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agarza

403b Account Transfer

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My wife has a 403b annuity which she defaulted on one loan a few years ago... Now she wants to transfer her account value to a second company where the performance of this particular 403b annuity is doing a lot better - she has a second annuity...

 

Company #1 tells her she has to meet one of three qualifying events: 1. Seperation of employment; 2. Permanently disabled; 3. Meets the 591/2 rule.

 

Is this the only way my wife can transfer account # 1 to her second annuity with the better performing company? Can't Company # 1 just deduct the amount of the defaulted loan and transfer the balance as my wife wants? Company # 1 says the IRS would consider this as a distribution... But how is this so if my wife would be transfering qualified money to a qualified account...ie from one 403b account to her second 403b account. There is no distribution taking place... It is simply a transfer of qualified money to a qualified account.

 

Thank you for any suggestions posted....

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Company # 1 is correct because of the way the law is structured.

 

When the loan was defaulted, it was included in gross income as what the regulations refer to as a "deemed distribution." A deemed distribution is not an actual distribution of cash, but rather a taxable event.

 

When a deemed distribution occurs, the participant is sent a 1099R for the amount of the defaulted loan. However, the loan actually stays intact, and continues to accrue interest. The reason for this is IRC section 403(b)(11), which prohibits a reduction in the account balance until one of the qualifying events occur, most of which you listed. Only when a qualifying event occurs can the plan custodian (Company #1, in this case) reduce the account value to actually repay the loan. In the regulations, this is called an "offset distribution."

 

There are a couple of things to consider. One, you can repay the defaulted loan. This would create an after-tax cost basis on your 403(b) account (which would be recovered income tax free at retirement) and would permit the existing loan to be eradicated. That should free up the funds for transfer. Just make sure that Company #1 tells the new vendor about the cost basis when the money is transferred.

 

The other possibility is to transfer only that amount of the account that is not "securing" the loan. You'll have to leave part of your funds with Company #1, but should be able to transfer at least part of the money.

 

I hope this is of some benefit to you.

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