Can you rollover a 403(b) to an IRA while still employed?

Like 401(k)s, 403(b) plans offer tax-deferred retirement investing—specifically for to those who work in the nonprofit sector. Public school employees, as well as employees of charitable or otherwise tax-exempt organizations, may have a 403(b) plan as part of their retirement plan options.

Also like a traditional 401(k), 403(b) plans can be rolled over into a rollover IRA, or individual retirement account. Generally, you can’t perform the rollover while you’re still employed, but you may be able to in some cases.

Below, we’ll walk you through what you need to know about these different retirement plans, as well as the steps it takes to open a rollover IRA and begin the transfer. Don’t forget that if you have remaining questions, a qualified tax advisor can help.

Understanding 403(b) Plans

Let’s first review what a 403(b) plan is, including its features, benefits, and restrictions.

What is a 403(b)?

A 403(b) plan is a type of employer-sponsored plan offered to those who work at non-profits, schools, and certain governmental organizations. A 403(b) can be thought of as a 401(k) for those workers under a different type of employer sponsorship.

Features of a 403(b) plan

Some of the key features of a 403(b) retirement plan include:

• Tax-deferred contributions
• Employer matching contributions (up to a specified percentage of salary)
• Various investment options (usually mutual funds)
• Maximum employee contribution limits of $24,500 for tax year 2025

Benefits of contributing to a 403(b) plan

Just like when you make a contribution to a traditional 401(k), you’ll reduce your taxable income in the current year, build tax-deferred savings, and accelerate your retirement saving timeline. Roth accounts, or Roth 403(b)s, if available, work in the opposite fashion: Contributions will count toward your taxable income this year, but you’ll enjoy tax-free retirement income in the future.

Additionally, you current employer may offer matching contributions that can augment your investment strategy and retirement planning. Because matches on an employer-sponsored plan basically amount to a free raise, they’re a really attractive option for many participants.

Restrictions of a 403(b) plan

Like a 401(k), taking money out of your tax-deferred (or pre-tax) 403(b) plan will lead to ordinary taxes (both federal income tax and state) as well as early withdrawal penalties if you’re not yet 59.5 or older.

When you reach age 73, you’ll also have to manage Required Minimum Distributions (RMDs).

Finally, you’ll likely have access to only a relatively limited set of investment options, at least when compared to those available inside an individual retirement account.

Contributions to a 403(b) plan must be made through payroll deductions, and, like a 401(k), there are contribution limits to how much an employee can contribute, though an employer match can help.

IRA Rollovers

Now, we’ll walk through a brief primer on IRA rollovers: what they are, the types of IRA rollovers you might encounter, the benefits and regulations associated with them, and what a normal IRA rollover process looks like.

What are IRA rollovers?

An IRA rollover is the process of moving funds from one retirement account, like a 403(b), to an IRA account. Fortunately, an IRA rollover done correctly shouldn’t lead to any penalties or taxes.

This means a pre-tax 403(b) should be rolled into a pre-tax, traditional IRA, and a Roth 403(b) (if you have one) should be rolled into an after-tax Roth IRA account. Both account types have their own tax advantages.

IRA rollovers can be used to consolidate retirement accounts, access more investment options, or simply change to a new plan administrator.

Types of IRA rollovers

There are two main types of IRA rollovers: direct rollovers and indirect rollovers.

A direct rollover involves transferring funds directly from one retirement account to another, while an indirect rollover involves withdrawing funds from one account and depositing them into another tax-advantaged account within 60 days.

Direct transfers tend to be administratively easier, while indirect rollovers have more regulations and introduce more risk to the process, including potential unexpected tax implications. We recommend avoiding them.

Benefits of IRA rollovers

There are a number of benefits to IRA rollovers, such as access to more investment options, the potential for lower investment fees, and greater control over your investment strategy.

Your employer-sponsored plan may only permit rollovers after you’ve left your job, but sometimes you may be able to roll over your 403(b) while you’re still employed.

Nonetheless, an IRA rollover done right should be both tax-free and penalty-free.

Process of IRA rollovers

If you decide to move forward with a rollover, you’ll need to select a new provider for custody of your account, initiate the rollover, and complete any necessary paperwork from either your previous employer or the receiving financial institution.

It’s important to carefully review your new IRA account provider’s terms and conditions, as well as any account fees that may apply. Also, remember that rollovers to an IRA are not considered IRA contributions, so you won’t have to worry about the annual limits here.

Rollover Rules for 403(b) Plans

When it comes to performing a rollover while you’re still employed (also known as an “in-service rollover”), you’ll need to follow the rules and restrictions set forth in your employer’s 403(b) summary plan document.

Here are some of the most common rules and restrictions.

In-Service Rollover rules

An in-service rollover is the process of rolling over funds from an active 403(b) plan to an IRA while you’re still employed. It’s usually easier to roll over a 403(b) you have from a previous employer, but in certain cases, you may be able to roll over an active 403(b) plan.

