What are your options with your 403(b) when you quit?

If you’ve just left a job at a public school or a non-profit, there’s a fairly decent chance you’ve had access to a retirement savings plan called a 403(b). Leaving any job is a good reason to reevaluate finances and retirement planning, so it’s a good idea to look at your options for moving your old 403(b).

Here, we’ll discuss what a 403(b) is, who is likely to have one, and the options for moving it out of your old employer’s plan once you decide to leave your job.

What is a 403(b)?

A 403(b) is a retirement savings account offered by employers that is typically available to teachers and other public service workers. The 403(b) is cleverly named after its tax-protected status in the IRS uniform code. A useful way to think about a 403(b) is as a 401(k) for those who work in public schools or other non-profit environments.

The following careers are usually eligible for 403(b) retirement benefits:

• Public school teachers
• College and university employees
• Hospital workers
• Employees of NFP (Not-For-Profit) organizations
• Some church and charity employees

In short, the 403(b) operates in a similar way to a 401(k) since it helps people save and invest for retirement, but there are some differences between a 403(b) and a 401(k) you should be aware of. It also has certain tax implications, depending on whether you choose the tax-deferred (pre-tax) or a Roth (after-tax) option.

What can I do with my 403(b) when I quit?

This is where it can get tricky — but fear not. You have several choices when it comes to handling your 403(b) retirement funds once you change jobs, or simply leave your previous one, including doing nothing, rolling it over, or combining it with a new plan.

Do nothing with your 403(b) and leave it alone.

There isn’t anything preventing you from just leaving your 403(b) as is and letting it grow into and through retirement. It’s a good idea to make sure you have the contact information of your plan administrator before leaving should you need to reach out with any questions in the future.

Pros of leaving your 403(b)

• No time commitment, other than to make the initial decision
• Simplest option
• Works well if your 403(b) investment menu and fee structure are adequate

Cons of leaving your 403(b)

• Account may be easily forgotten or suboptimally invested
• Investment options tend to be limited (fine for some, but not for others)
• Potentially higher cost — but not always

Leaving your 403(b) retirement funds alone is of course an option. Still, you’ll want to be sure that the account is part of your comprehensive financial plan and that you understand the investment and tax ramifications of leaving your account with your previous employer.

Roll your 403(b) over to an Individual Retirement Account (IRA).

Rolling over to an IRA involves making a few phone calls and arranging for your old account to be moved from your previous employer to a provider of your choice. Since IRA accounts are opened outside of your employer, this option won’t involve your new employer, even if they also offer a 403(b) plan (more on this later).

Pros of rolling over a 403(b)

• Wider choice of investments to choose from for your retirement funds
• Almost always lower cost
• More likely to allocate money within the context of a greater financial plan
• Consolidation tends to make things easier to visualize

Cons of rolling over a 403(b)

• You’ll need to initiate a transfer
• It will take a bit of time for your former employer to transfer the funds
• You’ll need to decide which type of IRA makes sense for you
• You’ll likely want your IRA to have the same tax status as your 403(b), so you don’t incur any unwanted tax consequences
• May be unnecessary if your 403(b) is sufficient and to your liking

The biggest pitfall of moving your 403(b) to an IRA is not carefully weighing the tax consequences of the particular type of account you’re considering. For instance, if you’re thinking of moving your 403(b) to a Roth IRA (a Roth conversion), you’ll need to explicitly calculate the tax cost based on your account balance and be sure you have the money available to cover the upcoming income tax bill. Alternatively, your rollover will be tax-free if you proceed with moving your pre-tax 403(b) to a Traditional IRA (also pre-tax). You may want to consult a tax advisor before moving your retirement account and to better understand your contribution limits.

Bottom line: If you do choose to move your 403(b), know why you’re moving it, how it benefits you, and also be sure that you understand any potential tax consequences.

Combine with your new employer’s 403(b) retirement plan 一 if you have one

This is only an option for you if you decide to move on to an employer that also offers a 403(b) plan, and your new employer’s plan would also need to allow “roll-ins” to the plan. Note that you won’t be able to combine your old 403(b) with a 401(k) plan or 457 new employer-sponsored retirement plan, you’ll only have the choice of merging your old 403(b) into a new 403(b) plan if that’s even on the table in your specific circumstances.

Pros of combining with your new 403(b)

• Consolidation of 403(b) plans into a single account (the “less is more” approach)
• Preserve benefits of 403(b) plans, like ERISA protections
• May offer distributions without penalty if you decide to retire after age 55
• Beneficial if the new employer has a superior 403(b) retirement benefits plan and offers employer contributions

Cons of combining with your new 403(b)

• Still may be less effective than opening an IRA
• This will depend on costs and investments offered within the new 403(b)
• Will take time to set up, transfer, and reinvest the money
• The new 403(b) plan may be inferior to your old plan

403(b) Frequently Asked Questions

What happens to my 403(b) when I quit?

Provided you don’t direct any specific action, you’re 403(b) will typically remain as-is within your previous employer’s plan (should they allow it). You may want to consider rolling over your 403(b) if you feel the benefits of doing so outweigh leaving your 403(b) behind.

Can I cash out my 403(b) after leaving my job?

You can elect to cash out your 403(b) after you leave your job, but if you’re under the age of 59.5, you’ll be subject to a 10% early withdrawal penalty on top of the income tax that you pay on cashing out. Most financial planning experts recommend against this, as it can detract from your retirement strategy and decrease your future retirement income.

What are my 403(b) withdrawal options?

Some people may be tempted to take an early retirement withdrawal on a 403(b), but be aware that you may be subject to an early withdrawal penalty and should consult a financial advisor if you’d like to be penalty-free.

Can I contribute to 403(b) after leaving my job?

If you choose to leave your 403(b) at your previous employer’s plan, you won’t be able to make any additional contributions once you quit.

Can I roll over my 403(b) to an IRA while I’m still employed?

You will want to check with your 403(b) plan administrator to see if they allow you to roll over your 403(b) while you’re still employed.

The bottom line

As long as you’re including— and thoroughly understanding — your 403(b) investments as part of your broader financial plan, you’re on the right track. The next step is to ensure that your money sits in the best vehicle possible, which may be an IRA. This will completely depend on your situation. Different IRA brokerages can offer lower account fees and more investment choices, including mutual funds and ETFs, making them a popular option for an IRA rollover destination. Capitalize can help with both direct rollovers and indirect rollovers and will manage the entire process for you for free. Click here to get started.