A 403(b) plan, also known as a tax-sheltered annuity, is a retirement savings plan offered to employees of certain tax-exempt organizations, such as public schools. Because a 403(b) is designed for retirement savings, one of the only times you have access to the money in your account before retirement is when you leave your job. 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. This can be a good option if you are familiar with the plan and it has generated 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
A common option for employees after they leave their job 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, including traditional IRAs, 401(k) accounts and other 403(b) plans. Typically, a 403(b) rollover is a straightforward process. 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. If you choose an indirect rollover instead, the process gets more complicated. You'll receive a check from your administrator, which will withhold 20 percent for taxes. If you don't deposit the full amount of your rollover into a new account within 60 days, you'll face the same taxes and possible penalties on that amount.
Take a Distribution
Once you leave your job, you're free to take a full distribution of your 403(b) money if you choose. In most cases, however, this decision proves 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 easily could 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) have end up having to work more years than you intended as a result before you're able to retire.