualified deferred
compensation plan (state or local government or tax-exempt
organization plan). |
| Wages, salaries, and fees for personal services earned with the
employer maintaining your 403(b) account. |
| Income otherwise excluded under the foreign earned income
exclusion. |
| The value of qualified transportation fringe benefits (including
transit passes, certain parking, and transportation in a commuter
highway vehicle between your home and work). |
Includible compensation does not
include the following items.
- Your employer's contributions to your 403(b) account.
- Compensation earned while your employer was not an eligible
employer.
- Your employer's contributions to a qualified plan that:
- Are on your behalf, and
- You can exclude from income.
- The cost of incidental life insurance.
Contributions after retirement. Nonelective
contributions may be made for an employee for up to five years after
retirement. These contributions would be based on includible
compensation for the last year of service before retirement.
Cost of Incidental Life Insurance
Includible compensation does not include the cost of incidental
life insurance.
Note. If all of your 403(b)
accounts invest only in mutual funds, then you have no incidental
life insurance.
If you have an annuity contract, a portion of the cost of that
contract may be for incidental life insurance. If so, the cost of the
insurance is taxable to you in the year contributed and is considered
part of your basis when distributed. Your employer will include the
cost of your insurance as taxable wages in box 1 of Form W-2.
Not all annuity contracts include life insurance. Contact your plan
administrator to determine if your account includes incidental life
insurance. If it does, you will need to figure the cost of life
insurance each year the policy is in effect.
Figuring the cost of incidental life
insurance. If you have determined that part of the cost of
your annuity contract is for an incidental life insurance premium, you
will need to determine the amount of the premium and subtract it from
your includible compensation.
To determine the amount of the life insurance premiums you will
need to know the following information.
| The value of your life insurance contract, which is the amount
payable upon your death. |
| The cash value of your life insurance contract at the end of
the tax year. |
| Your age on your birthday nearest the beginning of the policy
year. |
| Your current life insurance protection under an ordinary
retirement income life insurance policy, which is the amount
payable upon your death minus the cash value of the contract at
the end of the year. |
Back to Index
|
Limit on Elective Deferrals
The second, and final, component of MAC is the limit on elective
deferrals. This is a limit on the amount of contributions that can be made
to your account through a salary reduction agreement.
A salary reduction agreement is an
agreement between you and your employer allowing for a portion of your
compensation to be directly invested in a 403(b) account on your behalf.
You can enter into more than one salary reduction agreement during a year.
More than one 403(b) account. If, for
any year, elective deferrals are contributed to more than one 403(b)
account for you (whether or not with the same employer), you must combine
all the elective deferrals to determine whether the total is more than the
limit for that year.
403(b) plan and another retirement plan.
If, during the year, contributions in the form of elective deferrals are
made to other retirement plans on your behalf, you must combine all of the
elective deferrals to determine if they are more than your limit on
elective deferrals. The limit on elective deferrals applies to amounts
contributed to:
| 401(k) plans, to the extent excluded from income, |
| Section 501(c)(18) plans, to the extent excluded from income, |
| SIMPLE plans, |
| Simplified employee pension (SEP) plans, and |
| All 403(b) plans. |
Excess elective deferrals. If the amount
contributed is more than the allowable limit, you must include the
excess in your gross income for the year contributed.
Under the general limit on elective deferrals, the most that can be
contributed to your 403(b) account through a salary reduction agreement
for 2004 is $13,000. The limit for 2005 is $14,000. This limit applies
without regard to community property laws.
If you have at least 15 years of service with a public school system,
hospital, home health service agency, health and welfare service agency,
church, or convention or association of churches (or associated
organization), the limit on elective deferrals to your 403(b) account is
increased by the least of:
| $3,000, |
| $15,000, reduced by increases to the general limit you were
allowed in earlier years because of this rule, or |
| $5,000 times the number of your years of service for the
organization, minus the total elective deferrals made by your
employer on your behalf for earlier years. |
If you qualify for the 15-year rule, your elective deferrals under
this limit can be as high as $16,000 for 2003 and $17,000 for 2004.
