What is a 403b Retirement Plan Rollover?

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So, you’ve left your job, or plan to, but still have a 403b retirement plan with your old employer, with a tidy pile of money in it.
Question: What should you do with it?

You’ve got four options:

  • Cash it out.
  • Leave the money in your old company’s retirement plan. 
  • Move your money into your new employer’s retirement plan.
  • Rollover your 403b retirement plan into an IRA.

The first option is rarely the best one. If you cash in your 403b retirement plan, the tax consequences can be stunning. Chances are, any 403b consultancy that you approach, will advise against it. To start with, your employer is required to withhold 20% for federal income taxes, in this case a 403b retirement plan withdrawal costs you a 10% premature withdrawal penalty (if you are younger than 59½), and the money will no longer be tax-deferred for your retirement. In addition, since it will be counted as taxable income in the year you receive it, you may find yourself in a much higher tax bracket. On larger balances, it’s common to see a 35-40% loss due to these factors in accordance with the Internal Revenue Service’s 403b withdrawal rules. By comparison there are many tax benefits if you rollover your 403b to another tax qualified plan such as another 403b or an IRA. The other 3 options preserve the tax-deferred status. If you rollover the funds, make sure you choose a ‘trustee to trustee’ transfer, also known as a “direct rollover.” With this method, your old employer writes a check directly to the custodian that administers your new plan. This avoids taxes, penalties, and the mandatory 20% withholding requirement.

Here are the pros and cons of each option.

Reasons not to rollover your 403b to an IRA

There are a few reasons why you may choose not to rollover your 403b plan as listed by the consultants at Integrated Financial Services, Inc. when discussing 403b Consultancy Services:

  • The investments and expenses of the old 403b are so attractive, they cannot be replicated.
  • 403b retirement plans have loan options– IRAs do not.
  • If you’re still working for your employer at age 72, you can delay taking Required Minimum Distributions (RMDs) until you retire. Funds in IRAs must begin RMDs at the age of 72.

Note:  If you have less than $5,000 in your 403b retirement plan, your old employer may require that you withdraw your funds from the plan.

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Rollover an old 403b Retirement Plan to a new 403b Retirement Plan

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  • This option may be worthwhile if you have a smaller balance or you like the investment’s options and costs of the new plan.
  • It allows you to consolidate your 403b retirement plans giving you one less account to worry about.

Rollover your old 403b Retirement Plan to an IRA

Conventional wisdom has long been to take your 403b retirement plan with you and roll it into an IRA that you control. For up to 95% of retirees this may be the best option for the following reasons:

You can set up your own plan for your nest egg, with the investment options that you choose. 403b retirement plans are established by your employer and it is their plan, you are just a participant. You are subject to the rules they have adopted.  You are limited to the 20 or so allocation choices that the company allows with the custodian that they have chosen. Rolling to an IRA makes sense as you have a much broader range of investment options.  You can choose from over 10,000 mutual funds, and just about any individual stock, bond, annuity, or ETF. With many custodians, a huge selection of no-load mutual funds is offered to choose from with hundreds of different fund companies.

  • You can divide your funds into goal specific allocations. You can do different things such as income with a portion of your funds that are not available in a 403b retirement plan. Example: setting up a stream of lifetime monthly income that you are guaranteed never to outlive– like a traditional pension.  
  • If you rollover your 403b retirement plan into a traditional IRA— aka not a Roth — you won’t have to pay any taxes when you switch your account.  If you have under performing funds, you can make changes as you choose. 403b plans historically are slow to change their investment allocation options, based on performance or fees. 
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  • More options for early withdrawals: Unlike 403b rollover rules, the traditional IRA allows early distributions without penalty — (taxes are still owed) — for higher education expenses and a first-time home purchase.
  • 403b Inservice Rollover: Many 403b retirement plans allow Inservice Rollovers and withdrawals for individuals who are age 55 or older (often age 59 ½). With these provisions, an employee can take all or part of their 403b balance and roll it over to an IRA of their choice as an In service Rollover.  They can remain an active participant in the 403b retirement plan and continue to receive the company match on employee contributions. Often individuals who are approaching retirement are concerned with large potential losses and want investments that are not offered by the 403b retirement plan.Seeking help from a 401k consultant makes it easier for them to better understand the situation and set their expectations.

Can you rollover an IRA to a 403b Retirement Plan?

