What Are the Benefits of Moving Assets From a 403(b) to an IRA?

A 403(b) plan is a defined-contribution retirement savings plan designed for employees of nonprofit organizations, schools and university systems. Such plans are also called "tax-sheltered annuities." They provide the twin benefits of asset protection, and tax-deferral on contributions and growth until retirement. Investment choices can be narrow in many 403(b) plans, and they don't offer much flexibility. This is why many people roll 403(b) balances into IRAs when they become eligible.

Investment Options

In a 403(b) plan, you are limited to the investment options your employer chooses. Your plan administrator, often an insurance or mutual fund salesperson, typically presents the employer with a list of options that are most profitable to the insurance or investment company. With an IRA, you have an immensely wider investment universe to choose from, including any mutual funds, annuities, stocks, or bonds, and even real estate, precious metals, or a closely held company in a so-called "self-directed IRA."

Avoid the 20-Percent Withholding

When you take a direct distribution from a 403(b) or 401(k) plan, the law requires your employer to withhold 20 percent of the distribution to offset expected income taxes. When you roll your 403(b) balance, in whole or in part, to an IRA, there's no withholding. You keep control of the entire balance — though you must still pay income taxes on the money, eventually, when you take it out of the IRA.

Roth Conversion

By rolling your 403(b) balance over to a traditional IRA, you are set up to do a conversion to a Roth IRA. You would pay income taxes on any balances you convert, but any growth in the account after that is tax-free for as long as you live — provided you leave the money in the Roth account for at least five years. Withdrawals in retirement are tax-free, though a 10-percent penalty on non-hardship withdrawals may apply if you are younger than 59 1/2.

Lower Fees

Traditionally, 403(b) plans have been dominated by annuities. Annuities can provide valuable guarantees, but these guarantees come at the cost of higher fees than those available in other investment options. By rolling out of a 403(b) plan to an IRA, you may be able to lower your internal plan expenses, including expense ratios, and mortality and administration charges that come with annuities.


Balances in a 403(b) plan enjoy unlimited protection from the claims of creditors. Federal law only protects $1 million of IRA balances against creditors, but some states provided additional protection. Also, be diligent about taking the money directly, intending to transfer it to your IRA. If you fail to complete the transaction in 60 days, the IRS will charge you income tax, plus possible penalties for an early withdrawal.