Can You Roll Over a 401k to a 403b?

It is possible to transfer funds from a 401(k) retirement account to a 403(b) retirement account. Both are employer-sponsored retirement plans, though offered by different types of organizations. A 401(k) is commonly associated with for-profit companies, while a 403(b) is used by non-profit organizations, public schools, and certain government entities. This article explains when such transfers are allowed, factors to consider, and steps for a direct rollover.

Eligibility for Rollovers

Funds can typically be rolled out of a 401(k) when employment with the sponsoring company terminates, or when a participant reaches age 59½. Plan termination by the employer also permits distributions that may be rolled over. However, the ability to roll over funds often depends on the rules of both the originating 401(k) plan and the receiving 403(b) plan.

A 403(b) plan must specifically permit the acceptance of rollovers from 401(k) accounts according to its plan document. Not all 403(b) plans are structured to accept such transfers. Therefore, confirm with the administrator of the prospective 403(b) plan whether they allow incoming rollovers.

The tax treatment of funds is important for eligibility. Pre-tax contributions from a traditional 401(k) can be rolled into a traditional 403(b) without immediate tax consequences. Roth 401(k) funds, which are composed of after-tax contributions, can be rolled into a Roth 403(b) while maintaining their tax-free withdrawal status in retirement. Converting Roth 401(k) funds to a traditional 403(b), or vice-versa, would trigger a taxable event.

Important Factors When Deciding to Roll Over

The method of rollover impacts tax implications. A “direct rollover” transfers funds directly from the 401(k) plan administrator to the 403(b) plan administrator, bypassing the individual. This method avoids mandatory tax withholding and potential penalties, making it the recommended approach.

In contrast, an “indirect rollover” distributes funds to the individual, who then has 60 days to deposit them into the new retirement account. If the 60-day deadline is missed, the distribution becomes taxable income and may incur a 10% early withdrawal penalty if the individual is under age 59½. With indirect rollovers, the 401(k) plan administrator is required to withhold 20% of the distribution for federal income tax, which the individual would need to replace from other sources to roll over the full amount.

Investment options can differ considerably between 401(k)s and 403(b)s. While 401(k) plans often provide a broad selection of investment choices, including mutual funds, exchange-traded funds, and sometimes individual stocks and bonds, 403(b) plans historically offered more limited options, often centered around annuities and a narrower selection of mutual funds. Evaluating the range of investment choices, their historical performance, and the availability of desired asset classes in the target 403(b) is essential for maintaining an effective investment strategy.

Fees associated with retirement plans can erode investment returns over time. Both 401(k) and 403(b) plans involve administrative fees, recordkeeping fees, and investment management fees (expense ratios). Compare these costs between the existing 401(k) and the prospective 403(b) plan. Some 403(b) plans not subject to the full Employee Retirement Income Security Act (ERISA) requirements may have lower administrative costs, but could also feature higher investment-related fees with annuity products.

Employer-sponsored retirement plans, including most 401(k)s and many 403(b)s, receive creditor protection under federal law, specifically ERISA. This protection shields assets within these plans from creditors in the event of bankruptcy or other legal liabilities. While some 403(b) plans may not be fully ERISA-qualified, many still offer creditor protection.

Required Minimum Distributions (RMDs) are another factor to consider. Individuals must begin taking RMDs from traditional pre-tax retirement accounts, including 401(k)s and 403(b)s, upon reaching age 73. However, an exception allows individuals still working for the employer sponsoring the plan to delay RMDs from that specific plan until they retire, provided they do not own more than 5% of the business. Rolling funds from a 401(k) into a 403(b) could affect this “still working” exception, especially if the new 403(b) plan does not offer it or if you change employers.

Steps for a Direct Rollover

To initiate a direct rollover, contact the administrator of the current 401(k) plan. Request the necessary forms and instructions for a direct rollover to a 403(b) plan.

Concurrently, contact the administrator of the new 403(b) plan to inquire about their acceptance procedures and any forms they require. Ensure the receiving plan is prepared to accept the funds.

Once all required forms are obtained from both the 401(k) and 403(b) plan administrators, they must be completed and submitted. These forms authorize the transfer of funds between the two accounts.

The funds will then be transferred directly from the 401(k) plan to the 403(b) plan. This transfer occurs via a check made payable directly to the new 403(b) plan or through an electronic transfer, ensuring the funds do not pass through the individual’s hands.

After the transfer is complete, confirm with the new 403(b) administrator that the funds have been received and allocated to the correct account. Following the rollover, the individual can expect to receive a Form 1099-R from the former 401(k) plan administrator, documenting the distribution and indicating it was a direct rollover. This form must be reported on the individual’s tax return, even though the rollover itself is not a taxable event.