The IRS does permit rollovers between these 401(k) and 403(b) plans, allowing you to consolidate retirement savings when appropriate. However, not all 403(b) plans accept rollovers from 401(k) accounts. This decision is up to the individual plan administrator. While both 401(k) and 403(b) accounts are tax-advantaged retirement plans, they serve different employer types. 401(k)s are typically offered by private companies, whereas 403(b)s are designed for employees of public schools, non-profit organizations and certain ministries.
How to Transfer Your 401(k) to a 403(b)
The simplest way to transfer your 401(k) to a 403(b) is through a direct rollover. This method moves your funds directly between plan administrators without you handling the money.
To make one, first need to contact your new employer’s HR department to confirm they accept direct rollovers. If they do, request the necessary forms from both your former and current plan administrators. This will help you avoid potential tax withholding and penalties.
Another option is an indirect rollover. This involves receiving a distribution check from your 401(k) administrator that you must deposit into your 403(b) within 60 days. There are significant drawbacks to this approach, though.
For one, your former plan administrator will typically withhold 20% for taxes. As such, you’ll need to make up this difference from personal funds when depositing into your 403(b) to avoid taxes and potential penalties on that portion.
Additionally, it’s important to complete your rollover within the IRS-mandated 60-day window to avoid taxes and early withdrawal penalties. Missing this deadline could result in your distribution being treated as taxable income, plus a 10% early withdrawal penalty if you’re under 59½. Plan administrators may take several weeks to process paperwork, so start the process as soon as possible.
Advantages of Rolling a 401(k) to a 403(b)
When changing jobs or seeking better retirement options, understanding the advantages of rolling a 401(k) to a 403(b) can help you make informed decisions about your financial future. While both 401(k) and 403(b) plans are tax-advantaged retirement accounts, there are distinct benefits to consider when making this transition.
- Potential for lower fees: 403(b) plans, particularly those offered by non-profit organizations, often have lower administrative costs than 401(k) plans. These reduced fees can significantly impact your retirement savings over time, potentially saving you thousands of dollars throughout your career.
- Access to different investment options: Moving your retirement funds to a 403(b) may provide access to a different selection of investment vehicles. Many 403(b) plans offer annuity options through insurance companies. These aren’t typically available in 401(k) plans.
- Simplified retirement planning: Consolidating retirement accounts by rolling a 401(k) into your current employer’s 403(b) can streamline your financial management. Having fewer accounts to monitor means less paperwork, easier performance tracking and a more comprehensive view of your retirement savings.
- Employer matching contributions: Some employers offer matching contributions to 403(b) plans, which can accelerate your retirement savings. By rolling over your 401(k) funds, you can potentially benefit from these matching contributions on a larger balance, effectively earning “free money” toward your retirement.
Disadvantages of Rolling a 401(k) to a 403(b)
While transitioning between retirement accounts can be beneficial, there are drawbacks to consider before rolling over a 401(k) to a 403(b) plan. Before doing so, carefully review both plans’ features, fee structures and investment options.
- Limited investment options: 403(b) plans typically offer a narrower range of investment choices compared to 401(k) plans. Many 403(b) plans are heavily focused on annuity products from insurance companies, which may not align with your investment goals or risk tolerance.
- Loss of certain protections: 401(k) plans offer federal protection from creditors under ERISA laws. 403(b) plans, on the other hand, may have more limited protections depending on your state. This difference could be crucial if you ever face bankruptcy or legal judgments.
- Restricted withdrawal options: 403(b) plans sometimes have more stringent rules regarding when and how you can access your money. This could limit your flexibility during retirement or in emergencies when you might need to tap into your savings.
- Possible surrender charges: If your 403(b) includes annuity products, you might face surrender charges for early withdrawals. These fees can be substantial and may apply for several years after the initial investment.
Other Options for an Old 401(k)
When considering what to do with your retirement savings, you might wonder if you can roll over a 401(k) into a 403(b) account. While that specific rollover is possible in certain circumstances, it’s worth exploring all available options for your old 401(k) before making a decision.
If your previous employer allows it and your balance meets minimum requirements, you can keep your money in your old 401(k). This option requires no immediate action and maintains your investments’ tax-deferred status. Just note you’ll no longer be able to make contributions.
Another option is rolling your 401(k) into an individual retirement account (IRA), which can give you greater investment flexibility and control. With an IRA, you can choose from thousands of investment options rather than the limited menu typically offered by employer plans. If appropriate for your tax situation, you might even convert traditional 401(k) funds into a Roth IRA. This requires paying income taxes on the converted amount now, but allows for tax-free withdrawals in retirement.
While possible, cashing out your 401(k) before retirement age is typically not advisable. Doing so triggers income taxes, plus a 10% early withdrawal penalty if you’re under 59½. This option also significantly impacts your long-term retirement savings. As such, this should generally be considered only as a last resort.
Bottom Line
You can roll over a 401(k) into a 403(b) account. However, this specific transfer is less common and comes with important considerations. Also note that while the IRS permits these rollovers, your new employer’s 403(b) plan must explicitly allow incoming transfers from other retirement accounts. If it does, carefully review both plans’ rules and consult with plan administrators before proceeding. Remember that retirement account transfers should align with your broader financial goals.
Tips for Investment Planning
- Your investment plan requires constant attention and expertise that you may not have or be able to give. A financial advisor can help you better manage your investments and help provide the expertise to meet your long-term goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- An investment calculator can help you estimate how your investment portfolio might grow over time.
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