For the most part you get to decide what happens to your 403(b) when you quit or change jobs.
You may be able to leave your 403(b) with your old employer. Otherwise you can withdraw it, roll it into an IRA, or transfer it over to a new employer.
What you do depends in part on whether you plan to continue to contribute to your 403(b) plan, or are getting ready to retire. Either way, this 403(b) calculator can help you see where you stand.
Let’s look at the options.
Leave Your 403(b)
In most cases you CAN simply leave your 403(b) with your old employer. (If you have small balance your employer can force a rollover.)
Of course just because you can leave it doesn’t mean you should. There’s no real benefit to you to leave it behind, and you’ll have to deal with a company you don’t work for anymore if you need help.
One reason you would want to leave it is if your new employer’s 403(b) plan investment options are poor and you don’t want to go through the hassle of opening an IRA (assuming you don’t already have one).
What usually makes 403(b) investment options poor is their cost. Make sure to check out the expense ratios of your new plan. If they are significantly more than your old plan, it may be best to just leave the money where it is or roll it into an IRA.
It may also make sense to leave it if you aren’t moving to a new employer with a 403(b) and you plan to retire before 59&1/2. I explain why in the IRA rollover section below.
Withdraw
You could also simply withdraw the balance as cash. This is almost never the best option. You’ll have to pay income tax on the full amount of the withdrawal, and it will no longer grow tax-deferred.
If you are under 55 you’ll also have to pay a 10% penalty on top of your regular income tax.
Roll into an IRA
You can also roll your 403(b) into an IRA. This option will give you the most flexibility and investment choice. It’s also convenient because you won’t have to worry about moving your account again if you change employers in the future.
If you don’t already have an IRA account you can open one at the same time you initiate the transfer. It’s an easy process for your advisor, or the online account opening tool will prompt you if you are doing it yourself.
Before you decide to roll your 403(b) into an IRA make sure to think about when you want to retire. If you roll your 403(b) into an IRA then you lose the ability to take penalty-free withdrawals from your 403(b) starting at 55. Withdrawals from an IRA before 59&1/2 are subject to a 10% early withdrawal penalty, but the age is 55 for a 403(b).
Of course, that’s a moot point if you are already in your 60’s.
Roll Over New Employer’s 403(b)
Similar to transferring your old 403(b) over to an IRA, you can move into your new employer’s 403(b) if your new plan allows it.
Moving your old 403(b) to your new employer’s plan will make it easier to manage than leaving it behind because then you’ll only have one account. Again, make sure your new plan isn’t unnecessarily expensive. If it is, it would be better to roll your old 403(b) into an IRA.
Check Your Vested Balance
If you’ve only been with your employer for a few years you’ll notice that the amount you transfer could be substantially less than the amount you have in your account.
That’s because of the matching contributions your mad to your account. You have to work for your employer for a defined period of time to be able to keep any matching contributions. If you leave before that time, you have to give back all or a portion of the matching funds they have contributed. Your vested balance is the amount of your 403(b) that you get to keep if you quit.
Your unvested balance will go back to your employer when you quit whether you leave your 403(b) there, transfer it to your new employer, or withdraw it.
What about a Pension?
If you have a 403(b) because you worked in education then chances are you have a pension too. What happens to your pension when you leave a job? Again, you have options.
What Should I Do with My 403(b) When I Quit?
What should you do with your 403(b) when you quit depends on the reason you quit and whether you will still be working.
When possible, try to avoid simply withdrawing the account. Rolling your old 403(b) into a new plan or IRA will make the best use of tax advantages and allow returns to continue to grow. If you are planning ahead for retirement or need to start thinking about retirement withdrawals consider which option best supports your goals.
If you are nearing retirement and plan to work with a retirement planner, ask them. Also consider these additional questions to ask a financial advisor about retirement.
To get help from a fee-only fiduciary and make sure you are making the best choice for your 403(b), email me at [email protected] or call 903-471-0624 and we will get started.
