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What Should I Do With My Old 403(b)? 5 Options to Consider

What Should I Do With My Old 403(b)? 5 Options to Consider

You may have recently changed jobs and are wondering, “What should I do with my retirement account that was established through my former employer’s retirement plan?”

If you work for a university, public school, or a 501(c)(3) tax-exempt organization (more commonly referred to as a charitable organization or nonprofit), you may have participated in a 403(b) plan. A 403(b) is similar to a 401(k) in many ways. It is a defined-contribution plan that offers an opportunity for an employee to save and invest for retirement in a tax-deferred manner. Some 403(b) plans offer a Roth feature, as well. Roth contributions are taxed in the year of the contribution with the promise of tax-free withdrawals (assuming the withdrawal is considered a qualified distribution).

Five Options For the 403(b) From Your Previous Employer

So let’s get to the reason why you’re probably here – options for the 403(b) from your previous employer. You have several options on what can be done with your old 403(b):

  1. Do nothing
  2. “Roll” the 403(b) into an IRA
  3. “Roll” the 403(b) into your new employer’s retirement plan
  4. Cash it out
  5. A hybrid of these options

1. Do nothing

You can keep the account where it’s at. It will continue to stay invested in the mutual funds or the annuity contract within the 403(b) plan. You won’t be actively contributing to the account anymore, but the account value will still fluctuate (and hopefully grow over the long haul). Balances in the tax-deferred bucket will continue to be tax-deferred and balances in the Roth bucket will continue to be treated as Roth funds. In some cases when the account balances are very low, the plan may force the former employee to take the funds out of the 403(b) plan. If that is the case, there usually is a way to roll the funds into an IRA (see bullet point 2 below) at the same custodian where the 403(b) is held.

2. “Roll” the 403(b) into an IRA

Tax-deferred balances can be rolled into a Traditional/Rollover IRA. If done correctly, there is no taxable event when rolling the funds from the 403(b) to the IRA. Be aware of an “indirect rollover” which is required to withhold 20% upon sending the 403(b) funds out of the account (also known as a 60-day rollover). This is where unwelcome tax surprises can occur. Similarly, Roth balances can be rolled into a Roth IRA. Again, if done correctly there is no taxable event when rolling the Roth funds from your old 403(b) to the Roth IRA.

3. “Roll” the 403(b) into your new employer’s retirement plan

The IRS allows you to roll your old 403(b) into your new employer’s plan, whether it be another 403(b) or another qualified plan like a 401(k). However, just because the IRS allows it doesn’t mean that your new employer’s plan allows it. In other words, when your new employer creates a retirement plan, they are not required to have the plan allow incoming rollover contributions. That said, many plans allow rollover contributions. Both tax-deferred and Roth funds can be rolled into your new employer’s plan and will continue their respective tax treatment (i.e. tax-deferred stays tax-deferred, Roth stays Roth).

4. Cash it out

Generally, this isn’t recommended! However, it is an option. Unless there is a severe need for cash we do not recommend this when it comes to your long-term retirement goals. Generally speaking, the funds distributed will be taxed and penalized. There are additional variables that come into play here (hardship withdrawals, age of the employee, tax-deferred vs. Roth funds, basis vs. earnings, etc.) but that is beyond the scope of this blog post.

5. A hybrid of these options

You can rollover some funds and also perform a Roth Conversion of some of the funds, if you’d like (a Roth Conversion will be a taxable event). A Roth Conversion can be part of a complex planning strategy; make sure you talk to your professional advisors when considering this approach. You could also rollover some of the funds and take some of the funds in cash (taking the cash will be a taxable event). Again, taking a cash distribution before retiring generally isn’t recommended.

Where to from here?

Some of the scenarios above are pretty straightforward; others are not! Things to consider before making any changes include investment options available, fees, plan design (in the case of a qualified retirement plan), and consolidation needs. Chat with your financial advisor and your tax professional to determine what makes the most sense for your retirement plan and your individual situation. Please reach out if we can be valuable to you when it comes to your financial planning needs.

Mitch DeWitt, Certified Financial Planner™, MBA

What are the Limits for My Investing and Spending Accounts?

What are the Limits for My Investing and Spending Accounts?

As Spring springs and we approach the end of the first quarter of 2022, it is a good time to familiarize yourself with the changes to the more popular savings vehicles. It is imperative to understand the basics of these accounts to avoid mistakes, as the penalties can be quite onerous. This is not an exhaustive list, but it is a good place to start. 

The list is broken up into the appropriate categories of employer-sponsored plans, personal retirement plans, healthcare and spending accounts, and educational accounts.   

Employer-Sponsored Plans

401(k), 403(b), and most 457 plans have a new maximum employee contribution limit of $20,500, up from $19,500 in 2021. The overall maximum annual additions into defined contribution plans (which include 401(k) and 403(b) plans) increased from $58,000 to $61,000. 

Individuals aged 50 and older are allowed an additional $6,500 of contributions. Note that the “age 50 catch-up” amount did not increase from 2021 to 2022.

Personal Retirement Plans

IRA and Roth IRA contribution limits are unchanged at $6,000 for people under the age of 50 and $7,000 for individuals 50 years old and older. 

The traditional and Roth IRA income phase-out ranges are also increasing. 

Healthcare and Spending Accounts

Health Savings Account contribution limits increased from $3,600 to $3,650 for individuals and $7,200 to $7,300 for families. 

