Tip of the Week: Tax-Free Transfers for 403(b)s

Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.

Following is a discussion of tax-free transfers authorized for 403(b) accounts.

There are two types of tax-free transfers authorized for 403(b) accounts. The first results from the addition of paragraph 13 of Section 403(b) which was included by EGTRRA (available in chapter 6). The second was created by the final 403(b) regulations.

1. Under IRC §403(b)(13), tax-free transfers of 403(b) values can be used to purchase years of service in state retirement system defined benefit plans. As long as the 403(b) plan language includes this transfer feature and the pension system accepts the tax-free transfer to buy years of service, participants may use their 403(b) or governmental 457(b) account values to purchase service credits.
2. After Sept. 24, 2007, a “transfer” is a “plan-to-plan” transfer in which the participant is permitted to transfer all or some portion of a 403(b) account from the employer’s 403(b) plan to another 403(b) plan of the employer, or, following a severance of employment to a different employer’s 403(b) plan (see §1.403(b)-10(b)(3) of the final regulations). It may also involve a transfer from the current employer’s plan to the former employer’s plan. In order to affect a plan-to-plan transfer, both the receiving plan and the transferring plan must include language that permits plan-to-plan transfers.