To determine if you are eligible for the increased limit on
elective deferrals you will first need to figure your
years of service . How you figure
your years of service depends on whether you were a full-time or a
part-time employee, whether you worked for the full year or only part
of the year, and whether you have worked for your employer for an
entire year.
You must figure years of service for each year during which you
worked for the employer who is maintaining your 403(b) account.
If more than one employer maintains a 403(b) account for you in the
same year, you must figure years of service separately for each
employer.
Your years of service are the total number of years you have
worked for the employer maintaining your 403(b) account as of the
end of the year.
Figuring Your Years of Service
Take the following rules into account when figuring your years of
service.
Status of employer. Your years of service
include only periods during which your employer was a qualified
employer. Your plan administrator can tell you whether or not your
employer was qualified during all your periods of service.
Service with one employer. Generally,
you cannot count service for any employer other than the one who
maintains your 403(b) account.
Church employee. If you are a
church employee, treat all of your years of service with related
church organizations as years of service with the same employer.
Self-employed ministers. If you are a
self-employed minister, your years of service include full and
part years in which you have been treated as employed by a
tax-exempt organization that is a qualified employer.
Less than one year of total service.
Your years of service cannot be less than one year. If at the
end of your tax year, you have less than one year of service
(including service in any previous years), figure your limit on
annual additions as if you have one year.
Total years of service. When figuring
years of service, figure each year individually and then add the
individual years of service to determine your total years of
service, ending with the year for which the limit on annual
additions is being calculated. The total years of service will be
used when figuring your limit on annual additions.
Full time or part time. To figure your years
of service, you must analyze each year individually and determine
whether you worked full time for the full year or something other than
full time. When determining whether you worked full time or something
other than full time, you use your employer's
annual work period as the standard.
Employer's annual work period. Your
employer's annual work period is the usual amount of time an individual
working full time in a specific position is required to work. Generally,
this period of time is expressed in days, weeks, months, or semesters
and can span two calendar years.
Full-Time Employee for the Full Year
Count each full year during which you were employed full time as one
year of service. In determining whether you were employed full time,
compare the amount of work you were required to perform with the amount of
work normally required of others who held the same position with the same
employer and who generally received most of their pay from the position.
How to compare. You can use any method that
reasonably and accurately reflects the amount of work required. For
example, if you are a teacher, you can use the number of hours of
classroom instruction as a measure of the amount of work required.
In determining whether positions with the same employer are the
same, consider all of the facts and circumstances concerning the
positions, including the work performed, the methods by which pay is
determined, and the descriptions (or titles) of the positions.
Full year of service. A full year of service for
a particular position means the usual annual work period of anyone
employed full time in that general type of work at that place of
employment.
Other Than Full Time for the
Full Year
If, during any year, you were employed full time for only part of your
employer's annual work period, part time for the entire annual work
period, or part time for only part of the work period, your year of
service for that year is a fraction of your employer's annual work period.
|
Catch-Up Contributions
The most that can be contributed to your 403(b) account is the lesser
of your limit on annual additions or your limit on elective deferrals.
If you will be age 50 or older by the end of the year, you may also be
able to make additional catch-up contributions.
These additional contributions cannot be made with after-tax employee
contributions.
You are eligible to make catch-up contributions if:
| You will have reached age 50 by the end of the year, and |
| The maximum amount of elective deferrals that can be made to your
403(b) account have been made for the plan year. |
The maximum amount of catch-up contributions is the lesser of
| $3,000 for 2004 ($4,000 for 2005), or |
| Your includible compensation minus your other elective deferrals
for the year. |
Back to Index |
Excess Contributions
If your actual contributions are greater than your MAC, you have an
excess contribution. Excess contributions can result in income tax,
additional taxes, and penalties. The effect of excess contributions
depends on the type of excess contribution. This chapter discusses excess
contributions to your 403(b) account.
