The Internal Revenue Service defines the retirement age as 59 1/2. From this age, you can roll over your 403(b) into an IRA without penalty, even if you're still working for the employer. The only other time you can move your 403(b) is when you switch jobs. During a job change there are more options available, since you can roll the funds into your current employer's plan, or into a traditional or a Roth IRA.
You can roll an old 403(b) into an IRA or your new employer's plan any time you switch jobs; there's no time limit. Those aged over 59 1/2 can roll a 403(b) plan over to an IRA as an in-service distribution, even if they are still employed.
What Is a 403(b) Plan?
A 403(b), also known as a tax-sheltered annuity plan, is the public sector equivalent of a 401(k). It allows employees of some public education institutions, hospitals, churches and nonprofits to save for retirement through a range of plan structures, each with different risk profiles. Your employer may also offer a match for your investments.
Like 401(k)s, 403(b)s are funded with pretax dollars. The contributions you make can lower your taxable income and help you save on your tax bill, and the retirement fund itself will grow tax-free for as long as the money is sitting in the account. You only pay taxes on distributions when you take them in retirement – by which time, you may be in a lower tax bracket.
A 403(b) plan also has the same contribution limits as a 401(k) plan. This is $19,000 for 2019 if you are aged 50 and below, up from $18,500 in 2018. If you are over age 50, you can invest an additional $6,000 in "catch up contributions." The contribution limits are reviewed every year and tend to go up in line with inflation.
What Happens When You Change Jobs?
Since most people change jobs several times in their career, it's fairly common to leave a trail of employment-sponsored retirement plans behind as you move. Assuming you have not yet reached the retirement age of 59 1/2, you can do one of five things with your old 403(b).
Option One: Do nothing and leave the plan with your old employer.
You can leave the plan to continue growing on its own but this may not be the best option financially. The plan won't grow very fast since you're no longer making contributions to it, and some 403(b)s come with limited investment options and high fees. But, doing nothing is better than making the wrong decision. If you need some time to decide what to do with your fund, then consider leaving it where it is.
Be aware that you'll need the employer's permission to stay with your old plan. Some employers will let you stay with the 403(b) as long as you have a certain amount of money in it, while others will require you to roll the plan over. Be sure to check the conditions with the plan administrator.
Option Two: Roll the account over into a traditional IRA.
This is relatively easy to do and the exercise should be tax neutral as long as you fill out the right paperwork. Generally, IRAs offer more investment options than 403(b) plans, so you'll get more flexibility than you had before. Like 403(b)s, traditional IRAs are tax-deferred. This means you can continue deferring taxes on your savings until you reach retirement age. Many people find themselves in a lower tax bracket at retirement, so deferring the tax means your savings may be taxed at a lower rate.
Option Three: Roll the account over into a Roth IRA.
A Roth has different tax treatment compared to a 403(b) because it's funded with after-tax dollars. You can still roll a 403(b) into a Roth, but you'll need to pay tax on the full account balance at the time of the rollover. The payoff comes five years after you make your first contribution. That's when you can start withdrawing funds for "qualifying events" without penalty, such as coping with a disability or buying your first home.
Upon reaching the retirement age of 59 1/2, you can make Roth withdrawals tax-free, which means you're not paying taxes on your investment gains.
Option Four: Transfer to an employer's plan.
Another option is to roll your 403(b) funds into your new 403(b) or 401(k). This is worth considering if you like having all your funds in one place. However, while the IRS permits 403(b) to 403(b) rollovers, your employer may not. Contact the plan administrator to see if this is an option for you.
Option Five: Take the money and run.
Perhaps the worst option you can pick is withdrawing your 403(b) in a lump sum. Cashing out your plan triggers an immediate tax charge. First, you'll pay federal (and possibly state) income taxes on the amount you withdraw. Second, if you're under age 59 1/2, you'll be hit with a 10 percent premature distribution penalty. The withdrawal itself could push you into a higher tax bracket for the year.
Also, the employer is required to withhold 20 percent of the withdrawal for federal taxes, so the check you're cut may not be as large as you're expecting. This option is only worth considering if you need the money and you're prepared to face the financial consequences.
How To Do a 403(b) Rollover
When people talk about rollovers, they usually are referring to direct rollovers. This moves the balance of the 403(b) fund directly into a traditional IRA account or the new employer's 403(b) or 401(k) plan, thus avoiding the mandatory 20 percent federal tax withholding that's usually assessed on retirement fund withdrawals.
