If you are leaving a job working as a public school teacher or at a non-profit, you may be wondering what to do with your 403(b) after leaving your job. This post will cover your options.
Fortunately, there are several different options to consider and each one has its pros and cons.
The primary three options to consider are the following:
- Leave your 403(b) as is
- Rollover your funds to an IRA
- Transfer your 403(b) to your new employers plan
Of course, another option is to withdraw the money in your 403(b) account, however, for the majority of people this is the worst option. You will have to pay income tax on the amount withdrawn from the account AND your money will lose the benefit of being in a tax-sheltered account. Additionally, if you are under age 55 you will owe a 10% early withdraw penalty in addition to the regular income tax. Unless you are in dire need of the money, do not consider this option.
This post is all about what a 403(b) is and what to do with 403(b) after leaving your job.
What is a 403(b)?
A 403(b) is a type of retirement savings plan that is offered by public schools as well as certain tax-exempt organizations and nonprofits. Sometimes a 403(b) is called a tax-sheltered annuity (or TSA plan).
The 403(b) is very similar to a 401(k) except that it is offered to those who work in certain public sectors, rather than in the private sector. When investing in a 403(b) account, you can choose to invest pre-tax dollars (traditional) or after-tax dollars (Roth). Because of the tax benefits offered, a 403(b) is a great type of account to invest through.
Does it matter if I have a traditional 403(b) or a Roth 403(b)?
The options for what to do with your 403(b) are the same whether you have a traditional type of account or a Roth account. However, it is important to know which type of account you have.
In case you’re not sure, here is the difference between the two: In a traditional 403(b) your contributions are done with pre-tax dollars. This means your taxable income is lowered meaning you’ll owe less in federal income taxes.
In a Roth 403(b), your contributions are made with after-tax dollars. Since you have already paid taxes on this money, you will be able to withdraw it in the future (after age 59.5) tax-free.
If you’re not sure what type of account you have, you can figure it out by asking your current employer or by looking at a recent pay-stub.
What do I do with my 403(b) after I leave my job?
There are three primary options for what to do with your 403(b) when you separate from your employer. You can simply leave the money where it is, you can roll it over to an IRA, or you can combine your old plan with a new 403(b) plan if your new job offers one. There are pros and cons for each option and you may want to consult with a financial advisor to determine the best option for you.
Leave your 403(b) as is
Most companies will allow you to leave your 403(b) plan as is. If you leave the money in your current plan, you will no longer be able to make contributions to it but the money will continue to grow.
When considering this option, you’ll want to keep in mind a few things.
By keeping this account, you’ll maintain a connection with your previous employer. You may have to deal with this employer at times even though you no longer work for them. If that’s going to be awkward or uncomfortable for you, this option might not be a good idea for you.
You’ll also need to look into the fees associated with your current 403(b) account. If you are in an account with high fees and/or poor investment choices, you should consider moving your money elsewhere-either to an IRA or to your new company’s plan. If your account has lower fees than the account offered by your new employer, consider leaving the money or rolling it over into an IRA.
Rollover IRA
An IRA is an individual retirement account. This means that unlike employer-sponsored plans such as a 403(b) or 401(k), it has absolutely no connection to your employer.
When you leave a job, the rollover IRA is a good option to consider. It allows you to keep the same tax-deferred status (Roth or traditional) of the funds in your 403(b) and does not require you to pay taxes or early withdrawal penalties when you transfer the money.
To avoid paying any unnecessary taxes, you’ll probably want your IRA to have the same tax status as your 403(b). This means if you have a Roth 403(b), you’ll want to open a Roth IRA. If you have a traditional 403(b), you’ll want to open a traditional IRA. For more tax advice be sure to consult a tax advisor.
For many people, the rollover IRA will be the best choice. This is because you will have complete control of the financial institution you choose to open your new account with AND you’ll likely have more flexible investment decisions. An IRA has a wide array of investment options including stocks, bonds, CDs, ETFs, and mutual funds.
Some good companies that are well-known for offering low-fee products are: Vanguard, Charles Schwab, Fidelity. Betterment is also a great company if you prefer to use a robo-advisor for your investing. There are lots of other options to choose from, so do your research! For full transparency, I use Vanguard and Betterment and I am not being paid or sponsored for the content of this post.
If you are considering retiring early, you might want to avoid this option. If you withdraw any money from your IRA before age 59.5, you will be subject to a 10% withdrawal penalty. However, in a 403(b) you can take penalty-free withdrawals starting at age 55. This is an important decision to consider before moving forward with the IRA option.
Transfer your 403(b) to your new employer’s retirement plan
If your new employer offers a 403(b), you have the option to transfer the account balance from your former employer’s plan to your new employer’s plan.
A benefit of this option is that you will have your money consolidated in one account rather than having multiple accounts to keep track of. Oftentimes, people end up forgetting about accounts that were left with former employers. You don’t want that to happen to you!
A potential downside of this option is that the new plan could have higher costs than your previous plan. You’ll want to look into the plan’s investment options to see how they compare to the options at your old company. If there are high administrative fees or if the expense ratios of the new plan are significantly higher than the previous plan, you’ll probably want to consider leaving your money where it is or rolling it into an IRA.
These are your options when it comes to deciding what to do with your 403(b) after you leave your job. The option that requires the least amount of work is leaving your money with your former employer’s plan. However, depending on the plan this may not be your best option. You should look into the new employer’s retirement plans as well as IRAs. If these plans offer lower fees and better expense ratios, consider moving your money. Remember that it is also important to consider the age at which you hope to begin withdrawals. If you want to start to take money at age 55, keeping your money in a 403(b) is likely the best choice. If you can wait until 59.5, an IRA might be the better option.
Which option is best for me?
You’ll have to decide which option is best for you based on the information above. Here are some key takeaways:
- Your options are: leave the money where it is, rollover your 403(b) into an IRA, merge your old 403(b) with a new one (if one is offered by your new employer), withdraw the money. Withdrawing is not a good idea UNLESS you are at retirement age and can withdraw without penalty
- When considering your options, pay attention to any fees associated with the account. It’s also important to see which account offers the lowest expense ratios.
- Consider the tax implications. If you’re considering moving your old 403(b) to an IRA or a new 403(b) make sure you choose an account with the same tax-structure (Roth 403(b) moves to Roth IRA or 403(b) and traditional moves to traditional)
- The age you want to retire matters. A 403(b) is eligible for penalty-free withdrawals at an earlier age than an IRA.
This is not investment advice. This post is for informational purposes only.
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