What section of the code applies (back to top)

 First we need to determine what section of the tax code applies;

 * A tax-sheltered annuity (TSA) plan for employees of public schools and certain tax-exempt organizations (403(b) plan).

  If you are eligible (meet minimum age and years of service requirements) to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are considered covered by the plan. This rule applies even if you declined to be covered by the plan, you did not make a required contribution, or you did not perform the minimum service required to accrue a benefit for the year.

   A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a defined benefit plan are based on a computation of what contributions are necessary to provide definite benefits to plan participants. Defined benefit plans include pension plans and annuity plans.

 A tax-sheltered annuity plan, often referred to as a "403(b) plan," "tax-deferred annuity plan," or simply "TSA plan" (which is used in this publication), is a retirement plan that, if operated properly by a qualified employer, is tax-exempt.

    The TSA plan can invest funds for participating employees in:

    * Annuity contracts,

    * Custodial accounts holding mutual fund shares, or

    * Retirement income accounts (defined contribution plans maintained by

churches or certain church-related organizations).

 Rollover rules apply as follows (back to top)

 ROLLOVER FROM EMPLOYER'S PLAN INTO AN IRA (back to top)

   If you receive an ELIGIBLE ROLLOVER DISTRIBUTION from your (or your deceased spouse's) employer's qualified pension, profit-sharing or stock bonus plan, annuity plan, or tax-sheltered annuity plan (403(b) plan), you can roll over all or part of it into a traditional IRA.

 If your traditional IRA contains only assets (including earnings and gains) that were rolled over from a tax-sheltered annuity, you may roll over these assets into another tax-sheltered annuity. If you plan another rollover into another tax-sheltered annuity, do not combine the assets in your IRA from the rollover with assets from another source.

 DO NOT roll over an amount from a tax-sheltered annuity into a qualified pension plan.

 DISTRIBUTION FROM A TAX-SHELTERED ANNUITY. If you receive an eligible rollover distribution from a tax-sheltered annuity plan, it can be rolled over into a traditional IRA. It cannot be rolled over into another eligible retirement plan unless that plan is a tax-sheltered annuity plan.

   Generally, a distribution cannot be made from a TSA contract until the employee:

    * Reaches age 59 1/2 ,

    * Separates from service,

    * Dies, or

    * Becomes disabled.

 In most cases, the payments you receive, or that are made available to you, under your TSA contract are taxable in full as ordinary income. In general, the same tax rules apply to distributions from tax sheltered annuities that apply to distributions from other retirement plans. These rules are explained in Publication 575. Publication 575 also discusses the additional tax on early distributions from retirement plans.

   A qualified plan is one that meets the requirements of the Internal Revenue Code.

 TRANSFER OF INTEREST IN TSA

    If you transfer all or part of your interest from a TSA contract or account to another TSA contract or account, the transfer is tax free. 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 ROLLOVERS

    You can generally roll over tax free all or any part of a distribution from a TSA plan to a traditional IRA or another TSA 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.

    NONQUALIFYING DISTRIBUTIONS. Under these rules, you cannot roll over:

    (1) Minimum distributions (generally required to begin at age 70 1/2),

    (2) Substantially equal payments over your life or life expectancy,

    (3) Substantially equal payments over the joint lives or life expectancies of you and your beneficiary, or

    (4) Substantially equal payments for a period of 10 years or more.

 DIRECT ROLLOVERS FOR TSA DISTRIBUTIONS. You have the option of having your TSA 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 TSA under the individual retirement arrangement (IRA) rules instead of deducting contributions to a traditional IRA.

    If you made voluntary deductible contributions to a TSA 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.

 The taxable parts of most other distributions are eligible rollover distributions. See MAXIMUM ROLLOVER, later. Also, see Publication 575 for additional exceptions.

 WRITTEN EXPLANATION TO RECIPIENTS. The administrator of a qualified employer plan must, within a reasonable period of time before making an eligible rollover distribution, provide a written explanation to you. It must tell you about all of the following.

   * Your right to have the distribution paid tax free directly to a traditional IRA or another eligible retirement plan.

   * The requirement to withhold tax from the distribution if it is not paid directly to a traditional IRA or another eligible retirement plan.

   * The nontaxability of any part of the distribution that you roll over to a traditional IRA or another eligible retirement plan within 60 days after you receive the distribution.

