If you’ve just left a job at a public school or a non-profit, there’s a fairly decent chance you’ve had access to a retirement savings plan called a 403(b). Leaving any job is a good reason to reevaluate finances and retirement planning, so it’s a good idea to look at your options for moving your old 403(b).
Here, we’ll discuss what a 403(b) is, who is likely to have one, and the options for moving it out of your old employer’s plan once you decide to leave your job.
A 403(b) is a retirement savings account offered by employers that is typically available to teachers and other public service workers. The 403(b) is cleverly named after its tax-protected status in the IRS uniform code. A useful way to think about a 403(b) is as a 401(k) for those who work in public schools or other non-profit environments.
The following careers are usually eligible for 403(b) retirement benefits:
In short, the 403(b) operates in a similar way to a 401(k) since it helps people save and invest for retirement, but there are some differences between a 403(b) and a 401(k) you should be aware of. It also has certain tax implications, depending on whether you choose the tax-deferred (pre-tax) or a Roth (after-tax) option.
This is where it can get tricky — but fear not. You have several choices when it comes to handling your 403(b) retirement funds once you change jobs, or simply leave your previous one, including doing nothing, rolling it over, or combining it with a new plan.
There isn’t anything preventing you from just leaving your 403(b) as is and letting it grow into and through retirement. It’s a good idea to make sure you have the contact information of your plan administrator before leaving should you need to reach out with any questions in the future.
Leaving your 403(b) retirement funds alone is of course an option. Still, you’ll want to be sure that the account is part of your comprehensive financial plan and that you understand the investment and tax ramifications of leaving your account with your previous employer.
Rolling over to an IRA involves making a few phone calls and arranging for your old account to be moved from your previous employer to a provider of your choice. Since IRA accounts are opened outside of your employer, this option won’t involve your new employer, even if they also offer a 403(b) plan (more on this later).
The biggest pitfall of moving your 403(b) to an IRA is not carefully weighing the tax consequences of the particular type of account you’re considering. For instance, if you’re thinking of moving your 403(b) to a Roth IRA (a Roth conversion), you’ll need to explicitly calculate the tax cost based on your account balance and be sure you have the money available to cover the upcoming income tax bill. Alternatively, your rollover will be tax-free if you proceed with moving your pre-tax 403(b) to a Traditional IRA (also pre-tax). You may want to consult a tax advisor before moving your retirement account and to better understand your contribution limits.
Bottom line: If you do choose to move your 403(b), know why you’re moving it, how it benefits you, and also be sure that you understand any potential tax consequences.
Start your free 403(b) rollover in just a few minutes.
Capitalize is an online service that helps you digitally locate your old 403(b) and pairs you with an expert who manages the entire process of rolling over your 403(b) into an IRA of your choice for you – for free. This can save you hours of your time and spare you the headache of going through the antiquated rollover process. Capitalize is a great option for you if you’re busy or unsure about how to approach the 403(b) rollover process yourself.
This is only an option for you if you decide to move on to an employer that also offers a 403(b) plan, and your new employer’s plan would also need to allow “roll-ins” to the plan. Note that you won’t be able to combine your old 403(b) with a 401(k) plan or 457 new employer-sponsored retirement plan, you’ll only have the choice of merging your old 403(b) into a new 403(b) plan if that’s even on the table in your specific circumstances.
Provided you don’t direct any specific action, you’re 403(b) will typically remain as-is within your previous employer’s plan (should they allow it). You may want to consider rolling over your 403(b) if you feel the benefits of doing so outweigh leaving your 403(b) behind.
You can elect to cash out your 403(b) after you leave your job, but if you’re under the age of 59.5, you’ll be subject to a 10% early withdrawal penalty on top of the income tax that you pay on cashing out. Most financial planning experts recommend against this, as it can detract from your retirement strategy and decrease your future retirement income.
Some people may be tempted to take an early retirement withdrawal on a 403(b), but be aware that you may be subject to an early withdrawal penalty and should consult a financial advisor if you’d like to be penalty-free.
If you choose to leave your 403(b) at your previous employer’s plan, you won’t be able to make any additional contributions once you quit.
You will want to check with your 403(b) plan administrator to see if they allow you to roll over your 403(b) while you’re still employed.
Start your 403(b) rollover in just a few minutes.
As long as you’re including— and thoroughly understanding — your 403(b) investments as part of your broader financial plan, you’re on the right track. The next step is to ensure that your money sits in the best vehicle possible, which may be an IRA. This will completely depend on your situation. Different IRA brokerages can offer lower account fees and more investment choices, including mutual funds and ETFs, making them a popular option for an IRA rollover destination. Capitalize can help with both direct rollovers and indirect rollovers and will manage the entire process for you for free. Click here to get started.