Can You Combine a 403(b) and a 401(k)?

Retirement planning often involves navigating various employer-sponsored savings vehicles, with 401(k) and 403(b) plans being two common examples. A 401(k) is a defined contribution plan typically offered by for-profit companies, allowing employees to contribute a portion of their paycheck, often with employer contributions. Funds grow tax-deferred until withdrawal in retirement. A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, serves a similar purpose but is specifically available to employees of public schools and certain tax-exempt organizations, such as 501(c)(3) charities. Both plans enable individuals to save for retirement with tax advantages, but their availability depends on the type of employer.

Understanding Rollover Eligibility

Funds held in a 403(b) or 401(k) plan generally become eligible for a rollover upon specific events, allowing individuals to move their retirement savings to another qualified account. One common trigger is separation from service, meaning when an employee leaves their job, regardless of the reason. This includes situations like resignation, termination, or retirement.

Reaching age 59½ also makes funds eligible for distribution and rollover without the 10% early withdrawal penalty that applies to withdrawals before this age. Another trigger is the termination of the retirement plan by the employer. If a company discontinues its 401(k) or 403(b) plan, participants become eligible to roll over funds.

Disability can also trigger eligibility for a rollover, allowing penalty-free access to funds if the account holder becomes totally and permanently disabled. In the unfortunate event of an account holder’s death, the beneficiaries become eligible to roll over the inherited funds.

Consolidation Options for Your Accounts

Once 403(b) or 401(k) funds are eligible for rollover, several account types can serve as destinations. A common choice is an Individual Retirement Account (IRA), including Traditional and Roth IRAs.

A Traditional IRA allows pre-tax contributions and tax-deferred growth, with withdrawals taxed in retirement, similar to a 401(k) or 403(b). Rolling pre-tax funds from a 401(k) or 403(b) into a Traditional IRA maintains tax-deferred status.

Alternatively, individuals may roll funds into a Roth IRA, converting pre-tax money to after-tax money. This conversion is a taxable event, but future qualified distributions from the Roth IRA are tax-free.

Another option is to roll funds into a new employer’s retirement plan, such as a 401(k) or 403(b). This is possible if the new employer’s plan accepts incoming rollovers. Consolidating into a new employer’s plan can simplify retirement savings management.

Executing the Rollover Process

Performing a rollover from a 403(b) or 401(k) involves specific steps to ensure correct transfer and avoid tax implications. The most common method is a direct rollover, also known as a trustee-to-trustee transfer. Funds move directly from your current plan administrator to the new financial institution, without passing through your hands.

To initiate a direct rollover, contact your current 401(k) or 403(b) plan administrator. Inform them of your intention and provide new account details, such as the receiving institution’s name and account number. The administrator handles the transfer directly to the new custodian, often requiring specific rollover request forms. This method avoids immediate tax withholding and the risk of missing a deadline.

Another method is an indirect rollover, where a check for your retirement funds is made payable to you. If you choose this option, you have a 60-day window from the date you receive the funds to deposit them into a new qualified retirement account, such as an IRA or a new employer’s plan. Your plan administrator is required to withhold 20% of the distribution for federal income taxes. If you do not deposit the full amount (including the withheld 20%) into the new account within 60 days, the un-rolled portion becomes taxable income and may be subject to a 10% early withdrawal penalty if you are under age 59½.

Important Factors Before Consolidating

Before consolidating your 403(b) or 401(k) accounts, consider several factors that can impact your retirement savings. One aspect is comparing fees and expenses between your current plan and any new account. This includes administrative, investment management, and transaction costs, which can vary and affect overall returns. Request a fee disclosure from both your current plan and the prospective receiving account for an informed comparison.

The breadth and quality of investment options in each account also warrant review. Employer-sponsored plans may offer a limited selection of mutual funds, while an IRA might provide access to a wider range of investments, including individual stocks, bonds, and exchange-traded funds (ETFs). Evaluate whether the new account offers investment choices that align with your financial goals and risk tolerance.

Creditor protection is another factor, as it can differ based on the retirement account type. Plans qualified under the Employee Retirement Income Security Act of 1974 (ERISA), such as most 401(k)s and 403(b)s, offer protection from creditors in bankruptcy or lawsuits. While IRAs also receive federal protection in bankruptcy, protection outside of bankruptcy can vary by state law.

The “Rule of 55” is an early withdrawal rule for 401(k)s and 403(b)s, allowing penalty-free withdrawals at age 55 if you leave your employer’s service in or after that year. Rolling these funds into an IRA would forfeit this benefit, reverting to the standard age 59½ rule for penalty-free withdrawals, unless another exception applies.

Required minimum distributions (RMDs) must be taken from most retirement accounts starting at age 73. Consolidating multiple accounts into one IRA can simplify the calculation and management of these annual distributions.