The 403b to IRA decision is driven by two common questions: (1) can I make a 403b to IRA transfer and (2) which one is better. The first questions is easy to address, the second question will vary by individual. However, we will cover some of the basics as you navigate through your retirement planning.
What is a 403b?
The 403b plan, also known as a Tax Sheltered Annuity (TSA) plan, is a tax deferred retirement plan available to employees of educational institutions, church employees, government and certain tax exempt organizations as determined by the Internal Revenue Service (IRS) Publication 571.
403b plans have different structures:
- An annuity contract through an insurance company,
- A custodial account invested in mutual funds, or
- A retirement income account set up for church employees which are usually invested in either annuities or mutual funds.
403b is similar to a 401k. Contributions and investment earnings in a 403b grow tax deferred until retirement, at which time they are taxed as ordinary income.
For the most part, you will pay a 10% penalty if you receive distribution prior to age 59 ½ except when allowed. You can avoid the penalty on distributions when you:
- reach the age of 59½,
- separate from your employer in or after the year in which you reach the age of 55,
- receive severance from employment,
- become disabled,
- encounter financial hardship,
- In certain cases, have made salary reduction contributions, or
- In certain cases, are a reservist who is called for duty.
Lets compare some of the advantages and disadvantages that impact the 403b to IRA decision.
- If employed:
- you can contribute more on the a 403b,
- your employer might offer a contribution,
- you reach 55 and retire, you can receive distributions at 55.
- You might be able to borrow from you 403b, but it will very depending on the provider.
- Limited investment choices,
- High and difficult to quantify costs. In particular if the investment is structure around an annuity, and
- Limited frequency of changes.
Did we solve the 403b to IRA question?
If you are employed, the benefits of a 403b are difficult to beat. The lack and many time poor investment choices and high costs are often more than offset by employer contributions. However, the benefits of a 403b are limited when you leave your job.
403b to IRA: What are the options?
When you contributed to a 403b plan and leave that job, you have four options:
- Take an early distribution 403b (cash it out)
- Keep it in your previous employers plan
- Transfer to qualified retirement account such as another 403b or Rollover IRA
- Rollover into a Roth IRA
A Rollover is the transfer from a qualified retirement account to another qualified retirement account.
The early distribution and Roth IRA option create tax consequences. In order to avoid the withdrawal penalty, the best option is to either (1) keep the assets in the current plan or (2) set up a Rollover IRA.
- Flexible investment choice,
- Freedom to select financial institution,
- Ability to choose cost structure (you can even pay someone to actively manage the account),
- You can rollover over from one Rollover IRA to the another Rollover IRA,
- Additional flexibility with beneficiary planning (via Inherited IRA),
- Tax penalty for withdrawals before you reach the age of 59½.
403b to IRA: Should I roll my 403b to Rollover IRA?
You can generally rollover your account without paying taxes. In the Rollover IRA post, the chart outlines that a Rollover IRA is able to receive a direct rollover of all your assets in your 403b. The central question with most financial decisions is: does it make sense for my particular situation? Below are some questions to consider or ask your employer and financial advisor when thinking about making your 403b to IRA decision:
- Are you comfortable leaving the assets in their current plan?
- Are you still employed with an institution offering a 403b? You might be able to transfer your old 403b to your new 403b.
- What are your investment options and costs?
- How does the 403b fit into your retirement planning?
- Can you wait to 59½ for distributions?
A Rollover IRA and 403b plan usually have Required Minimum Distributions (RMD) by the age of 70½. The distributions are based on age and account balance and FINRA has a good RMD calculator. However you might have an additional 4½ years for the contributions made and kept in the same account prior to 1987 to a 403b.
In addition, public safety officers (law enforcement and firemen) might be eligible to take up to $3,000 in distributions tax free each year to pay for long-term care or health insurance premiums for themselves, spouse, or dependents.
We hope you are closer to solving your 403b to IRA decision.