What to Do With Money in a 403(b) Retirement Plan When Leaving a Job

A 403(b) plan, also known as a tax-sheltered annuity, is a retirement savings plan offered to employees of specific tax-exempt organizations, such as public schools. In addition, some ministers working for qualified church-controlled organizations, workers of cooperative hospital service organizations, and civilian staff working in the Uniformed Services University of the Health Sciences may also have access to this plan.

Because a 403(b) is designed for retirement savings, some of the few times you have access to the money in your account before retirement is when you leave your job or become disabled. You may also access the funds if you meet the set financial hardship criteria. At that point, your choices are to keep the money in your current plan, roll it over to a new account, or take a distribution.

Keep Money in Original Plan

If you leave your job for any reason, your 403(b) plan trustee will inform you of your options.Typically, an employer will allow you to keep the money with the current plan administrator if your balance is at least $5,000. However, in such a case, you cannot contribute additional funds to that account.

Such a move is a good option if you are familiar with the plan and it generates positive returns. However, if your balance is ​less than $5,000,​ you may be forced to move the money out.

Roll Over to New Account

After they leave their job, a common option for employees is to roll over the funds into a new tax-deferred account. The IRS permits tax-free rollovers from 403(b) plans to numerous other types of accounts. These include:

  • Traditional IRA
  • Roth IRA
  • SIMPLE IRA(after it has been in existence for two years)
  • Another 403(b)
  • 401(k)

If you leave a job and have money saved in your employer’s retirement plan, always roll that money into an IRA using a direct rollover, which allows you to avoid taxes and penalties.

A 403(b) direct rollover is usually a straightforward process. It involves transferring distributions directly to another eligible retirement plan without the payment passing through you. You can request a direct rollover from your plan administrator by providing it with information about the account where you want your money to go. Then you can transfer the 403(b) to a new employer.

If you choose an indirect rollover instead, the process gets more complicated. Once you receive a payment, you have ​60 days​ to deposit it. And the plan will withhold 20 percent​ of that payment for federal income taxes. So, you must use funds from other sources to meet that shortfall that has been withheld.

If you don’t deposit the complete amount of your rollover into a new account within ​60 days​, you will have to pay more taxes. Those include ​10 percent​ additional income tax on the amount you haven’t rolled over. However, if you are at least ​59 1/2 years​ old, the penalty does not apply.

Take a Distribution

Once you leave your job, you’re free to take a full distribution of your 403(b) money if you choose.However, in many cases, this decision can prove costly. Since your contributions and earnings in your 403(b) were never taxed, any money you take out of the plan is fully taxable. You’ll also owe an additional ​10 percent​ penalty to the IRS for an early withdrawal if you’re younger than ​59 1/2​ when you take a distribution.

If you’re in a high tax bracket, combined federal and state taxes and penalties could quickly eat up more than half of your distribution. The hidden cost of taking a distribution is the opportunity cost. Any money you take out of your 403(b) may force you to work more years than you intended as a result before you’re able to retire.

However, if you use the rule of 55, you could withdraw your money from the 403(b) plan without paying additional taxes. Based on the rule, if you quit your job in the year you turn 55 or later, you could take distributions from that employer’s 403(b) plan without paying the 10 percent early withdrawal penalty.

You can continue to get 403(b) plan distribution regularly even if you get another job and start saving in another plan. And depending on the circumstances, public service employees may be able to withdraw their money from the age of 50.

Final Thoughts on 403(b) Plans

You need to decide what you want to do with the money in your 403(b) plan. If you have one of the best 403(b) providers and like your current returns, your 403(b) plan options could include leaving your investment alone.

But you could also go with a 403(b) plan rollover to take advantage of diversified investment options in other plans. And if you can avoid additional taxes, taking distributions may be the best choice for you. Do what works for you to meet your financial needs after leaving your job. It’s your money, after all.