   * Other qualified employer plan rules, if they apply, including those for lump-sum distributions, alternate payees, and cash or deferred arrangements.

   The plan administrator must provide you with a written explanation no earlier than 90 days and no later than 30 days before the distribution is made.

   However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as both of the following requirements are met.

   (1) You must have the opportunity to consider whether or not you want to make a direct rollover for at least 30 days after the explanation is provided.

   (2) The information you receive must clearly state that you have the right to have 30 days to make a decision.

 Contact the plan administrator if you have any questions regarding this information.

 WITHHOLDING REQUIREMENT. If an eligible rollover distribution is paid directly to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to a traditional IRA (or another qualified plan as discussed in Publication 575). However, you can avoid withholding by choosing the direct rollover option, discussed later.

   EXCEPTIONS. Withholding from an eligible rollover distribution paid to you is not required if either of the following conditions apply.

   (1) The distribution and all previous eligible rollover distributions you received during your tax year from the same plan (or, at the payer's option, from all your employer's plans) total less than $200.

   (2) The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.

   OTHER WITHHOLDING RULES. If you receive a distribution that is not an eligible rollover distribution, the 20% withholding requirement does not apply. However, other withholding rules apply to these distributions. The rules that apply depend on whether the distribution is a periodic distribution or a nonperiodic distribution that is not an eligible rollover distribution. For either of these distributions, you can still choose not to have tax withheld. For more information, get Publication 575.

 DIRECT ROLLOVER OPTION. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a traditional IRA (or to an eligible retirement plan as discussed in Publication 575). Under this option, all or part of the distribution can be paid directly to a traditional IRA (or another eligible retirement plan that accepts rollovers). This option is not required for distributions that are expected to total less than $200 for the year.

   WITHHOLDING. If you choose the direct rollover option, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the traditional IRA (or other plan).

   If any part is paid to you, the payer must withhold 20% of that part's taxable amount. Since most distributions are fully taxable, payers will generally withhold 20% of the entire amount designated for distribution to you.

 CHOOSING THE RIGHT OPTION. You generally can leave all or part of the distribution in the plan. If you do not leave the distribution in your employer's plan, the following comparison chart may help you decide which distribution option to choose. Carefully compare the following tax effects of each option.

Premature distribution rules apply to 403(b) as follows (back to top):

 PREMATURE WITHDRAWALS TAX. The 10% additional tax on withdrawals made before you reach age 59 1/2 does not apply to tax-free withdrawals of your contributions. However, your early withdrawal of interest or other income must be reported on Form 5329 and, unless the withdrawal qualifies as an exception to the age 59 1/2 rule, it will be subject to this tax.

   You must include premature distributions of taxable amounts from your traditional IRA in your gross income. Premature distributions (sometimes called early withdrawals or early distributions) are also subject to an additional 10% tax, as discussed later.

 PREMATURE DISTRIBUTIONS DEFINED. Premature distributions are amounts you withdraw from your traditional IRA account or annuity before you are age 59 1/2, or amounts you receive when you cash in retirement bonds before you are age 59 1/2 .

 TAX-FREE TRANSFERS FOR CERTAIN CASH DISTRIBUTIONS. A tax-free transfer may also apply to a cash distribution of your annuity contract or account from an insurance company that is subject to a rehabilitation, conservatorship,

    (1) Reinvest the cash in an annuity contract or account issued by another insurance company.

    (2) Withdraw all the cash to which you are entitled in full settlement of your contract rights or the maximum permitted by the state.

    (3) Reinvest the cash distribution into another annuity contract or account issued by another insurance company or single custodial account not later than 60 days after you receive the cash distribution.

    (4) 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.

    (5) Reinvest in an annuity contract or account subject to the same or stricter distribution restrictions as the original contract.

    In addition to the preceding requirements, you must provide the new insurer with a written statement containing ALL of the following information.

    (1) The gross amount of cash distributed under the old contract.

    (2) The amount of cash reinvested in the new contract.

    (3) 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.

    (1) A copy of the statement you gave the new insurer.

    (2) A statement that includes:

       (a) The words "ELECTION UNDER REV. PROC. 92-44,"

       (b) The name of the company that issued the new contract, and

       (c) The new policy number.

                         MINIMUM DISTRIBUTIONS (back to top)

    You must receive all, or at least a certain minimum, of your interest accruing after 1986 in the TSA plan by April 1 of the calendar year following the later of the calendar year in which you become age 70 ½ or the calendar year in which you retire.