Preventing Excess Contributions
To prevent excess contributions, you should figure your MAC at the
beginning of each year using a reasonable estimate of compensation. If,
at any time during the year, your employment status or your compensation
changes, you should refigure your MAC using a revised estimate of
compensation.
How Do I Know If I Have Excess Contributions?
At the end of the year or the beginning of the next year, you should
refigure your MAC based on your actual compensation and actual
contributions made to your account.
If the actual contributions to your account are greater than your
MAC, you have excess contributions.
What Happens If I Have Excess Contributions?
Certain excess contributions in a 403(b) account can be corrected.
The effect of an excess 403(b) contribution will depend on the type of
excess contribution.
Types of excess contributions. If, after
checking your actual contributions, you determine that you have an
excess, the first thing is to identify the type of excess that you
have. Excess contributions to a 403(b) account are categorized as
either an:
| Excess annual addition, or |
| Excess elective deferral. |
An excess annual addition is a contribution that is more than your
limit on annual additions. To determine your limit on annual
additions.
In the year that your contributions are more than your limit on
annual additions, the excess amount will be included in your income.
Amounts in excess of the limit on annual additions that are due to
elective deferrals may be distributed if the excess contributions were
made for any one of several reasons, including:
| A reasonable error in determining the amount of elective
deferrals that could be made under the limit on annual additions,
or |
| A reasonable error in estimating your compensation. |
If your 403(b) account invests in mutual funds, and you exceed
your limit on annual additions, you may be subject to a 6% excise
tax on the excess contribution. The excise tax does not apply to
funds in an annuity account or to excess deferrals.
You must pay the excise tax each year in which there are excess
contributions in your account. Excess contributions can be corrected
by contributing less than the applicable limit in later years or by
making permissible distributions.
You cannot deduct the excise tax.
Reporting requirement. You must file Form
5330 if there has been an excess contribution to a custodial
account and that excess has not been corrected.
An excess elective deferral is the amount that is more than your
limit on elective deferrals. To determine your limit on elective
deferrals.
Your employer's 403(b) plan may contain language permitting it to
distribute excess deferrals. If so, it may require that, in order to
get a distribution of excess deferrals, you either notify the plan of
the amount of excess deferrals or designate a distribution as an
excess deferral. The plan may require that the notification or
designation be in writing and may require that you certify or
otherwise establish that the designated amount is an excess deferral.
A plan is not required to permit distribution of excess deferrals.
Correction of excess deferrals during year.
If you have excess deferrals for a year, a corrective distribution
may be made only if both of the following conditions are satisfied.
| You or your employer designate the distribution as an excess
deferral to the extent you have excess deferrals for the year. |
| The correcting distribution is made after the date on which
the excess deferral was made. |
Correction of excess deferrals after the year.
If you have excess deferrals for a year, you may receive a
corrective distribution of the excess deferral no later than April
15 of the following year. The plan can distribute the excess
deferral (and any income allocable to the excess) no later than
April 15 of the year following the year the excess deferral was
made.
Tax treatment of excess deferrals. If the
excess deferral is distributed no later than April 15, it is
included in your income in the year contributed and the earnings on
the excess deferral will be taxed in the year distributed.
Back to Index |
Distributions and Rollovers
Generally, a distribution cannot be made from a 403(b) account until
the employee:
| Reaches age 59½, |
| Has a severance from employment, |
| Dies, |
| Becomes disabled, or |
| In the case of salary reduction contributions, encounters
financial hardship. |
In most cases, the payments you receive or that are made available to
you under your 403(b) account are taxable in full as ordinary income. In
general, the same tax rules apply to distributions from 403(b) plans
that apply to distributions from other retirement plans.
Minimum Required Distributions
You must receive all, or at least a certain minimum, of your
interest accruing after 1986 in the 403(b) plan by April 1 of the
calendar year following the later of the calendar year in which you
become age 70½ or the calendar year in which you retire.
