Can You Roll Over a Tax Sheltered Annuity into an IRA?

Posted by David Funes on Apr 3, 2021


Plenty of options exist when it comes to retirement savings. There are the 401(k) employer-sponsored plans. There are also simplified employee pensions (SEPs) and solo 401(k)s for the self-employed. Also in this group are individual retirement accounts for, well, individuals. Then there are tax-sheltered annuities, better-known as 403(b) retirement plans

One question we regularly field at Realized is what accounts can be rolled over into other accounts. Specifically, whether a tax-sheltered annuity can be rolled over into an IRA. 

The answer to this question is yes -- but only kind of. The tax-sheltered annuity is, first and foremost, an employer-directed retirement account. As such, it carries specific rules when it comes to rollovers and withdrawals.

Defining the tax-sheltered annuity

At one time, the 403(b) was an actual annuity. These days, it is an IRS-approved retirement plan and employee benefit offered by public schools and universities, religious organizations, non-profit agencies, and some charities. The 403(b) is similar to the 401(k), in that employees defer a portion of their pre-tax salaries into this particular investment, as a tax-deferral strategy. 

If you are an employee working for an organization offering a 403(b), you could, in theory, roll those funds into an IRA. But unless you leave your job, or are older than 59 ½ years, such an action would trigger a large withdrawal penalty. Under these circumstances, taking funds from an employer-sponsored, tax-sheltered annuity and putting them into an IRA is considered a withdrawal. As such, you could lose a great deal of money moving those funds from one tax shelter to another.

But, should I?

The above brings up another question. If you leave your job or hit that age of 59 ½, is it a good idea to roll the 403(b) into an IRA? The answer here is: It depends.

Certainly, an IRA can offer a greater array of investment options than an employer-sponsored 403(b) plan. The 403(b) is known as a tax-sheltered annuity, partly because it might offer only annuities. Though low risk, annuities have the reputation of lower returns, with certain tax disadvantages. Additionally, rolling over the 403(b) into an IRA can provide you more direct, hands-on management of your funds, something that could be lacking with many employer-sponsored accounts.

Answering the above question should also take into consideration your employment status and age. Namely, if you’re leaving your job or are old enough to withdraw without penalties, a tax annuity-IRA rollover might make more sense.

To summarize, the “should I?” question should focus on whether you are pursuing a potential higher rate of return, and whether you want to take responsibility for hands-on management of the account. 

Relocating funds

When it comes to most investments, especially retirement investments, no one is holding your funds hostage. You could take money out of a 403(b) account and funnel it into an IRA anytime you want. 

Doing so, however, could exact a heavy price in the form of early withdrawal penalties. As such, when deciding to roll over your tax-sheltered annuity into an IRA account, you should take into account whether the target investment might be a better fit with your investment goals than your current venture. Figuring this out should include a careful look into your investment goals, along with an in-depth talk with your tax professional or financial advisor.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.

Start Maximizing Your Investment Property Wealth

Defer Capital Gains Taxes & Shelter Potential Income
Download eBook


Defer Capital Gains Taxes & Shelter Potential Income

Start Maximizing Your Investment Property Wealth

Discover How To Seek Passive Income Generation Without Property Management Responsibilities.

By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received.