Should I rollover my 403(b) into an IRA or 401(k)?
I recently left my job in the nonprofit world where I had a 403(b). I now have an employer 401(k) as well as a personal IRA account. Which is the best account to rollover the money in my 403(b)? Or should I just leave the money in my 403(b)? How do I go about making this decision?
A lot depends upon the fees and flexibility in your 401(k) and 403(b) accounts. Some of these have as much choice as IRA accounts. Other employer plans have only a few choices and all kinds of restrictions. If you are happy with your 403(b) account then you should not move it into an IRA account purely for consolidation's sake; that is a common mistake. However, if you like your 403(b) account the least then consider doing so. Also remember that your pre-tax money should into a traditional IRA and your after-tax money into a Roth IRA.
Finally, don't do a rollover! Hundreds of people here want to do rollovers; I want to grab them by their necks and wake them up to reality. The IRS substantially changed the rollover rules a year ago and no one seems to have gotten the message. Do a transfer from one retirement account to another, not a rollover. If you do a rollover you will be subject to scrutiny along with an IRS audit and you may have to pay penalties if you do more than one rollover in any 12-month period.
Just to recap, you have three options: do nothing and keep the funds in the 403(b), roll them into the 401(k), and roll them into your IRA. Here are some of the economics of each:
1 - Keeping the funds in the 403(b):
This is the least likely to be your best course of action. In my opinion it would only be viable if the retirement plan had very good investment options compared to your 401(k) and/or the investment options you'd have and choose in your IRA. Again, this is unlikely to be a big enough factor to make this the most attractive option.
2 - Rolling into the new 401(k):
There may be some simplicity gained by performing this rollover. In this case a large portion of your retirement assets would be in the established asset allocation you've chosen in the 401(k) and, assuming this allocation is appropriate, the rebalancing features may be beneficial to you if you're more of a hands off investor. However, some 401(k) plans have high expenses and limited or poor investment options. In these cases it's unlikely that this would be the ideal route.
3 - Rolling into an IRA
As a professional portfolio manager, this is the direction I would go, but it's not for everyone. With an IRA you have access to a much broader universe of investments, the costs have the potential to be lower, and you have the ability to strategically perform tax optimization strategies like Roth IRA conversions. If you feel comfortable being responsible for moderating and managing the asset allocation yourself, then this may be a good route to consider.
As with any advice, there's simply no blanket statement that works for everyone, regardless of their situation. The ideal path for you must reflect your individual circumstances. Of course, if I can clarify anything or help in any way, please reach out.
Adam Harding, CFP
The reasons why would want to rollover your 403(b) to an IRA are consolidation, easy access, control, and flexibility to invest in whatever you deem appropriate. it's easy to keep an eye on your retirement savings in your personal IRA. Most people tend to ignore funds left in previous employers for many years until its too late. You can choose to rollover the funds in cash or in-kind.
However, sometimes 401k and 403b plans offer access to certain lower cost mutual fund class shares that are not always available to individual investors. Some of these funds could be even closed to new investors. If this is the case in your new 401k plan, then it's worth moving your 403b funds there. You have to do some due diligence and see what makes the most sense to you.
In most cases the best course is to roll your 403b into your IRA. The reason for this is that you have many more choices in an IRA than you do in a 401k. In addition, the expense ratios on the funds offered in a 401k or 403b are generally higher than the expense ratios of investments you can buy in an IRA. Finally, if you need guidance and wish to use the services of an investment manager like an RIA it’s easier to have your money in an IRA rather than a 401k.
There may be legal reasons for keeping your money in a qualified plan like a 401k, but for most people the choice is obvious.
The last thing you want to do is leave the money in your old 401k. I find that many people leave a series of 401k plans behind as they change jobs out of sheer inertia. It’s simply hard to create a coherent investment strategy when your money is scattered among many individual accounts. Plus, there is the chance that either you or a beneficiary will lose track of this money. It’s happened more than once.
My answer is to pick the option available to you that has the least fees and gives you the most investment options. Most likely it will be the IRA but check to make sure. Also, there may be limitations on rolling a 403(b) into a 401(k). Call the 401(k) administrator and ask about limitations when you are asking about fees. Good luck.