No Special 10-Year Tax Option
A distribution from a 403(b) plan does not qualify as a lump-sum
distribution. This means you cannot use the special 10-year tax option
to calculate the taxable portion of a 403(b) distribution.
Transfer of Interest in 403(b) Contract
If you transfer all or part of your interest from a 403(b) account to
another 403(b) account, the transfer is tax free. This is known as a
90–24 transfer. However, this treatment applies only if the transferred
interest is subject to the same or stricter distribution restrictions.
This rule applies regardless of whether you are a current employee, a
former employee, or a beneficiary of a former employee.
Transfers that do not satisfy this rule are plan distributions and
are generally taxable as ordinary income.
Tax-free transfers for certain cash distributions.
A tax-free transfer may also apply to a cash distribution of your
403(b) account from an insurance company that is subject to a
rehabilitation, conservatorship, insolvency, or similar state
proceeding. To receive tax-free treatment, you must do all of the
following.
| Withdraw all the cash to which you are entitled in full
settlement of your contract rights or, if less, the maximum
permitted by the state. |
| Reinvest the cash distribution in a single policy or contract
issued by another insurance company or in a single custodial
account subject to the same or stricter distribution restrictions
as the original contract not later than 60 days after you receive
the cash distribution. |
| Assign all future distribution rights to the new contract or
account for investment in that contract or account if you received
an amount that is less than what you are entitled to because of
state restrictions. |
In addition to the preceding requirements, you must provide the
new insurer with a written statement containing all of the following
information:
| The gross amount of cash distributed under the old contract. |
| The amount of cash reinvested in the new contract. |
| Your investment in the old contract on the date you receive
your first cash distribution. |
Also, you must attach the following items to your timely filed
income tax return in the year you receive the first distribution of
cash.
- A copy of the statement you gave the new insurer.
- A statement that includes:
- The words ELECTION UNDER REV.
PROC. 92-44,
- The name of the company that issued the new contract, and
- The new policy number.
Direct trustee-to-trustee transfer. If you make
a direct trustee-to-trustee transfer, from your governmental 403(b)
account to a defined benefit governmental plan, it may not be
includible in gross income.
The transfer amount is not includible in gross income if it is
made to:
| Purchase permissive service credits, or |
| Repay contributions and earnings that were previously refunded
under a forfeiture of service credit under the plan, or under
another plan maintained by a state or local government employer
within the same state. |
Permissive service credit.
Permissive service credit means credit for a period of service
recognized by your defined benefit governmental plan, only if you
voluntarily contribute to your 403(b) plan an amount that does not
exceed the amount necessary to fund the benefit attributable to the
period of service and that is in addition to the regular employee
contribution, if any, under the plan. Check with your plan
administrator as to the type and extent of service that may be
purchased by this transfer.
You can generally roll over tax free all or any part of a
distribution from a 403(b) plan to a traditional IRA or an eligible
retirement plan. The most you can roll over is the amount that, except
for the rollover, would be taxable. The rollover must be completed by
the 60th day following the day on which you receive the distribution.
Hardship exception to rollover rules.
The IRS may waive the 60-day rollover period if the failure to waive
such requirement would be against equity or good conscience, including
cases of casualty, disaster, or other events beyond the reasonable
control of the individual.
Rollovers to and from 403(b) plans. You can
roll over, tax free, all or any part of a distribution from an
eligible retirement plan to a 403(b) plan. Additionally, you can roll
over, tax free, all or any part of a distribution from a 403(b) plan
to an eligible retirement plan.
If a distribution includes both pre-tax contributions and
after-tax contributions, the portion of the distribution that is
rolled over is treated as consisting first of pre-tax amounts
(contributions and earnings that would be includible in income if no
rollover occurred). This means that if you roll over an amount that is
at least as much as the pre-tax portion of the distribution, you do
not have to include any of the distribution in income.
