One of the questions that come up on a regular basis is what to do with old retirement accounts. In the old days, many workers stayed at the same company their entire career and retired with 30 to 40 years of service.
Nowadays, people are more likely to switch jobs every few years, bringing up the question of what to do with old retirement accounts such as 403(b) plans. According to a survey by staffing firm Robert Half, 64 percent of workers favor job hopping.
The result of this movement between companies is trying to decide what to do with old retirement accounts. If you find yourself in a similar position, you could do one of the following:
We’ll go more in depth about some of the options above, but first let’s discuss what is a 403(b).
Before we get into the different options for your 403(b) account, let’s go over exactly what it is so you have a better idea if this is what you have. Basically, it’s a retirement plan for employees of certain public school districts, hospitals, tax-exempt organizations and some ministries.
In many cases, a 403(b) plan is also referred to as a tax-sheltered annuity (TSA) plan. That’s because when these types of accounts were first created, they mainly consisted of TSAs. Nowadays, you’ll find more diversity of investments within 403(b) plans.
These accounts usually can be set up differently depending on where they are offered as well as the selections of the plan administrator. However, 403(b) plans are treated similarly to employer-sponsored 401(k) plans.
They are both funded using pre-tax dollars, which allows the money to grow tax-free until retirement. In addition, they have the same annual maximum contribution limit - $19,500 for 2020 for those age 50 and younger. If you’re older than 50, you can also make a catch-up contribution of an additional $6,000.
Since contributions to a 403(b) account are made on a pre-tax basis, they lower your taxable income. Also, your money will continue to grow tax-free until you reach retirement age. If you don’t withdraw the funds at that point, the money will continue to earn. However, you’ll need to pay income taxes on distributions when you take them out.
If you do find yourself with a 403(b) account as you change jobs, you may be wondering what your options are. For the most part, you can treat your 403(b) plan the same way you would a 401(k).
There are several options for what you can do with the account. Each one has its own advantages and disadvantages so pick the one that makes the most sense for you.
Below are the four most common choices when it comes to your old 403(b).
Provided your new jobs offers an employer-sponsored retirement account, you can just roll over your old 403(b) into a new retirement account. The retirement plan administrator at your new position can help you with the rollover.
Make sure that your new employer’s defined contribution plan allows rollovers from another plan. Look at all of the investment options available to make sure you will be satisfied with them before making the move.
If you don’t like the options available to you or the associated fees, keep in mind that there are other things you can do with your plan that may be a better fit.
One of the advantages of rolling over your old 403(b) into your new employer’s plan is having all retirement accounts into one place. As you change jobs, if you can continue to roll over the funds, it may be easier to keep on top of your investments.
This also means that when you start contributing to the retirement plan offered by your employer, everything will be together under one login. Depending on how often you switch positions, this can be very helpful for staying organized.
Depending on the balance of your old 403(b) account, you may have the option to keep it with your previous employer. While you won’t be able to contribute any more money to that account, it will continue to grow as you approach retirement age.
Since you know the account well and the investment options available, this could be a good move. Make sure your money is invested in highly diversified index funds with low expense ratios.
Keeping your old account also gives you the time and flexibility to decide what you want to do with it. A 403(b) account has better creditor protection than an IRA so that’s something to consider before making a decision. If you practice in a field that is high-risk where you may be subjected to lawsuits, this is an important consideration.
In most cases, it makes sense to pursue different investment options rather than keeping your 403(b) as is. Many employer-sponsored investment options are limited and typically have higher fees. Making a switch will give you more choices and can lower the cost of investments.
Since a 403(b) allows you to defer taxes on your investments until retirement, rolling it into a traditional IRA will let you keep that perk. If you already have a traditional IRA, this means you can combine the funds so it’s easier to keep track of them.
Traditional IRAs are independent investment accounts not affiliated with your employer. As such, you have more flexibility in where you open your IRA and what funds and fees you pay on your investments.
Just like with contributions to a 403(b) account, the money within a traditional IRA is sheltered from taxes and can be deducted from your taxes. However, you will also encounter the same income limitations as you had with your 403(b).
Taxes and income limitations do not apply to rollovers, on the other hand. Generally speaking, IRAs offer more investment options than 403(b) accounts. You can invest your money in mutual funds, index funds and even individual stocks.
Another thing to keep in mind if you’re considering a traditional IRA are the associated costs. Unlike employer-sponsored plans, traditional IRAs can charge transaction costs. This means you may have to pay to buy or sell funds and stocks.
Your retirement savings held in a traditional IRA will also not be protected if you ever file for bankruptcy or get sued. The Employee Retirement Income Security Act does have a provision for protecting some of the money in IRA assets from bankruptcy claims. However, there are no safeguards in place in the case of a lawsuit.
Another option is to convert your 403(b) plan into a Roth IRA. However, keep in mind that you may be facing a tax bill since Roth IRAs are funded with after-tax dollars. If you choose to roll your 403(b) into a Roth IRA, make sure you’re clear on the tax implications.
If you decide to take the plunge and do the rollover, make sure you consult with a qualified financial advisor or a certified public accountant (CPA) on the tax implications of this move. The last thing you want is a surprise bill come tax time.
Roth IRAs have different rules on distributions as well as how funds are treated than tax-deferred retirement accounts. Here are some of the reasons you may decide to do a rollover:
If you’re ready to do a roll over into a new account, there are a few things to consider. First, make sure you do a direct rollover of the funds so you can avoid the 20 percent federal income tax withholding on a retirement funds withdrawal.
There are many financial institutions that offer IRA accounts so do your research to find one that fits your needs and provides the types of funds you want with low fees. When you’re ready to roll over your 403(b) account, make sure you do so by the 60th day following the day the distribution is received.
Stay on top of your rollover since the 60-day rule is a requirement by the IRS. There are two exceptions, however - you can get an exemption in the case of financial hardships or unforeseen circumstances.
To get an exception, you’ll need to provide proof to the IRS such as a financial crisis or hospitalization. Even with proof, there is no guarantee that you will be granted an exemption.
Check with the specific financial institution on their policies for doing a rollover before starting the transaction. This will help you avoid delays in processing. Usually, you’ll only need to complete a signed contribution form as required by the IRA trustee so you can get the fund rolled over into your IRA account.
Talk to the plan administrator of your 403(b) account on what paperwork you need to complete when rolling over the funds into a traditional IRA. Some will ask for a completed distribution request before doing the rollover. Others will also need a letter of acceptance from the IRA trustee/financial institution.
The goal with this paperwork is to prevent fraud and show that you’re rolling over the money into a legitimate retirement plan account.
There are many different options for what to do with your old 403(b) account. It’s important to consider all of your options before you decide how you want to move forward. Keep in mind that as you switch jobs, you’ll need to figure out the best way you want to deal with retirement plan funds.
Overall, the less accounts and funds you have, the simpler your life will be. That way you don’t have to keep track of all of them and check different financial institutions to find all of your accounts.
It’s always a good move to consult with a trusted financial advisor who can help walk you through the options and the process. This will allow you to consider different options and ask questions before making a final decision. The more information you get before deciding how to handle your account, the better.
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This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.
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