Yes. You can rollover your IRA into a 403b retirement plan, assuming the plan allows this type of rollover. If your 403b is set up as a Roth 403b plan it must go into another Roth designated plan whether Roth IRA or Roth 403b plan. You can always check with your 401k consultant to check whether your retirement plan allows you to conduct such a rollover.
Rollovers from IRAs to 403b retirement plans typically don’t receive much attention as they are uncommon. It might be worth considering for the following reasons:

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  • Potential for early access to your money: A little known provision of some 403b retirement plans is that if you retire after age 55, but before age 59½, you may be able to start tapping your 403b without penalty. If you retire earlier than 55, this provision doesn’t apply. Qualified distributions from traditional IRAs can’t begin until 59½ unless you start a series of substantially equal distributions known as a 72(t) plan. This is where you set up distributions for at least 5 years or until you turn 59½, whichever comes last. You must use an IRS approved calculation method which factors in your IRA balance, age, life expectancy, and a reasonable interest rate, based on treasury rates. It could mean taking much more or much less than you need or receiving the income for a longer period of time than you would desire.
  • If you work past age 72, you may be able to put off distributions. With a traditional IRA required minimum distributions to begin at age 72.A 403B does too – IF YOU ARE RETIRED.  However, if you’re still working, you can postpone required minimum distributions from a 403B until you retire.

Are rollovers permitted from 401k
Retirement Plan into 403b Retirement plans?

According to The Internal Revenue Service (IRS) you can rollover between  403b and 401k plans, IF your employer allows it.
401k plans are designed “for profit” corporations (the private sector).
403b plans are designed for “not for profit” and governmental entities.  
In the real world, employers don’t maintain both types of plans.
If you changed jobs and moved from a non-profit employer with a 403b retirement plan to the private sector employer who offers a 401k retirement plan, you could rollover the balance into it, IF your new employer’s plan will accept it.

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While the IRS regulations allow the rollover of assets between 401k retirement plans and 403b retirement plans, employer’s plan documents must be written to allow such rollovers.
If you have questions about your own situation, please call us at (616) 942-9080 and we will be happy to answer any questions that you may have.

Frequently Asked Questions

A 403b plan is also known as a tax-sheltered annuity plan. 403b plans are employer sponsored retirement plans that are available to non-profit or governmental employers including schools. Most 403b plan consultants will help employees in setting up contributions of a portion of their wages into the plan on a tax-deductible, tax deferred basis. Many 403b consultants will encourage employees to contribute at least enough to receive the employer matching funds if offered within the plan which is essentially “free money”. 403b consultants typically help employees choose among the investment allocations available within the plan. 403b consultancy services also help employers choose between available 403b plan custodians who actually hold the funds for the benefit of the participants and provide third party administrative services. 403 b consultancy benefits include helping in the selection of the appropriate provisions in the 403b plan document.
One of the primary advantages is the ability to contribute pre-tax dollars via payroll deduction, into a professionally managed tax-deferred retirement account. Contributions are often limited to a percent of wages (frequently 20%) but may not exceed 100% of the employee’s yearly wages or $58,000 (in 2021) whichever is less. 403b consultancy services will explain how employees can be eligible for matching employer contributions – which is essentially “free money”. Employers match contributions to encourage employee participation. Matching contributions vary by employers but are typically limited to a cap, such as 50% of the first 4% of employee contributions. 403b consultancy services are available to explain one of the disadvantages are the restrictions imposed by the government such as a 10% tax penalty for withdrawals prior to age 59 ½. 403b consultants will also point out that most 403b plans now have mutual fund allocations available. 403b consultants can explain Roth 403b plans, where the funds not only grow on a tax free basis but are tax free after retirement when they are withdrawn. The drawback of the Roth 403b plan is that the contribution to the plan are made with after-tax dollars unlike the traditional 403b plan contribution that is made with pre-tax dollars.
403b consultants will explain that the chief difference between a 401k plan and a 403b plan is the tax status of the employer who establishes the plan. 403b consultants will tell you to think of both of these plans as being “cousins”, since they are very similar. They are each authorized in a different section of the IRS Code, which handles retirement plans for employers with different tax status’. 403b plans are available for tax-exempt and non-profit employers such as schools, hospitals and governmental agencies. 401k plans are better known as they are available to a wider range of “for profit” commercial enterprises, such as factories, stores and other corporations.
How to choose between a 403b and 401k plan? 403b consultants can help but will be quick to point out that while there are differences, an individual typically doesn’t have the option to choose between a 401k and a 403b plan. 403b plan consultants will tell you UNLESS you work for BOTH a non-profit and a for-profit employer at the same time you only can contribute to the plan offered by your current employer. It’s the employer, who sets up the plan and their options are limited based on their tax status. Their employees in turn, can only enroll in the plans offered by their employer. 403b consultancy services are available to both the employer and the participants (the employees).
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