Throughout your working career, you are more than likely to switch jobs and companies at some point or another. For some people, that working transition happens earlier and for others, it can happen many years down the road. And some people, will, unfortunately, experience a layoff or even get fired.
If you have a 403(b) plan through your employer and switch jobs, get fired, or inherit a 403(b), you have some options. Knowing your options will help you avoid unnecessary taxes and help you to continue saving money for your retirement. Let’s take a look.
What to Do With a 403(b) After Leaving Job?
What you should do with your 403(b) plan after you leave a job will depend on whether or not you will continue to work. Below are some of the different options you have.
Option 1) 403(b) Rollover To Your New Employer
If you’re leaving for a new job and your new employer offers a 403(b) plan, you can move your current 403(b) plan over to your new employer. This is typically done with a 403(b) rollover which will require you to fill out some forms provided by your old plan administrator. Before you decide to do this, you should consult your new employer along with the plan fees.
Option 2) 403(b) Rollover to a New Plan
The great thing about 403(b) plans is that they have flexibility when it comes to rollovers. If you’re going to a new employer that doesn’t offer a 403(b) retirement plan but offers a standard 401(k) plan, you can roll your 403(b) plan into a 401(k). This is very common for employees who shift into a different career.
Option 3) Take a Withdrawal
If you don’t plan to start another job, you can make a withdrawal. This is an option, but it tends to be the priciest if you don’t do it correctly. Before making a withdrawal, it’s important you know how 403(b) withdrawal rules work. Withdrawing your whole balance before age 55 will cause you to pay a 10% penalty along with income taxes on the amount you withdrew.
Option 4) Leave your 403(b)
Depending on the rules from your employer, you can simply leave your 403(b) plan with your old employer. Leaving it will simply keep the money in the funds you have invested, however, this isn’t recommended. If your balance is small and below your employer’s minimum, they may either force a withdrawal or roll over. In either case, they will notify you prior to doing so.
What Happens to My 403(b) If I Get Fired?
If you are fired or laid off, the contributions you made to your 403(b) plan can’t be forfeited or taken away. However, contributions to your 403(b) plan made by your employer are subject to the vesting schedule outlined by the plan. Check out your vesting schedule for more information.
So any money that isn’t vested from the day you were fired or laid off does not belong to you. Funds that are 100% vested can be moved to your future employer’s retirement plan.
In either case, below are the 4 different options you have with your 403(b) plan if you were fired or laid off.
- Rollover your 403(b) to your future employer’s plan
- Convert to a Roth IRA
- Keep the money in your old plan
- Withdraw the funds – can be subject to taxes and 10% penalty
These options are essentially the same as the options if you were to switch to a new job.
What Happens To 403(b) When You Die?
The things that can happen with your 403(b) after your death can get a little complex. It all depends on how your living will be set up and how you appoint your beneficiaries. As such, you should review beneficiary designations on your 403(b) plan. However, below are some important rules about 403(b) plans when the account owner dies.
- When a 403(b) account owner dies but there are still funds inside the account, there are 403(b) inheritance rules that apply.
- 403(b) beneficiaries must withdraw the full account balance by the end of the 10th year following the year the account owner passed away.
There are more circumstantial rules for a 403(b) plan when the account owner dies. They are stated in the 403(b) inheritance rules. However, if the named beneficiary is a spouse or children, the rule above is the main one to follow.
It’s worth noting that 403(b) plans are tax-deferred. This means that the IRS has to receive federal income payments on the contributions and earnings when the money is withdrawn from the plan.
In addition to this, the 403(b) plan doesn’t have any minimum required distributions that need to be taken out during the 10-year period. This provides beneficiaries with flexibility for the withdrawal amounts in order to minimize their tax liability.
Can you Roll a 403(b) Plan Into an IRA After Someone Has Died?
This is a very good question. An inherited 403(b) plan can be rolled into an inherited IRA plan. This requires careful setup with a retirement specialist for it to be done accordingly and avoid tax consequences. The good news is that beneficiaries of inherited 403(b) plans have options including:
- Inherited rollover options
- Cash-out distributions
- Conversions
As long as you complete the necessary paperwork required, 403(b) plans have great options for beneficiaries.
Conclusion
One of the great advantages of 403(b) plans is how portable they are when it comes to rollovers and conversions. Whether you have changed jobs, been fired, or inherited a 403(b) plan, you have flexibility with how to best make use of the funds. These can be complex situations and we advise to consult with a licensed financial advisor that can point you in the right direction.
