How to Roll Over a 403(b) to a 401(k)

Moving retirement funds from a 403(b) to a 401(k) is a financial process known as a rollover, common for those moving from non-profit or public sector jobs to a for-profit company. Consolidating retirement assets into a single plan can simplify account management and provide different investment opportunities. Understanding the rules and comparing the specifics of each plan are important steps before initiating any transfer of funds.

Rollover Eligibility and Rules

The ability to roll over a 403(b) plan depends on specific circumstances. The most common trigger is a “separation from service,” meaning you are no longer employed by the organization sponsoring the 403(b). After leaving your job, you can move your vested account balance. Other events permitting a rollover include the termination of the 403(b) plan by your former employer or reaching age 59½, though plan rules vary.

Your new employer’s 401(k) plan must be set up to accept incoming rollovers from a 403(b), as not all plans are required to do so. To verify this, review the 401(k) plan’s Summary Plan Description (SPD), which outlines the plan’s rules. This document will state whether rollovers are permitted and from which types of plans. If the information is unclear, contact the 401(k) plan administrator for clarification.

Key Comparison Points for Your Plans

Before initiating a rollover, a detailed comparison between your old 403(b) and new 401(k) is necessary to determine if the move is advantageous. A primary area of comparison is the lineup of investment options. Evaluate the diversity and quality of the funds available in the new 401(k) against your current 403(b). The goal is to ensure the new plan provides access to assets that align with your risk tolerance and retirement timeline.

Fees and expenses can erode your investment returns over time. Scrutinize the fee disclosures for both plans, looking for administrative or recordkeeping fees, which can be flat annual charges or a percentage of assets. Also, compare the expense ratios of the individual investment funds. Some 403(b) plans, particularly those with annuity products, can have higher average fees than 401(k)s.

Another feature to investigate is the availability of plan loans. While borrowing from retirement savings is not always advisable, having the option can be a benefit. 401(k) plans are more likely to include loan provisions than 403(b) plans. The Summary Plan Description for the 401(k) will detail if loans are permitted, the maximum amount, the interest rate, and repayment terms.

Identify any special features within your 403(b) that may be lost upon a rollover. Many 403(b) plans are built around annuity contracts, which may offer guaranteed income streams or death benefits not found in a 401(k). However, these annuity-based plans can also come with surrender charges if you move the money before a specified period. These charges can be a high percentage of your account value and must be weighed against the potential benefits of the rollover.

The Rollover Execution Process

Once you decide to proceed, the next step is the transfer of funds. There are two methods for executing a rollover: a direct rollover or an indirect rollover. The method you choose has tax implications and procedural differences, so it is important to understand how each one works.

The most common method is the direct, or trustee-to-trustee, rollover. In this process, funds are sent directly from your 403(b) provider to your new 401(k) administrator without you taking possession of the money. To initiate this, contact your new 401(k) provider for their rollover paperwork. You then provide this information to your former 403(b) administrator, who will execute the transfer. This method is preferred because it avoids mandatory tax withholding.

The alternative is an indirect rollover, which is governed by the 60-day rule. In this scenario, your 403(b) provider will send you a check for the proceeds. However, the plan administrator is required by the IRS to withhold 20% of the total amount for federal income taxes. For example, on a $100,000 balance, you would receive a check for $80,000.

You then have 60 days from the date you receive the funds to deposit the full original amount into the new 401(k). This means you must use your own money to make up for the amount that was withheld. If you successfully complete the rollover, you can reclaim the withheld amount when you file your annual tax return. Failing to deposit the full amount within the 60-day window results in the shortfall being treated as a taxable distribution, and if you are under age 59½, it may also be subject to a 10% early withdrawal penalty.