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How to Rollover a 403(b) to a New Retirement Plan

June 7, 2022
7
min

A rollover can be an easy way to transfer funds from an old 403(b) into a new retirement account. Rolling over a retirement account can be a smart move for an investor.

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Changing jobs can be an exciting new chapter in a person’s career. A new job comes with new coworkers and projects—as well as a lot of administrative tasks. One thing employees should consider when starting new jobs is what to do with the retirement account from their previous employer. It may be tempting to leave the money in the old plan, forget about it, and just start saving with the new employer’s plan. But this may not always be the best option—or even be permitted.

When employees at non-profit organizations and public schools leave their employers, they can decide what to do with their 403(b) account, an employer-sponsored retirement account similar to the 401(k) at private companies—including potentially doing a 403(b) rollover.

403(b) rollover basics

A 403(b) rollover is a transaction that moves funds from a 403(b) to another retirement account type. A rollover typically occurs when a person leaves an employer or reaches the retirement age of 59 ½. Reaching age 59 ½ may be a time to do a rollover if the person does not need the funds in retirement immediately and if they want more investment options than their employer’s plan provides. 

A rollover might be mandated if an employee leaves a job where they have a 403(b) plan. Some employers’ plans will force a rollover if the account balance is below a certain threshold, generally $5,000. 

An employee may also choose to roll over their 403(b) funds into another account because leaving it behind may make it more difficult to receive information about the plan (since the employee no longer works for the employer the plan is tied to). 

The types of retirement account a 403(b) can roll over into is determined by the IRS and is based on the tax consequences of the accounts. Funds from a 403(b) can roll over into a 401(k) or a traditional IRA, among other accounts. For example, when rolling over a 403(b) into a traditional IRA, the funds are moved from the employer-sponsored 403(b) into a person’s IRA retirement account, which is one that is not associated with an employer. 

A rollover is different from an exchange or transfer of a 403(b) account. An exchange is a transaction that occurs while someone is employed at the same employer. A transfer typically occurs when someone changes jobs and funds are moved between different 403(b) plans. 

  • Exchange. This moves funds from one 403(b) plan provider to another 403(b) at the same employer. This can only happen if an employer offers more than one approved plan provider, and if both plans allow for it. An exchange can also occur when funds are moved from one investment option to another, such as changing mutual funds, within the same plan. A person can complete an exchange while employed at the same job. 
  • Transfer. A transfer occurs when funds are moved from one 403(b) account to a new 403(b) account when an employee changes jobs. Both plans have to allow for a transfer and both the new and old employers must offer 403(b) plans. 

What are the steps to roll over a 403(b) plan?

Completing a rollover can be as simple as filling out a few forms. These are the steps to complete one:   

  1. Ensure that the new plan allows for rollovers. 
  2. Decide whether to roll over to a new employer’s plan or an IRA. An employee that wants more control can choose an investment advisor that helps facilitate rollovers and open an IRA. 
  3. Ask the plan administrator what forms are needed and complete the required paperwork. Depending on the plan administrator, that may include a rollover or distribution form with the old plan. An acceptance form may need to be completed by the new plan custodian.

Potential tax consequences of 403(b) rollovers

A rollover might come with a tax bill. One could owe regular federal income taxes depending on how the rollover is done and the type of account the funds are moved into. There could also be a 10% tax penalty if the funds are withdrawn before retirement. There are two scenarios that will incur potential tax consequences: doing an indirect rollover and rolling over into a Roth IRA.

An indirect rollover is when the funds from a retirement account go to the investor before being deposited into a new account. This kind of rollover allows the employee to use the money however they’d like, but there’s a catch: the plan administrator must withhold 20% for federal income taxes. The investor must deposit the total amount of funds from the old account into the new retirement account within 60 days of receiving the distribution. That total amount is the amount they received, with an additional amount that was withheld for taxes. If they don’t do this, the individual may owe a 10% penalty on the amount not rolled over unless an exception is met. Exceptions include retirement age, disability, or for first-time homebuyers on their primary residence. 

For example, if a 40-year-old employee has an account balance of $100,000 and does an indirect rollover, they will receive $80,000 since $20,000 will be withheld for taxes. The employee must redeposit a total of $100,000 (which includes the $20,000 tax withholding) within 60 days of receiving the distribution to avoid paying an extra penalty. 

Rolling over a 403(b) into a Roth IRA account is another scenario that will incur income taxes. This is because a 403(b) is funded with pre-tax dollars—so no taxes have been paid on the amount saved—while a Roth IRA account is funded with after-tax funds. 

403(b) plan rollover: potential benefits and risks

There are potential benefits and disadvantages to rolling over a 403(b) account. 

Potential benefits of 403(b) rollovers

  • More investment options. Based on IRS rules, 403(b) accounts are limited in the types of investment they can hold, so investors have fewer choices than in other retirement accounts. An IRA can provide more investment options. 
  • Potential savings on investment fees. It is possible to have lower investment fees when rolling a 403(b) plan over to an IRA or 401(k). 
  • Easier management of accounts. With retirement savings in one account, it can be easier to keep tabs on savings as opposed to having to manage multiple retirement accounts.   

Risks of 403(b) rollovers

  • Loss of protections. Employer-sponsored retirement accounts such as 401(k)s and some 403(b)s are covered by ERISA, the Employee Retirement Income Security Act, which protects from bankruptcy proceedings. Rolling over into an IRA could be more risky since IRAs are assets that can be taken in a lawsuit or bankruptcy, depending on individual state laws. 
  • Loss of loan benefits. Some 403(b) plans allow employees to borrow money from the account. There is no loan option with IRAs. 
  • Higher age threshold for withdrawals. Some retirement accounts have higher withdrawal ages. For a 403(b), an investor can take a distribution at age 55 without penalty if they have left employment, compared to 59 ½ for an IRA. 

Alternatives to rolling over a 403(b) plan

If rolling over a retirement account does not seem to be the right move, there are alternatives. 

  • Leave the funds with the previous employer’s plan. An employee may choose to just leave their retirement account with their previous employer and forget about it, if the plan permits. However, this may make it more difficult for the individual to manage that money since they no longer work at the employer that is tied to the plan.
  • Transfer the funds. If joining a new employer that also offers a 403(b) account, transferring the funds to the 403(b) offered by the new employer can be easy.
  • Withdraw the funds. Withdrawing funds from a 403(b) account is possible, but may incur a 10% penalty if specific early withdrawal rules are not followed. 

The bottom line

When changing jobs or retiring, it’s essential not to forget about your employer-sponsored retirement account. A 403(b) rollover can be an easy way to transfer funds from an old 403(b) into a new retirement account. Although there are potential tax consequences when rolling over, they can be avoided if a direct transfer is completed and the funds are not moved into a Roth account. Rolling over a retirement account can be a smart move for an investor looking for more control.

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