When you leave a job, you need to make sure you take your retirement funds in your 403b account with you. It sounds logical but many people become distracted by the recent changes in the life and forget about the retirement funds they have with their previous employer.
Once you have left an employer, you have several options for rolling over your 403b funds into another type of retirement account (like a traditional IRA or converting to a Roth IRA). A great way to keep the money you have saved to date growing in a tax-deferred account is by rolling over your assets into a traditional IRA (Individual Retirement Agreement).
What is 403b?
When you are talking to someone who has a 403(b), they usually don’t know as that. They will usually refer to it their “tax sheltered annuity”. This is primarily when 403(b)’s were initially adopted, insurance companies were the first ones to get their foot in the door. So most people who had a 403(b), had an annuity that was tax sheltered. Do you see the connection yet? Good. More common now is that you will find other investment companies also available within 403(b) plans.
How To Rollover 403b Funds
If you do a direct rollover of funds into the IRA account, you will avoid the mandatory 20% federal income tax withholdings assessed on retirement funds withdrawal. You can open an IRA account at any financial institution offering this type of account. You will need to complete the 403b rollover by the 60th day following the day distribution is received. The IRS does allow for two exceptions to the 60-day rollover rule. In the cases of financial hardships or unforeseen circumstances, you may be allowed an exemption. Exemptions are not guaranteed and the IRS will require proof of financial hardships, such as hospitalization or other kind of crisis. Unforeseen circumstances typically including when your funds are frozen in an account.
Typically, you only need to complete a signed contribution form which is required by the IRA trustee in order to rollover the funds into the IRA account. You will need to check with the specific financial institution regarding its rollover policies prior to conducting the transaction to avoid delays in processing.
You will also need to consult with the plan administrator of your 403b account to complete the appropriate paperwork. Some will require a distribution request for to be completed before assets can be rolled over. Some administrators will also need a letter of acceptance from the IRA trustee/financial institution. These documents will provide proof that funds are being transferred to a legitimate retirement plan account.
Pros and Cons of Rolling Your 403b into an IRA
The advantages of rolling over a 403b account into an IRA include greater flexibility for investing. You can then use the funds in the IRA account for other investment options including mutual funds and individual stocks. While there are advantages there may also be some disadvantages. An IRA may cost more money to maintain than the original 403b account because you likely did not have to pay for transaction costs. In the event you ever file for bankruptcy or are on the receiving end of a lawsuit, your funds in an IRA are not protected by the Employee Retirement Income Security Act established to ensure invested monies are designated especially for retirement and can not be used for debt purposes.
Note: Regarding the ERISA ruling and your IRA at least $1 million in IRA assets would be protected if you filed a bankruptcy claim. With lawsuits, it’s a different story. Depending on the suit and, most importantly, it depends on the state in which you reside.
403b to Roth IRA Conversions
If you don’t want to roll your 403b into a traditional IRA, you also have the option to convert it to a Roth IRA. You will have to pay the appropriate tax when you do convert so seek counsel from a tax professional before doing so. If you plan on doing it before year-end, be sure to check out my article on Roth IRA Conversion Rules.