The rules for in-service rollovers vary depending on your specific plan and your employer. You may never be allowed to perform an in-service rollover, or you might be able to once your account is a certain number of years old or other terms and conditions are met.

Your mileage definitely varies here, so be sure to check your employer’s 403(b) summary plan document to learn more.

Restrictions for In-Service Rollovers

If your plan allows for in-service rollovers, there are restrictions that may apply. There may be limits on the amount that can be rolled over (i.e., you can only roll over vested money) and restrictions on certain types of contributions (i.e., you can only roll over money that you contributed yourself).

Some plans may require the employee to first take a distribution of a certain amount—or percentage of the account balance—before an in-service rollover can be initiated. You may need to fill out a distribution request form, and this may have tax implications.

Taxes on 403(b) In-Service Rollovers

In-service rollovers from a 403(b) plan to an IRA of the same tax status are generally non-taxable events, but there are cases that may result in income taxes due—along with potential early withdrawal penalties.

A direct rollover of your tax-deferred 403(b) plan to a traditional IRA can avoid any immediate tax bill and/or tax penalties, but check with a tax advisor for details.

Advantages of Rolling Over a 403(b) to an IRA

There are many advantages of rolling over a 403(b) plan to an IRA. These include greater investment choices, lower investment fees, more control, and the opportunity to consolidate your retirement accounts.

Greater Investment Choices

403(b) plans are typically limited to a small number of investment options, usually consisting of mutual funds. IRAs offer a much broader range of investment choices including ETFs, single stocks, bonds, and in certain cases, even precious metals, real estate, and cryptocurrency.

That gives you more opportunities for diversification of your portfolio as well as the chance to do your own asset allocation.

Lower Investment Fees

Although it’s not always the case, many rollover IRA providers offer lower investment fees than the 403(b) plan administrator that’s been chosen for you.

Control

Rolling over a 403(b) plan to an IRA can provide greater control over retirement savings, including the ability to change investment providers, as well as greater access to account information.

With an IRA, you can manage retirement savings in a way that aligns with your individual investment strategy. You may also be able to convert to a Roth IRA to enjoy the additional benefit of tax-free retirement income.

Retirement Account Consolidation

Rolling over a 403(b) plan to an IRA can simplify your retirement savings, as it’s a way to by consolidate multiple retirement accounts into one. Consolidating accounts can simplify account management, potentially reduce administrative fees, and save a ton of time. Having multiple providers can be confusing and logistically difficult if you aren’t super attentive to all your accounts.

Disadvantages of Rolling Over a 403(b) to an IRA

There are also disadvantages of rolling over a 403(b) plan to an IRA, including potential tax charges and/or early withdrawal penalties, a potential loss of benefits, and less ready access to your retirement funds.

Potential Penalties

If you elect an indirect rollover, wherein you receive your 403(b) funds directly, you may wind up paying a large difference between the distribution and the balance out of pocket—and failing to recoup the funds at tax time if you don’t make the deposit in a timely manner.

Make sure to have a new account ready at a brokerage of your choice, regardless of the type of rollover you elect.

Loss of Benefits

Rolling over a 403(b) plan to an IRA may result in the loss of certain benefits, such as employer contributions or matching contributions. If your employer provides matching contributions, you might want to stick with the 403(b) plan as long as they’re willing to offer them.

Some 403(b) plans may offer lower fees or other benefits that may not be available in an IRA, so be sure to check with your employer (as well as a qualified financial advisor) before moving funds around.

Limited Access to Funds

Unlike 403(b) plans, IRAs don’t offer loan provisions before retirement age, which may be valuable to some retirement savers.

Factors to Consider Before Rolling Over a 403(b) to an IRA

Make sure you’ve thought about the key factors before you roll over your 403(b) plan to an IRA.

Future Job Opportunities

Your new employer’s plan may offer better benefits or investment options in their 403(b) plan than what you might find in an IRA.

As an example, a new employer might have a low-cost, up-to-date 403(b) plan that you can use to merge your old 403(b). Consider that a future job opportunity could enhance your retirement planning strategy before you make the leap to an IRA.

Total Financial Situation

Your complete financial picture is an important factor to consider when deciding whether to roll over a 403(b) plan to an IRA.

Rolling over a 403(b) plan to an IRA may result in potential early withdrawal penalties or loss of current benefits, which should be taken in the context of your total financial circumstances.

Retirement Goals

Different retirement goals may require different investment strategies, and the available investment options will certainly vary when you compare your 403(b) to an outside IRA.

It’s critically important to evaluate your retirement goals and the related investment strategy to achieve those goals. That will help to make your decision easier—especially if you aren’t satisfied with your current employer’s 403(b) plan offering.

Need Help Managing A Rollover While You’re Still Employed?

Capitalize can be your trusted partner for managing your 403(b) rollover—even if you’re still employed.

As with most personal finance decisions, there are clear benefits of working with a partner to manage the process. Capitalize can manage the entire process of your 403(b) rollover, as we’ve helped thousands of retirement savers from across the country get their account transfers in order.