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A 403(b) plan, also known as a tax-sheltered annuity, is a popular retirement for non-profit organizations, such as public schools and charities. While it can be an excellent way to save for retirement, many people want to convert their retirement assets into a Roth IRA. Here's what you need to know about doing this with your 403(b).

403(b)-to-Roth conversions are allowed
The short answer is yes, you can convert a 403(b) account to a Roth IRA. However, one of two conditions has to be met before you can do so. You must either be over 59 1/2 years of age so you can withdraw your retirement funds penalty-free at will, or you must no longer be working for the sponsoring employer.

You can either directly transfer the funds from your 403(b) into your new Roth IRA, or you can choose to take a distribution from the account and redeposit the funds in your Roth IRA within 60 days.

Why convert to a Roth IRA?
There are several reasons people consider a Roth conversion. Just to name some of the most common:

  • There are no required minimum distributions for a Roth IRA once you turn 70 1/2, unlike a 403(b).
  • While most 403(b) plans offer a small array of investment funds to choose from, money in a Roth IRA can be invested in virtually and stock, bond, or mutual fund you choose.
  • There is no maximum age for contributing. If you're 80 and still have earned income, you're free to contribute to your Roth IRA.
  • Your withdrawals are tax-free in a Roth. This allows you to "lock in" your current tax rate, or to add tax diversity if all of your retirement savings are in pre-tax accounts.

Taxes: Be sure you know what you're getting into
Contributions to a 403(b) plan are made on a pre-tax basis, meaning that you don't pay tax on the portion of your income deposited into the account. When you withdraw the money, it is then counted as income.

On the other hand, Roth contributions are made on an after-tax basis, and any qualifying withdrawals will be 100% tax-free. So when moving money from a pre-tax to and after-tax retirement account, such as a 403(b)-to-Roth conversion, the money you convert will count as taxable income.

Depending on the conversion amount, this can have serious tax consequences. A large Roth conversion can easily bump you into a higher tax bracket, so it's worth looking into how much your income will be after your conversion, and what your resulting tax liability will be. You can learn more here and shop for an IRA that's right for you.

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