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

Apr 13, 2022 | Financial Concepts

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

Walkner Condon Financial Advisors is a registered investment advisor with the SEC and the opinions expressed by Walkner Condon Financial Advisors and its advisors in this piece are their own. Registration with the SEC does not imply a certain level of skill or training. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.

Information presented in this piece is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed.

Information in this piece does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Readers are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.