The HSA catch-up contribution for individuals 55 years old and older is an additional $1,000. This is unchanged from 2021.

The  Health Care Flexible Spending Account (FSA) limit has increased to $2,850 in 2022 – up from $2,750 in 2021.

The Dependent Care FSA limit in 2022 has reverted back to $5,000 for a married couple filing a joint tax return. The American Rescue Plan temporarily increased the limit to $10,500 in 2021.

529 College Savings Plan

529 plans do not have contribution maximums; however, contributions are considered completed gifts for federal tax purposes, and in 2022 up to $16,000 per donor ($15,000 in 2021), per beneficiary qualifies for the annual gift tax exclusion.

The Coverdell IRA contribution limit is $2,000 per student, per calendar year. 

The annual changes to contributions and income limits are not consistent year-over-year; therefore, understanding the changes and how they affect your specific situation is important. It is a good idea to check your contribution levels early in the year as payroll adjustments and/or automatic contributions into your IRA accounts may be required periodically. 

Nate Condon 

Financial Check List for the End of the Year

Financial Check List for the End of the Year

There is a small, but distinct, satisfaction that comes from crossing items off of a list. The immediate sense of accomplishment gives us a boost that propels us to the next thing on the list. Whether it is a chore list on the weekend or items off a grocery list, we, as a whole, increase our productivity when we have a set of priorities. 

Our financial lives would benefit from a task list just the same. As we move through 2021 with Covid still in the news and the stock market enjoying another great year, we should keep in mind that there are still things to accomplish pertaining to our finances. Think of this as a mid-year financial checklist: 

1: Fund your IRA, HSA accounts

If you have personal retirement accounts, such as Roth or Traditional IRAs, be aware of how much you have contributed to this point and how much you plan to fund before April 15, 2022. The maximum contribution amount for Roth or Traditional IRAs for 2021 is $6,000, or $7,000 if you are over the age of 50. Monthly systematic contributions plans are a great way to fund these accounts; however, many of these plans were set up years ago when the contribution limits were lower. You may not be max funding your account if you haven’t increased your monthly amount within the last few years. Health Savings Accounts are another great way to save money in a tax-preferred way. Not everyone is eligible for an HSA, so check to make sure you qualify. The 2021 contribution limit for individual HSA accounts is $3,600 and $7,200 for family accounts. 

2: Complete your RMDs from IRA, Beneficiary RMD

Required minimum distributions, or RMDs, are annual distributions from IRA accounts. In 2020, required minimum distributions were suspended and have been reinstated for 2021. Recent legislation has increased the age for RMDs to 72 for tax-deferred IRA; however, inherited IRA accounts have different distribution restrictions, so be aware if you are the owner of an inherited IRA as you may need to take distributions prior to age 72. RMD’s must be taken by December 31 of each year, except in the year that you turn 72, in which you have until April 1 of the following year. It is the responsibility of the IRA owner to ensure that the total RMD amount due is withdrawn each year and that the calculation takes into consideration all of their tax-deferred IRA assets.  

3: Verify your 401k, 403b Contributions

The maximum amount that employees can contribute to their 401k or 403b accounts for 2021 is $19,500, with an additional $6,500 allowed if the employee is over the age of 50. This maximum contribution amount has been increasing over the last few years so it is important to verify the amount coming out of each paycheck if your desire is to max fund your account. These limits do not take into consideration any match provided by your employer. Most employers offer flexibility in making and changing contribution amounts, so you could increase your amount mid-year if you are not on track. Also, be aware that many of the 401k or 403b plans now offer a Roth option within their plan. This doesn’t affect any Roth IRA contributions. 

4: Check Your Mortgage Rate For Possible Refinance Opportunities

I fully realize that the mortgage refinance discussion is becoming quite repetitive at this point, but it does bear repeating. The current mortgage rates are under 3% for a 30-year fixed mortgage, and the 15-year mortgage rate is in the low 2% range at many lending institutions. We generally advise looking into a mortgage refinance if you are planning on staying in the home for at least 3-5 more years and a rate reduction of at least .5%-.75%. That said, everyone has a different financial situation and should consult with a financial advisor or mortgage specialist prior to making a final decision. For many people who have refinanced within the last few years, another refinance may not be appealing; however, it would behoove you to look into this option again if the variables are in your favor. 

5: Review Your Cash Position, Travel Expenditures

Take time to review your current cash position and the amount of cash you prefer to have at any given time. A person or family’s cash position is an interesting subject within the world of financial advising. We have clients who need six-figure cash positions to feel comfortable, while other clients desire to hold small cash positions as they don’t like “money on the sidelines.” We like to frame this conversation by taking into consideration any other investment and retirement accounts. For example, a client with a large taxable account can afford to get away with a smaller cash position in contrast to a client with all of their non-cash assets in IRA or 401k accounts, where liquidity provisions are more onerous. We strongly believe that every well-built financial plan has a healthy cash position to cover job losses, emergency expenses or unexpected travel. The current low-rate environment is creating a challenge to find a decent return for cash; however, safety is the main job for this portion of your financial plan. 

This is not a comprehensive list, by any means, but I hope this makes you think about a few things to review between now and the end of the year. We are more than happy to discuss any of these items with you and how they pertain to your overall financial plan.

Nate Condon