If you roll over money or other property from a 403(b) plan to an
eligible retirement plan, see IRS Publication 575 for information about
possible effects on later distributions from the eligible retirement
plan.
Direct rollovers of 403(b) plan distributions.
You have the option of having your 403(b) plan make the rollover
directly to the IRA or new plan. Before you receive a distribution,
your plan will give you information on this. It is generally to your
advantage to choose this option because your plan will not withhold
tax on the distribution if you choose it.
Withholding. If you
receive a distribution that qualifies
to be rolled over, the payer must withhold 20% of it for taxes (even
if you plan to roll the distribution over). You cannot choose to have
no withholding unless you elect the direct rollover option.
Distribution received by you. If you receive
a distribution that qualifies to be rolled over, you can roll over all
or any part of the distribution. Generally, you will receive only 80%
of the distribution because 20% must be withheld. If you roll over
only the 80% you receive, you must pay tax on the 20% you did not roll
over. You can replace the 20% that was withheld with other money
within the 60-day period to make a 100% rollover.
Voluntary deductible contributions. For tax
years 1982 through 1986, employees could make deductible contributions
to a 403(b) plan under the individual retirement arrangement (IRA)
rules instead of deducting contributions to a traditional IRA.
If you made voluntary deductible contributions to a 403(b) plan
under these traditional IRA rules, the distribution of all or part of
the accumulated deductible contributions may be rolled over assuming
it otherwise qualifies as a distribution you can roll over.
Accumulated deductible contributions are the deductible contributions
plus income and gain allocable to the contributions, minus expenses
and losses allocable to the contributions, and minus distributions
from the contributions, income, or gain.
Excess employer contributions. The portion
of a distribution from a 403(b) plan transferred to a traditional IRA
that was previously included in income as excess employer
contributions (discussed earlier) is not an eligible rollover
distribution.
Qualified Domestic Relations Order. You may
be able to roll over tax free all or any part of an eligible rollover
distribution from a 403(b) plan that you receive under a qualified
domestic relations order (QDRO). If you receive the interest in the
403(b) plan as an employee's spouse or former spouse under a QDRO, all
of the rollover rules apply to you as if you were the employee. You
can roll over your interest in the plan to a traditional IRA or
another 403(b) plan.
Spouses of deceased employees. If you are
the spouse of a deceased employee, you can roll over the qualifying
distribution attributable to the employee. You can make the rollover
to any eligible retirement plan. You cannot roll it over to a Roth
IRA.
If after you roll over money and other property from a 403(b)
plan to an eligible retirement plan, you take a distribution from that
plan, you will not be eligible to receive the capital gain treatment
or the special averaging treatment for the distribution.
Second rollover. If you roll over a
qualifying distribution to a traditional IRA, you can, if certain
conditions are satisfied, later roll the distribution into another
403(b) plan.
Frozen deposits. The 60-day period usually
allowed for completing a rollover is extended for any time that the
amount distributed is a frozen deposit in a financial institution. The
60-day period cannot end earlier than 10 days after the deposit ceases
to be a frozen deposit.
A frozen deposit is any deposit that on any day during the 60-day
period cannot be withdrawn because:
- The financial institution is bankrupt or insolvent, or
- The state where the institution is located has placed limits
on withdrawals because one or more banks in the state are (or are
about to be) bankrupt or insolvent.
If, by choosing or not choosing an election, or option, you provide
an annuity for your beneficiary at or after your death, you may have
made a taxable gift equal to the value of the annuity.
Joint and survivor annuity. If the gift is an
interest in a joint and survivor annuity where only you and your
spouse have the right to receive payments, the gift will generally be
treated as qualifying for the unlimited marital deduction.
Back to Index |
*Publication
571, (Revised: 12/2003), Tax Sheltered Annuity Plans (403(b) Plans) For
Employees of Public Schools and Certain Tax-Exempt Organizations.
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Other IRS Publications referred to herein, can be found at: http://www.irs.ustreas.gov
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