To start then, you'll need to check that your new employer accepts rollovers. If you're rolling to a traditional IRA, you'll need to open an IRA with the financial institution of your choosing. Once that's set up, you only need to fill out and sign a couple of rollover authorization forms – a "distribution request" form, which you can get from the plan trustee of your old 403(b) and an "authorization" or "acceptance" form from the IRA trustee/new plan administrator. Once the forms are processed, the employer will send the funds to the new trustee and the rollover is complete. It's that simple.
And if you're wondering what the 403(b) rollover limits are, here's another piece of good news. There's no dollar limit on how much 403(b) money you can transfer to an IRA.
403(b) Rollover Rules: Direct Versus Indirect Rollovers
Above all, make sure that the rollover is processed as a "direct" rollover. This means the entire fund balance is sent directly to the new trustee and there's no federal tax withholding. Everything happens behind closed doors – you won't ever see the money or receive a check for the plan funds.
If the distribution is sent to you – for example, you get a check made out in your name – this will qualify as an "indirect" rollover. Now, the 403(b) administrator is required to keep a deduction of 20 percent for federal tax withholdings. So, if you have $10,000 in the plan, you will receive a check for just $8,000.
With an indirect rollover, it's up to you to redeposit the funds into the IRA or the new employer's plan within 60 days of the withdrawal. The catch is, you have to deposit the entire distribution including the tax withholding – so, the full $10,000. You can claim back the $2,000 tax withholding later but for now, you'll have to make up the shortfall from your own money.
What's the Deadline for the Rollover?
Miss the 60-day deadline, and the IRS treats the rollover as an early withdrawal. You'll face a stiff 10 percent tax penalty on top of the tax withholding. Unlike the tax withholding, however, you can't get this money back – it's forfeited to the IRS.
Other than the 60-day deadline for redepositing distributions, there are no time limits for rolling over your 403(b) when you switch jobs. You could leave a plan with an employer for 10 or more years (if the employer allows) before deciding to roll it into an IRA or a new employer's plan. Many people choose to keep their old 403(b)s where they are while they consider their options. Some leave the cash there right up until retirement if, for example, the plan offers some unique investment options or operates at a lower cost than you can find elsewhere.
Once-a-Year 403(b) Rollover Limits
The other time restriction you may have heard of is the IRS's "one year rule." This says that you can't perform more than one rollover from the same account within a 12-month period.
The good news is, the one rollover a year only relates to IRA-to-IRA rollovers. It does not relate to plan-to-IRA rollovers or plan-to-plan rollovers. This means you can shift some of your fund to an IRA or new 403(b)/401(k), and the rest of it to the same or another account a few months later without suffering any adverse tax consequences.
Converting to a Roth IRA
Moving your fund to a Roth IRA adds an extra layer of complication since you're converting the fund balance from pretax income to post-tax income. This has huge tax repercussions; namely, you must pay ordinary income tax on the full amount of the fund at the time you do the conversion. Bear in mind that the fund amount will be added to your taxable income for the year and could potentially push you into a higher tax bracket.
Not everyone can contribute to a Roth IRA, and eligibility depends on your income. In 2019, your eligibility to contribute begins to phase out at $122,000 and you become ineligible with an annual income greater than $137,000 if you file taxes under the single status. For couples filing jointly, the limits are $193,000 (phase out) and $203,000 (ineligible). These limits don't apply to Roth IRA conversions, so you can move your 403(b) fund without affecting your eligibility.
In-Service 403(b) Distributions Rules
So far, we've talked about moving your 403(b) when you switch jobs. But what about a rollover, 403(b) to IRA, while you're still employed? Some 403(b) plans will let you withdraw the fund balance while you're still working for the employer as an in-service distribution. This is basically a distribution from your plan that you can roll into an IRA. The catch is, you must be aged over 59 1/2 to access the funds.
In-service distributions are complex and you must familiarize yourself with the rules to avoid messing up the rollover and being stung by an unanticipated tax liability. But if you get it right, this is another option for moving your 403(b) in order to invest the assets in a more flexible fund, or broaden the beneficiary options of the account.
- Internal Revenue Service: Rollovers of Retirement Plan and IRA Distributions
- Good Financial Cents: Can You Rollover a 403b into a Traditional IRA? Absolutely!
- Merrill Edge: Should I Roll Over My 403(b) Account into an IRA?
- Darrow Wealth Management: What Should You Do With Your Old 403(b)? Here Are Four Options
- CNBC: What Exactly is a Roth IRA — and Why Should You Have One?
- Financial Buff: 2018 2019 401k 403b IRA Contribution Limits
- The Street: How to Roll Your 401k Into an IRA While You're Still Working
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.