What To Do With Your 403(b) After Leaving Your Job
If you're leaving your job as a public school teacher or working at a non-profit organization, one of the crucial financial decisions you'll face is what to do with your 403(b) retirement plan. This article will guide you through the various options available to you and help you make an informed choice for your financial future.
Understanding Your 403(b)
A 403(b) is a specialized retirement savings plan offered by public schools and certain tax-exempt organizations and nonprofits. Sometimes referred to as a tax-sheltered annuity or TSA plan, it shares many similarities with a 401(k). The key distinction is that a 403(b) is available to employees in the public sector, while a 401(k) is primarily for those in the private sector. When contributing to a 403(b), you can choose between investing pre-tax dollars (traditional) or after-tax dollars (Roth). The tax advantages make a 403(b) an attractive option for retirement savings.
Traditional vs. Roth 403(b)
It's essential to understand the type of 403(b) account you have, whether traditional or Roth, as it will influence your post-employment decisions. In a traditional 403(b), contributions are made with pre-tax dollars, reducing your taxable income and, consequently, your federal income tax liability. In contrast, Roth 403(b) contributions are made with after-tax dollars, allowing you to withdraw your money tax-free after reaching the age of 59.5. If you're uncertain about the type of account you hold, consult your current employer or review a recent pay stub for clarification.
What to Do with Your 403(b) After Leaving Your Job
When you leave your job, you have three primary options for handling your 403(b) funds:
Leave Your 403(b) as Is: Many employers permit you to leave your 403(b) account untouched. While you can no longer contribute to it, your money will continue to grow. However, there are a few important factors to consider. You'll maintain a connection with your former employer, which could lead to interactions you might find uncomfortable. Additionally, it's crucial to examine the fees associated with your existing 403(b) account. If you're burdened with high fees or subpar investment options, you should explore moving your funds either to an IRA or your new employer's retirement plan.
Rollover to an IRA: An Individual Retirement Account (IRA) is independent of your employer and offers a good option when transitioning from a job. It allows you to maintain the same tax-deferred status (Roth or traditional) as your 403(b) without triggering taxes or early withdrawal penalties during the transfer. To minimize taxes, match your IRA's tax status with that of your 403(b. Consult a tax advisor for personalized advice. A rollover IRA provides more flexibility in selecting investment options, including stocks, bonds, CDs, ETFs, and mutual funds. Some well-known low-fee providers include Vanguard, Charles Schwab, Fidelity, and Betterment, although there are many alternatives to explore.
Transfer to Your New Employer's Plan: If your new employer offers a 403(b) plan, you can consolidate your 403(b) account balance with the new plan. This simplifies account management, reducing the risk of neglecting old accounts. However, be cautious about potential drawbacks. The new plan may carry higher costs or less attractive investment options compared to your previous one. Assess the new plan's investment choices and fees before proceeding. If the expenses in the new plan significantly outweigh those in your former employer's plan, you might want to consider the previous options.
Which Option Is Best for You?
The best choice for your 403(b) after leaving your job depends on your unique circumstances. Here are some key takeaways to consider:
You have four options: leave the money where it is, rollover to an IRA, merge your old 403(b) with a new one (if offered by your new employer), or withdraw the money. However, withdrawing is generally discouraged unless you've reached retirement age and can do so without penalties.
Pay close attention to account fees and seek out the lowest expense ratios.
Align the tax structure of your new account with your 403(b (i.e., Roth 403(b) moves to Roth IRA or 403(b) and traditional moves to a traditional IRA).
Consider the age at which you intend to start withdrawals, as 403(b)s allow penalty-free withdrawals earlier than IRAs.
In conclusion, choosing the right course of action for your 403(b) after leaving your job requires careful consideration of your financial goals, tax implications, and investment preferences. Consulting a financial advisor can help you make an informed decision that aligns with your retirement plans. Remember that your retirement savings deserve thoughtful management to ensure a secure financial future.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.