As you likely know, 403(b) plans, also called tax-sheltered annuities, are retirement plans offered by public schools, churches and certain 501(c)(3) tax-exempt organizations. If you currently hold a 403(b) plan and are changing jobs or retiring, you may be better off rolling over your plan into a different vehicle. Your choices include rolling over the 403(b) funds into an IRA or other retirement plan, keeping the funds where they are or simply cashing out of your plan.
Among the factors that should guide your decision are your work situation, your investment experience, the costs of various investment choices and your goals for investing the funds. Before moving your funds to another retirement plan, for example, be sure to research how much it will cost to invest in the new account. The costs (expense ratio) of the funds within any given plan can vary significantly. Also, be sure to ask if there are advisory or administration fees that will be applied to your account. I’ll detail the pros and cons of each of your potential options below.
Roll 403(b) Funds Over to an IRA
You can roll over your 403(b) funds to a traditional IRA without any tax consequences or penalties. Rolling over funds into an IRA will allow you to have many more investment options, along with more flexibility over security/asset allocation within the account. The 403(b) plan most likely only had 10-15 funds to select from. Moving the funds to an IRA will give you many more, depending on which custodian and strategy you select.
Once you have moved the funds to an IRA, you can start to take distributions from it after you reach age 59.5. Again, before moving your funds to an IRA, be sure to research how much it will cost to invest in this account. Fund management fees vary significantly, and you may be charged account advisory fees as well. (For related reading, see: How After-Tax Rollovers Affect Your IRA.)
Roll Funds Over Into Your New Company’s Retirement Plan
If you plan to find another job in the near future, you can most likely roll over your 403(b) plan to your new employer’s retirement plan if the new plan allows it. If you’re a teacher for a public school or work for a nonprofit, for example, you may find work with an institution that also offers a 403(b).
Whatever the type of retirement plan your new employer offers, the benefit of this option is to reduce the number of accounts you manage. As well, you may be more likely to monitor your investments in your current employer’s retirement plan. The same advice about fees applies: Do your homework. Administration fees are a normal part of retirement plans, and it is important to know how much you are paying as a participant in the plan.
Keep the Funds in Your 403(b)
You should also consider keeping the funds in your 403(b) plan if you are between jobs and don’t want to actively manage your investments. To keep funds in a 403(b) plan and not be forced to roll out the funds you must have a balance of more than $5,000. If your balance is under that amount, the plan administrator can roll over your balance to a rollover IRA automatically. 403(b) practices vary depending on the size of the organization, but if you worked for a large employer, the 403(b) plan will typically have lower fees. In addition, you might benefit from an investment committee—if your current plan has one—that reviews the investment options and will make changes if the committee determines a fund should be replaced.
Cash Out Your 403(b)
I sometimes get the question: Should I just cash out my balance? I’m including this option because it is available to you, but normally this should be a last resort. If you take a full distribution of the funds and put the funds into your bank account, the distribution is fully taxable and the IRS can apply a 10% penalty if you are under 59.5.
I would not recommend taking a full distribution even if the amount seems small to you and you are in your 30s or 40s. If you leave the funds in your 403(b) plan, the funds will grow for your retirement. People are surprised how much even small amounts can grow in 20 to 30 years. (For related reading, see: Retirement Funds: What Not to Do With Extra Cash.)
This is basically my full-throated recommendation that you carefully think through how much you’ll need for retirement and diligently continue to save toward that goal. Whether you’re just starting out in your career or closing in on the finish line, I would suggest you keep those funds in a retirement plan or rollover IRA so they can continue working and growing to help you secure a worry-free retirement.
(For more from this author, see: Prepare for 2017 With This Financial Checklist.)