Job Change and a 403(b)
by Susan Johnston Taylor
For her first job out of graduate school, Claire McGuire worked as a college librarian. When she left that job a few years later, she needed to decide what to do with her 403(b). “I didn’t consider withdrawing [the money],” she says. “I could have used the money but I was afraid to withdraw it, because I knew it would be too easy to make withdrawals again.”
Eventually, wanting more varied investment options, McGuire rolled into an Individual Retirement Account (or IRA), so she “wouldn’t be at the mercy of poor fund choices,” as she puts it. Rolling an old 403(b) into an IRA is one of several smart options job changers can take. Here’s a look at all your options for dealing with a 403(b) from an old job, as well as the pros and cons of each.
1) Leave it alone.
The easiest (but not necessarily best) option is to leave your 403(b) money in the account with your previous employer. You won’t be able to contribute any more money to that account, but hopefully it will continue to grow as you approach retirement.
Pros: There shouldn’t be any extra fees for leaving your 403(b) where it is. However, Ryan Inman, a financial planner for physicians (almost all his clients have a 403(b) account or multiple 403(b) accounts), only recommends this approach “if you are lucky and have a 403(b) that has amazing investment options--highly diversified, low expense ratio index funds.”
Cons: The investment options and fees in your old employer’s plan may not be your best option, plus managing multiple retirement accounts can be a hassle. “If you change jobs frequently or the balance is very small, it might become more of an administrative hassle [with] the time it takes to manage it,” Inman says.
2) Cash it out.
Rather than rolling over a 403(b) or leaving it alone, you could just cash out the balance.
Pros: Access to money now—but at a steep cost.
Cons: Unless you are in extreme financial need, Inman does not recommend this route due to the fees. “If you are under 59 ½, you will have a 10 percent penalty from the IRS,” he says. “This is the worst option you could take if you are under 59 ½.” Plus, you won’t have the benefit of that money in retirement. If you really need the money, consider other options like a personal loan or a home equity loan before cashing out your retirement.
3) Roll it into your new employer’s plan.
If your new employer allows it (no all do), you can roll your old 403(b) balance into your new workplace retirement account.
Pros: Rolling funds into your new employer’s plan has no tax consequences and helps you consolidate your retirement accounts for the sake of simplicity. “The IRS doesn’t have any limits or prohibit the rollover into the new plan,” Inman says.
Cons: Read up on your new employer’s retirement plan before you roll over funds from your old account. If the new employer’s plan has high fees or limited investment options, this might not be your best bet. “The only way that I would ever recommend someone doing that is if they had a bunch of really good investments: highly diversified, low cost index funds,” Inman says.
4) Roll it into an IRA with a Vendor of Your Choice
If you choose to roll over your 403(b) balance into an IRA, make sure you’re doing a direct rollover (also called a trustee-to-trustee rollover) to your IRA rather than an indirect rollover (where you receive a check made out to your name). Indirect rollovers can be subject to tax withholding, so a direct rollover is simpler and avoids the potential for an early distribution and tax penalties.
Pros: Ease of managing one account. “If you switch jobs regularly, I would be taking that money and rolling it into an IRA,” Inman says. “Then you’re able to keep everything in one place. You don’t have to log into six different sites.”
Simplicity isn’t the only benefit of a rollover IRA. “By moving directly into a rollover IRA, there are no tax consequences and you will gain the benefit of being able to choose better investment options,” Inman says. “Many 403(b) plans have subpar[SJT1] investment options so having the benefit of moving your money out with fees or taxes into an account that has thousands of investment choices is more than likely the most favorable outcome.”
Perhaps the biggest pro is that you get to choose the vendor. Many savers want access to low cost index funds. Not all employers offer this option. Companies known for low costs are: Fidelity, TIAA, T. Rowe Price and Vanguard. Simply call up the firm of your choice and a salaried employee should be able to walk you through the process. Each of these firms have individual units dedicated to Rollover IRAs. If you choose to work with a financial advisor be sure he or she is a fiduciary. See Advisor Questionnaire, How Advisors Get Compensated, and Fiduciary Pledge to learn more.
Cons: The only real con here is that it takes a little more work on your end. You will need to choose new investment options and pay attention to your investment mix over time. Alas, some people don’t realize this or get busy and simply roll over retirement money into an IRA but leave the money in cash instead of actually investing it. “It does you no good if you roll it over and leave it in cash,” Inman says.
- Asset Allocation
- Target Date Funds
- Impact of Fees
- Key Investment Terms
- 403(b) Basics
- Teach and Retire Rich podcasts
Susan Johnston Taylor is an Austin, Texas-based freelance writer for TraditionalIRA.com and RothIRA.com. She has covered personal finance and small business for publications including The Boston Globe, Entrepreneur, Fast Company, and U.S. News online.