Employers offer 403(b)s to help workers prepare for retirement. 403(b)s are specifically for employees of specific nonprofit organizations, and the investment allows pre-tax contributions and tax-deferred growth. A key feature of these plans is the ability to roll over these funds into other retirement accounts like IRAs and 401(k)s.

People might consider a 403(b) rollover to access more investment options or lower administrative fees. This article clarifies the process of rolling over a 403(b), including the advantages and potential pitfalls, so you can manage your retirement funds confidently.

What’s a 403(b) plan?

A 403(b) is a retirement plan offered to employees who work at public schools, churches, and charities that are tax-exempt under Section 501(c)(3).

Like a 401(k), these plans allow you to contribute a portion of your salary each year, often into assets like annuities and mutual funds. Employers may match a certain percentage of your contributions, and you won’t owe taxes on your holdings until you start taking distributions. These benefits may attract and retain workers.

What’s a 403(b) rollover?

After leaving a job, you can roll 403(b)s into 401(k)s or a similar retirement account to maintain tax advantages and consolidate savings. Below is high-level information on the differences between a 403(b) Plan and a 401(k) Plan.

403(b) vs. 401(k) Plan

• Eligibility
  • 403(b) Plan: Tax-exempt organizations, public schools, nonprofits, and certain religious institutions
  • 401(k) Plan: Employees of private-sector, for-profit companies
• Investment Options
  • 403(b) Plan: Often limited to annuities and mutual funds
  • 401(k) Plan: A broader range generally includes ETFs and may also include stocks and bonds
• Regulatory Oversight
  • 403(b) Plan: Less stringent; some plans are exempt from the Employee Retirement Income Security Act (ERISA)
  • 401(k) Plan: Stricter ERISA compliance, requiring responsible plan management

How a 403(b) rollover works

There are two primary methods for 403(b) rollovers: Direct and indirect.

Direct Rollover

A direct rollover involves your 403(b) plan administrator sending your funds directly to your new retirement account.

In general, conducting a direct rollover is a four-step process:

• Initiate the request: Contact your 403(b) plan administrator and inform them of your intent to perform a direct rollover.
• Specify the receiving account: Provide the name, contact details, and account number for your new financial institution.
• Direct transfer: The 403(b) plan administrator will send the funds via a check or electronic transfer. 
• Confirmation: Both custodians will typically send you confirmation statements once the rollover is complete.

Indirect Rollover

With an indirect rollover, the employer sends your 403(b) funds directly to you. To avoid potential taxes and penalties, you must deposit them into another qualified retirement account within 60 days. 

This is typically a three-step process: 

• Ask for your funds: Request a distribution from your 403(b) plan administrator.
• Wait for the payment: You’ll receive a check, or the funds will be directly deposited into your personal bank account.
• Reinvest the money: You’re responsible for putting the full distribution amount into an eligible retirement account within 60 days.

Important Considerations for Indirect Rollovers

• The 60-day deadline is strict: Missing this date means you’ll owe income tax on the full amount. And if you’re under age 59½, you may also be subject to a 10% early withdrawal penalty.
• Companies withhold taxes: If you opt for an indirect rollover, the plan administrators have to withhold 20% for taxes. You’ll need to replace that 20% in the new account yourself. Otherwise, it’s treated as a withdrawal and may be taxed and penalized.

Common 403(b) rollover options

Here’s an overview of accounts you can roll 403(b) funds into, however,all options may not be available and will depend on may depend on your employment status and type of retirement plan offered by a future employer.

• Traditional IRAs are individual retirement accounts that allow pre-tax contributions to grow tax-deferred. Withdrawals in retirement get taxed as ordinary income.
• Roth IRAs are individual retirement accounts where contributions come from after-tax dollars, and qualified withdrawals in retirement are tax-free. Pre-tax 403(b) rollovers to Roth IRAs are considered taxable events.
• 401(k)s are also employer-sponsored accounts but are part of the private sector.
• SEP IRAs, or simplified employee pension IRAs, are retirement plan options that only allow employer contributions.
• SIMPLE IRAs are retirement plans for small businesses offering both employee and employer contributions.
• 457(b) plans are tax-advantaged retirement plans available to certain government employees and tax-exempt organizations.

If your new employer offers a 403(b), you can also roll your existing 403(b) funds into their plan.

403(b) rollover to IRA

Many often ask if a 403(b) is an IRA, but the key difference is that a 403(b) is employer-sponsored, while individuals can open an IRA on their own. 

Rolling over funds from a 403(b) plan into an IRA allows savers to keep their tax-advantaged status, gain access to more investment options, and take control over their funds after leaving a job.

The process involves choosing the type of IRA that best suits your financial situation and tax goals. Options include converting a 403(b) into a Roth IRA or traditional IRA. 

Once you’ve settled on a plan and established an IRA account, you initiate the direct or indirect rollover process with your 403(b) plan administrator and provide them with the necessary information. Below are a couple of additional points to keep in mind before moving your money.

Eligibility

You can roll 403(b) funds into an IRA when:

• You leave your employer
• You retire
• You reach age 59 ½ or older
• The plan is terminated
• The account holder dies (beneficiaries can conduct the rollover)

Benefits 

The key benefits of rolling over a 403(b) into an IRA include: 

• Expanded investment options
• Potential tax advantages
• Lower fees
• Simplified account management 
• Greater control and flexibility

Key advantages of rolling over a 403(b)

Here are some key benefits of conducting a 403(b) rollover:

• More ample range of investments: Rolling over your 403(b) often gives you access to investments not offered by the original plan, including individual stocks, bonds, and ETFs.
• Lower fees: Rolling over to an IRA or other type of account can potentially result in lower overall fees.
• Consolidated accounts: Moving retirement accounts into one place simplifies savings tracking and asset management. 

Disadvantages and considerations for 403(b) rollovers

Below are a few disadvantages to consider before rolling over.

• Age restrictions: Typically, you can only rollover funds when you leave your employer, retire, reach age 59½, or experience a plan termination.
• Potential surrender fees: Some 403(b) plans may have surrender fees if you withdraw or transfer funds before a specified period.
• Tax implications: While direct rollovers to pre-tax accounts avoid immediate taxes, other scenarios, such as a 403(b) rollover to a Roth IRA, carry tax consequences.
• Investment restrictions: The rollover may not improve your portfolio’s flexibility or performance if the new plan has limited or costly investments.

Grow your retirement wealth with Gainbridge’s guaranteed rates

Rolling your 403(b) funds into new accounts can give you access to more investment options, like annuities. Gainbridge offers multiple annuities that provide guaranteed growth with no hidden fees or commissions. By eliminating the middleman, you keep more of your savings working for you.

Learn how to build a better retirement with Gainbridge.

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This communication / article is for informational / educational purposes only.

It is not intended to provide, and should not be interpreted as individualized investment, legal, or tax advice. For advice concerning your own situation, please consult with your appropriate professional advisor.

The Gainbridge^® digital platform provides informational and educational resources intended only for self-directed purposes.

Annuities issued by Gainbridge Life Insurance Company located in Zionsville, Indiana. Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company.