If you are an educator, changing jobs means you must decide what to do with the money in your 403b retirement account. Leaving the money in an old 403b may not be the best option since it is not growing and there will be no new contributions. Withdrawing the money makes it taxable income and Uncle Sam wants his fair share. The best thing to do may be to roll that money over into a retirement account that earns money and will help the balance grow. An old 403b plan can be rolled into a traditional or Roth IRA, tax-free, giving you access to limitless investment options. It can also be transferred to a current employer’s 401k or 403b retirement plan where contributions can continue to be made up to annual federal limits.
Traditional or Roth IRA
One of the most popular options for rolling over an old 403b plan is to put the money into a Traditional or Roth IRA account. An IRA account is an independent account that is typically not offered by the employer. You can open one at your current credit union or bank, or use a financial advisor. Your credit union’s IRA typically has a lower interest rate, but your money is completely safe and insured. If you opt to go with a financial advisor and open an IRA that is tied to stocks and bonds, you may earn more at a faster rate, but you also put your money at risk. A good in-between option is Gulf Coast Educator’s Premium Market IRA. With this type of IRA, your funds are completely secure, but you earn a higher rate that is tied to the market.
Sometimes, rolling over an old 403b means putting the money into a new 403b plan. If a new employer offers a plan with investment options you are comfortable with, then this may be right for you. It is important that you first familiarize yourself with the investment options and potential constraints of the new plan. However, many people enjoy the benefit of growing their nest egg quickly by keeping the bulk of their retirement in a 403b plan. An employer-sponsored 403b plan typically offers low administrative costs, making it an affordable option. There are no tax penalties for rolling money over into a new 403b plan, and you can still make tax-free contributions.
This type of plan also has much higher annual contribution limits. For 2019, the annual contribution limit is $19,000. There is also a catch-up provision for people over 50 that does not apply to the annual limit. People over 50 years old can potentially sock away an extra $25,000 in 2019 before any employer contributions. The great thing is that many employers do match contributions, up to a certain percentage, as part of the benefit or compensation package. This is an attractive perk that helps multiply savings. If you prefer to have all your retirement funds in one account and you are trying to grow your money quickly, consider rolling over into your new employer’s 403b.
If your new employer offers a 401k, then the IRS allows you to roll your old 403b retirement savings into that new account. This is known as a tax-free conversion. There are no tax penalties for this conversion, and you can still make tax-free contributions, subject to annual limits. Many employers also match contributions into a 401k plan, up to a certain percentage, allowing savings to grow quickly. As with the 403b option, the contribution limits are higher, and there is a catch-up provision for people over 50 years old. If you happen to max out your annual contributions, some employer-sponsored 401k plans have provisions that allow participants to make after-tax contributions as well.
Aside from growing your money quickly, a 401k plan offers a certain amount of asset protection, too. First, plan administrators must abide by the Employee Retirement Income Security Act, also known as ERISA. This means that they must comply with a set of fiduciary standards that put your best interest first, instead of pushing investments that may maximize profits. Plans are subject to full disclosure of historical performance and administrative fees. Assets are also protected from creditors and can’t be garnished, with a few minor exceptions. Many employer-sponsored 401k plans offer payroll deductions, making it easier to save for retirement.