    Check with your employer, plan administrator, or provider to find out whether this rule also applies to pre-1987 accruals. If not, a minimum amount of these accruals must begin to be distributed no later than the end of the calendar year in which you reach age 75. For each year thereafter, the minimum distribution must be made by the last day of the year. If you do not receive the required minimum distribution, you are subject to a nondeductible 50% excise tax.

 More information  (back to top)

 National Tax Sheltered Annuity Association! (NTSAA is the nation's only independent, nonprofit association dedicated to professionals working in the 403(b) tax-deferred retirement plan marketplace).   http://www.ntsaa.org/index.html

 Annuities Online http://www.annuity.com/tswi.html

 TAX-SHELTERED ANNUITY PROGRAMS FOR EMPLOYEES OF PUBLIC SCHOOLS AND CERTAIN TAX-EXEMPT ORGANIZATIONS

 ___________________________

 HOW TO GET MORE INFORMATION (back to top)

 http://WWW.IRS.USTREAS.GOV/

    You can order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.  

FREE TAX SERVICES. To find out what services are available, get Publication 910, GUIDE TO FREE TAX SERVICES. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

    PERSONAL COMPUTER. With your personal computer and modem, you can access the IRS on the Internet at WWW.IRS.USTREAS.GOV. While visiting our Web Site, you can select:

    * FREQUENTLY ASKED TAX QUESTIONS to find answers to questions you may have.

    * FILL-IN FORMS to complete tax forms on-line.

    * FORMS AND PUBLICATIONS to download forms and publications or search publications by topic or keyword.

    * COMMENTS & HELP to e-mail us with comments about the site or with tax questions.

    * DIGITAL DISPATCH and IRS LOCAL NEWS NET to receive our electronic newsletters on hot tax issues and news.

 You can also reach us with your computer using any of the following.

    * Telnet at IRIS.IRS.USTREAS.GOV

    * File Transfer Protocol at FTP.IRS.USTREAS.GOV

    * Direct dial (by modem) 703-321-8020

    TAXFAX SERVICE. Using the phone attached to your fax machine, you can receive forms, instructions, and tax information by calling 703-368-9694.

Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

    PHONE. Many services are available by phone.

    * ORDERING FORMS, INSTRUCTIONS, AND PUBLICATIONS. Call 1-800-829-3676 to order current and prior year forms, instructions, and publications.

    * ASKING TAX QUESTIONS. Call the IRS with your tax questions at 1-800- 829-1040.

    * TTY/TDD EQUIPMENT. If you have access to TTY/TDD equipment, call 1- 800-829-4059 to ask tax questions or to order forms and publications.

    * TELETAX TOPICS. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.

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    * A second IRS representative sometimes monitors live telephone calls.

That person only evaluates the IRS assistor and does not keep a record of any taxpayer's name or tax identification number.

    * We sometimes record telephone calls to evaluate IRS assistors objectively. We hold these recordings no longer than one week and use them only to measure the quality of assistance.

    * We value our customers' opinions. Throughout this year, we will be surveying our customers for their opinions on our service.

    WALK-IN. You can pick up certain forms, instructions, and publications at many post offices, libraries, and IRS offices. Some libraries and IRS offices have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs.

    MAIL. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response 7 to 15 workdays after your request is received. Find the address that applies to your part of the country.

    * WESTERN PART OF U.S.:

     Western Area Distribution Center

     Rancho Cordova, CA 95743-0001

    * CENTRAL PART OF U.S.:

     Central Area Distribution Center

     P.O. Box 8903

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    * EASTERN PART OF U.S. AND FOREIGN ADDRESSES:

     Eastern Area Distribution Center

     P.O. Box 85074

     Richmond, VA 23261-5074

    CD-ROM. You can order IRS Publication 1796, FEDERAL TAX PRODUCTS ON CD- ROM, and obtain:

   * Current tax forms, instructions, and publications.

   * Prior-year tax forms, instructions, and publications.

   * Popular tax forms which may be filled-in electronically, printed out for submission, and saved for recordkeeping.

    * Internal Revenue Bulletins.

 The CD-ROM can be purchased from National Technical Information Service (NTIS) for $25.00 by calling 1-877-233-6767 or for $18.00 on the Internet at

  http://WWW.IRS.USTREAS.GOV/