I recently helped Mrs. PT complete a 403(b) rollover to a traditional IRA.
A rollover is simply taking funds from one retirement account and transferring them to another without suffering any tax consequences. This is typically done when you leave a job.
The rules for the 401(k) rollover are very similar, if not identical, but I have recent experience with my wife’s 403(b). So that’s what I’ll cover here: 403b rollover rules.
In this post I’ll share the details of my wife’s rollover, how you can complete a rollover yourself, followed by some good reasons to rollover a 403(b) when you leave your job.
Why We’re Doing the 403(b) Rollover
My wife, a teacher, left the classroom back in the Spring of 2008 to go back to school (a different classroom) and to be a full-time Mom.
She’s enjoying her time away from teaching, as well as being a Mom. But neither have left her much time to address her old retirement accounts with the school district. For a long time we just weren’t sure what we wanted to do with the funds. Here’s a breakdown of the different funds she had:
- Teacher Retirement System Account
- 403(b) Retirement Plan
- Roth IRA
Our state offers teachers a nice pension plan, the teacher’s retirement system. She really has no choice with this plan. She was forced to contribute and unable to make any investment decisions. The way I understand it, she invested in that system in lieu of social security. So we tend to treat it like social security, and use a “don’t count on it” approach.
Therefore, as you see above, she also had invested in a 403(b), as well as a Roth IRA. The school district offered a very generous match with the 403(b). I assume this is to encourage folks not to rely on the pension alone.
The 403b funds, along with the Roth IRA were being managed by Primerica. As an aside, that’s something I wasn’t too happy to discover when I met my wife. But, to their credit, they had her getting the district 403(b) match and diversifying tax-wise with the Roth.
Not to turn this into a bashing session, but Primerica’s fees are just too high compared with other stock brokers. And their sales tactics are questionable. My wife said that the advisor was more interested in getting her friends’ and families’ names and phone numbers than they were in actually providing financial guidance. Regardless, they had her in a good mix of accounts and diversified in various investments.
Back to my wife’s rollover. She’s planning on returning to the school district at some point. But we just don’t know for sure when that will be. Nor do we know if she’d stay for very long (we might have another child, she may want to just stay home full-time, etc.). So, moving the funds to another place seemed like a nice idea. We just didn’t know where.
Then, in the Spring of this year, my wife and I opened up Roth IRAs with Vanguard. This was part of our goal to max out our Roth IRA contributions. Now that we had the Vanguard account ready and waiting, we decided to make the move.
I called up Vanguard and requested the forms to rollover the 403(b) to a Traditional IRA with Vanguard and to transfer the Roth IRA funds to her new Roth IRA with Vanguard. The forms were easy to complete and we should see the funds being moved within a few weeks.
How to Rollover Your 403(b)
Assuming you’re in Mrs. PT’s situation, here are the steps to rolling over your 403(b):
- Be Sure to Request a Direct Rollover – A direct rollover is when the funds go directly from your 403(b) account to the new IRA account. The money is never in your possession. So don’t go asking your old employer to send you the funds, so that you can do the rollover yourself. They’ll mail you a check, less 20% taxes. This forces you to try and comply with the IRS 60-day rule and scramble to get the funds reinvested in an IRA, using new funds to cover the 20% hit. They give you the 20% back in a credit if you do this, but the whole thing is just a hassle. Avoid it by insisting on a direct rollover. See more under the IRS rules for a tax-free 403(b) rollover.
- Know What Your Old Plan Requires – It’s a good idea to call up your old employer or old fund manager and learn the rules from their end for having the funds pulled. Also, make sure you’re aware of any fees or forms you might have to send them to give permission for the rollover.
- Open a New IRA– Your funds need a home. Determining exactly where that is, is up to you. There are many places to open up a traditional IRA. You can go through your bank, a discount broker, or a mutual fund company like Vanguard.
- Complete the New IRA Rollover Forms – Step 3 and 4 may be one in the same for your investment firms, but once you have your new account picked out, find their process for opening up a Rollover IRA. Be sure to have your statement and old account’s transfer info available to complete the forms. Once it gets rolling, the process may take a few weeks, but it’ll likely be worth it. Here’s why:
Reasons to Rollover Your 403(b)
While there might be a few reasons not to roll over your 403(b), for most people it’s a postive thing. Here are a few of the good reasons to do it:
- Consolidation of Your Accounts – We’re changing employers more than ever these days. After some time, your retirement funds can become spread out across different accounts. This can make it hard to properly manage your asset allocation, and generally, just a hassle. Rolling all your old 403(b) accounts to one traditional IRA makes sense for most people.
- Opportunity for Lower Fees – In most cases the mutual fund expenses associated with 403(b) accounts are going to be higher than what you can find on the open market through a traditional IRA.
- Typically More Investment Choices– Most 403(b) plans allow you to contribute to a pre-selected list of funds. When you roll your funds to a traditional IRA (through a large investment firm), you’ll typically have the option to invest in
- It’s Easy – Once you open up your new traditional IRA account with the new firm, they will be glad to do all the work for you. They do rollovers everyday and can typically take the hassle out of it for you. They’re getting your funds, let them do the work.
- It’s Tax Free – Last but not least, doing a direct rollover should have no tax consequences. You saved your hard-earned money, tax-free, for years in your 403(b). The last thing you want to do is retroactively pay the taxes on those funds. The rollover will prevent you from having to do that. Thus, your original goal for the funds (tax-advantaged retirement savings) remains intact.
If you’ve completed a 403(b) rollover, I’d love to hear about it. Share your experience in the comment section below.